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Badge - Super Lawyers Jenice L. Malecki

While the stock market and S&P 500 continue to hit all time highs, many investors still have the 2008 market collapse fresh in their memories and know that this historic bull run could, and likely will, come to an end.  There are many signs that the market is overheated, leading some to have speculated that a correction is inevitable, if not imminent.  One of many lessons from prior market collapses is that the investment portfolios most at risk are those which are not properly diversified and may be overly concentrated in either one security or one particular sector of the market.  For retirees, in particular, it is possible to sue and recover such investment losses when following the advice of a licensed financial advisor.

The cratering of an investment portfolio can come as a shock to most investors, particularly retirees who have increased medical and age-related expenses, and are thus unable to afford a long wait until the market bounces back.  In some instances, legal action may be necessary to recover the lost funds. While there is less legal recourse for investors who choose their own investments through a self-directed brokerage platform, the opposite is true for investors who still rely on licensed stockbrokers for financial advice.  Both financial advisors and their brokerage firms can be held liable for recommending investment decisions that are poorly suited to the investor’s needs.

The brokerage industry is regulated by the Financial Industry Regulatory Authority (FINRA), which, until recently, has long imposed FINRA Rule 2111, known as the “Suitability Rule” on all licensed stockbrokers and the brokerage firms that employ them.  Under Rule 2111, brokers were required to have a reasonable basis for recommending a transaction that reasonably considers a broad range of factors, which “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”

In August 2020, the Securities and Exchange Commission (SEC) adopted amendments to expand the definition of an “accredited investor.”  Adding these new expansive conditions as to who may qualify as an accredited investor will allow more investors to participate in private investment offerings, creating both more opportunity and more risk.  The goal of the SEC with this expansion was to both simplify and amplify investor opportunities, investor protections, and capital formation.

Traditionally, an accredited investor can be a business or individual that is qualified to trade unregistered, privately traded securities (i.e., not traded on a public stock exchange) by fulfilling specified minimum requirements such as net worth, income, assets, and trading experience or authority. Typically, issuers of unregistered securities are limited to sell only to accredited investors because they are considered more able to handle the associated risks.  While every investment has risk, non-public investments carry additional risk of having low liquidity, meaning it can be incredibly difficult to find a buyer if the investment goes south.

Accredited investors are important players in the securities industry because they provide liquidity and funds to new and unregistered investments in need of capital.  Historically, an accredited investor can be a bank, a private business, an organization, a director, or any individual who  typically has a separate or combined net worth of $1 million dollars.

Malecki Law is currently investigating allegations regarding a Ponzi scheme targeted by several regulators, including the Commodity Futures Trading Commission (CFTC), which filed a civil enforcement action against Avinash Singh and nine others, including Daniel Cologero and Randy Rosseau, who reside in Florida, and Hemraj Singh, from New Jersey, concerning allegations of an almost $5 million-dollar multi-level Ponzi scheme.  We are specifically interested in speaking to any affected investors in Highrise Advantage, LLC or other related investments discussed below. Upon information and belief, Mr. Singh may have been working closely with Equity Trust Company and one or more of its representatives, including Anthony (“Tony”) Sopko, who may have been helping to bring new investors into the scheme.

Mr. Singh is accused of misappropriating funds fraudulently solicited by him and his co-defendants.  They allegedly used their network of contacts to prey on those within their communities.  One individual charged, Surujpaul Sahdeo, was a priest who may have used his company, SR&B Enterprises, to prey on the Guyanese community and community church-goers, allegedly using their donations to fund the Ponzi scheme through Mr. Singh, who is alleged to have been a main point of contact for recruiting many investors. It is alleged that all of the funds were funneled through commodity pools set up to funnel the fraudulently solicited funds– Highrise Advantage, LLC., Green Knight Investments, LLC, Bull Run Advantage, LLC, and King Royalty, LLC.

Firms like Equity Trust Company have supervisory duties that require them to monitor both the internal and external business activities of their employees like Mr. Sopko.   This is significant because Ponzi victims often do not know who to turn to, as Ponzi funds are often spent and heavily depleted by the time a Ponzi scheme falls apart and is discovered.  Nevertheless, Malecki Law has decades of experience in successfully recovering millions of dollars from financial firms, such as those Malecki Law sued and successfully recovered from in Ponzi schemes perpetrated by Hector May and Robert Van Zandt.

On July 20, 2020, the Securities and Exchange Commission brought investment advisor and former registered representative Michael “Barry” Carter up on multiple federal charges relating to the alleged misappropriation of over $6 million in funds.  Mr. Carter allegedly stole this money from his brokerage customers, including nearly $1 million from one elderly client, defrauding them in the process in an effort to remain undetected.  His alleged fraudulent acts occurred between the fall of 2007 and spring of 2019 while working at Morgan Stanley, with over 40% of the misappropriation occurring in the last five years, all to sustain his extravagant lifestyle.

Mr. Carter was reportedly fired from Morgan Stanley in the summer of 2019 for misappropriation of funds.  Later that fall, FINRA launched an investigation into his alleged crimes and he was then barred by FINRA for refusing to turn over documents relating to the alleged misappropriations.

Additionally, the state of Maryland reportedly brought criminal charges against Mr. Carter, to which he has already pled guilty to the investment advisory fraud charges and wire fraud; as part of his plea agreement he will, according to prosecutors, be required to pay back about $4.3 million, the total net proceeds of his illegal activities.

Filing a claim for most investors is a walk over a new bridge and involves doing something they have never done before: filing a “lawsuit.” Most people never wanted to have anything to do with the law, but if you lost your life savings, you really do not have much of a choice but to fight to get it back.    The stress you may feel engaging in this process can be mitigated by understanding what lies ahead to prepare yourself mentally, emotionally and physically – by getting your evidence lined up.   Outlined below is the process of filing a claim in arbitration through the final days of trial, which will hopefully bring ease to questions you may have regarding investor arbitrations.

In today’s world, many people invest their money as a way to increase their income.  Some choose to invest on their own, while others use brokers and investment advisors.  As with any job, unfortunately in these professions, bad apples do exist.  Where wrongdoers exist, they cause harm to their clients and to their clients’ investment accounts.  If this happens, clients can sue their broker by filing an arbitration claim within the dispute resolution forum of the Financial Industry Regulatory Authority (FINRA) – the only forum for retail investors to sue brokers and brokerage firms.  The initial claim papers filed details the party or parties that have wronged you, specifies the relevant facts of the events leading up to and causing the harm in your investment account(s), and lists the remedies requested.  When deciding on whether to file an arbitration claim with FINRA, Malecki Law’s FINRA arbitration attorneys can help discuss the merits of your claims and frame them in what is known as a “Statement of Claim,” like a complaint pleading in court.

Once a Statement of Claim arbitration has been filed with FINRA, the party or parties you are suing, also known as the “respondent(s),” have 45 days to file a response, which is called the “Statement of Answer.”  The Answer will typically include relevant facts, supporting documents, and defenses from the perspective of the broker or firm you are suing.  One can anticipate that in the Answer the respondent(s) will try to discredit your claims.  Malecki Law is skilled and very familiar with debunking these typical defenses, as well responding to any creative new tricks.  After reading the Answer, you have the opportunity to amend your Statement of Claim if you feel something should be changed from your originally filed claim.

Many clients are asking whether FINRA arbitration claims can be brought against a bank and/or its employees for losses sustained in their investment accounts.  The answer is yes.  There are more than 5,000 commercial banks in the United States.  Along with traditional banking services, many of these banks also provide in house “financial advisors.”  In order to charge their customers more, these bank branch financial advisors encourage bank customers to invest their savings with them.  Now more than ever, bank customers are being pressured into using these services, and their life savings are being invested rather than saved.  This can lead to losses in customer accounts, where customers would have been better off keeping their funds in a savings account.  Malecki Law’s FINRA arbitration attorneys have handled many cases involving claims where customers lost money investing with a commercial bank financial advisor.

Up until Congress repealed the Glass Steagall act in 1999, commercial banks, banks that take in cash deposits and make loans, could not offer investment services.  The Glass Steagall Act separated commercial banks and investments banks and prohibited commercial banks from providing any investment service to its customers.  Once the act was repealed, in order to make greater profit, banks took advantage and began offering these services.  Although banks often incentivize their customers to use these services, such as offering lower fees or free checking, the bank’s investment services, however, are not free.

Investing funds with a bank is no safer than investing funds through an online or traditional brokerage firm.  Customers ordinarily use banks for savings, checking, CDs, and, sometimes, securing a mortgage or other type of loan.  These types of accounts are a bank’s specialty and are FDIC insured, meaning that these are vehicles designed to prevent the loss of money in customer accounts.  Contrarily, investments are not a bank’s specialty and investing with a bank’s financial advisor, similar to making an investment in an online or traditional brokerage account, comes with risk, often incurring higher fees than an online or traditional brokerage account.  Moreover, not only do the investment products offered at banks charge higher fees, but the quality and diversity of investment products is limited, which increases risk to the customer’s investments.

Can a Broker-Dealer Firm be Sued for Failure to Supervise a Broker?

Broker-dealers, also known as brokerage firms, are routinely sued for “failure to supervise” claims.  The Financial Industry Regulatory Authority (FINRA), the organization which regulates broker-dealers and their employees, has a series of rules requiring broker-dealers to establish and maintain a supervisory system to supervise its brokers and other employees, as well as to monitor all trading activity to ensure compliance with applicable securities laws and regulations.  In many of our clients’ cases, the brokerage firm’s lack of supervision and failure to properly supervise a broker’s misconduct has directly and indirectly impacted our clients’ accounts, causing losses.  Malecki Law’s FINRA arbitration attorneys have handled many cases against brokerage firms in New York (and across the country) for failure to supervise and have received favorable monetary awards and settlements for our clients.

A supervisory system that cannot reasonably surveil and detect trades that violate securities laws and deceptive trade practices does not meet FINRA’s minimum requirement of proper supervision.  Moreover, proper supervision also requires a firm supervisor to approve a broker’s daily trades, as well as to systematically review clients’ accounts for wrongful trading activity such as recommending unsuitable investments, trading without proper authority from the customer, or charging high commissions that make it virtually impossible for the customer to make any sort of profit.

Investors often ask whether a clearing firm can be liable for losses sustained in their accounts.  The answer is “yes.”  Traditionally, clearing firms, also known as clearing houses, are financial institutions established to handle the confirmation, settlement, and delivery of transactions.  To ensure its clients’ transactions are made in a prompt and efficient manner, the clearing firm acts as a middle-man and is essentially the buyer and seller in the transactions.  To attract business and compete with other clearing firms, clearing firms offer an ever-expanding suite of services that go beyond mere routine clearing functions, which often brings them to be actively and directly involved in the actions of brokerage firms and their brokers.  Courts have held that clearing firms that extend services beyond “mere ministerial or routine functions” can be liable to an investor for a broker-dealer or broker’s misdeeds.

On behalf of several investor clients, Malecki Law’s FINRA arbitration attorneys are currently investigating cases involving claims against Pershing, LLC, a clearing house, and its introducing brokerage firm client, Insight Securities, Inc.  The claims involve an SEC-censured entity, Biscayne Capital.  Our clients sustained losses in their accounts due, in part, to Pershing’s alleged negligent supervision of transactions through its shared platform with Insight.

In relationships like this, the introducing firm and clearing firm have a clearing agreement, usually giving the clearing firm discretion to terminate any account, the responsibility to notify the introducing broker of suspicious activity, and to provide training or trained employees to look out for misconduct.  Usually the clearing firm has the responsibility to conduct regulatory monitoring of SEC Financial Responsibility Rules and to be directly involved in Anti-Money Laundering oversight.  Thus, with these heightened responsibilities, a clearing firm can move beyond its ministerial and routine clearing functions.

Many clients are asking, “can my arbitration hearing be done online by video?” The answer is yes.  FINRA allows for remote hearing services, via Zoom and teleconference, to parties in all cases.  In arbitration, all parties can agree as to almost anything and FINRA will allow it – such as who the arbitrators are, methods of picking arbitrators and/or how the hearing will happen.  The trick is to get your adversary to agree to alternative hearing methods or to get a sitting arbitration panel to order (force) your adversary to do it. A hearing can happen a number of ways with FINRA’s blessing, so long as it can be recorded.  Next week, we expect that FINRA will set out more formal guidelines and we will update this blog in a new post.

Zoom is a user-friendly video platform that provides high-quality and secure options for conducting remote hearings.  The platform allows parties, arbitrators, counsel, and witnesses to share documents and their screens with other participants.  Zoom is a viable option for parties unable to attend an in-person hearing. Malecki Law’s FINRA arbitration attorneys have experience and systems in place, ready to use this method for hearings in investor arbitrations, as well as industry employment and regulatory matters.  For many years, remote witnesses have participated and testified via video and telephonic methods.  It is really not a completely new concept.

Whether the hearing is remote or in-person, the prehearing process will not be hindered.  In customer dispute cases, where customers bring claims against their broker and/or broker-dealer, all aspects, except for an in-person hearing, are done remotely (such as filing the claims, resolving discovery disputes, and interviewing witnesses).  As a matter of fact, most claims against a broker and/or broker-dealer will settle before the hearing is scheduled to begin.

U.S. oil prices have been on a roller coaster ride over the last few weeks, at one point dropping below $0 for the first time in history to -$37.63 a barrel.  Oil has since rebounded from its subzero levels, but it remains questionable as to whether it can stay there.  It begs the question, what does this mean for investors and the U.S. oil market generally?

When prices cratered below zero, there were those that weighed in that it was nothing to worry about.  After all, the subzero price drop really had more to do with the expiration of contracts for oil futures.  It was explained that the current demand for oil is so low that producers would rather put their oil in storage and then sell it at some point in the future.  Placing additional strain on the market, the U.S. is running out of places to store it, with backlogs of oil tankers from Saudi Arabia out at sea and being turned away from U.S. shipping ports.

The U.S. has traditionally been a net importer of oil, but with the emergence of oil fracking, the U.S. at one point in 2019 surpassed Saudi Arabia as the world’s top oil exporter.  This trend towards parity gave many observers of the U.S. oil market a feeling of confidence that the U.S. was a rising oil power, with President Trump going so far as describing the U.S. level of participation as “energy dominance.”  But as pointed out by professionals, increased participation in the market has little to do with control over the market.  For instance, the price of U.S. oil recently began to spiral down when Russia and Saudi Arabia started to increase their production levels.  U.S. oil prices teetered even further, and then below zero, when the global and U.S. economic response to the spread of Covid-19 began to take shape – every state being under some level of a stay-at-home order, with fewer cars on the road, fewer people travelling by air, and U.S. oil workers in Texas and elsewhere being laid off in the tens of thousands.  The pumps have stopped and oil companies are already declaring bankruptcy, with likely more to follow.

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