Can I Sue My Brokerage Firm for Filing a False Form U5?

Financial firms that deal in securities do carry legal liability for filing a Form U5 with false information, and financial advisors can indeed sue their former firms for filing an inaccurate Form U5.

Whenever a brokerage firm terminates the employment of a broker or financial advisor, the firm must file a Form U5 – the Uniform Termination Notice for Securities Industry Registration – with the Financial Industry Regulatory Authority (FINRA) within thirty days of termination.  The Form U5 is differentiated from the Form U4 – the Uniform Application for Securities Industry Registration or Transfer – which is filed upon a broker’s registration with a firm, whereas the Form U5 is filed upon the broker’s termination. The Form U5 requires a firm to provide accurate answers to various questions, including the reason for a broker’s termination.

The short answer is no.

When a customer opens an investment account with a brokerage firm, he or she is typically given the option to choose between a discretionary or non-discretionary account.  A discretionary account gives the assigned broker or financial advisor the latitude, or discretion, to buy or sell securities in the account without the customer’s prior authorization.  In non-discretionary accounts, a broker does not have that discretion and must obtain the customer’s permission prior to each transaction.

For reasons that may seem obvious, discretionary accounts are somewhat of a rarity in the brokerage world, in part because they require much more supervisory oversight than non-discretionary accounts.  Discretionary accounts are naturally prone to a higher risk for abuse or mismanagement of funds, as there is less customer input and oversight of the trading.  Thus it should be no surprise that the securities laws for discretionary accounts are especially geared towards investor protection.

As reported in the Wall Street Journal, there has been a recent trend at big brokerages of shifting the power from the headquarters to brokers and branch managers. Apparently big brokerages like Bank Of America, UBS Group, and Merrill Lynch are “unleashing” their brokers and moving power closer to the brokers and their managers, both to keep brokers from leaving their firms and to increase revenues.

These modifications come in the wake of declining revenues and broker exoduses several big brokerages have experienced after the financial crisis. They have also witnessed that brokers who dislike or disagree with their managers and find them unhelpful tend to leave the brokerages more easily. The big brokerages have had to deal with rising regulatory costs and competing with an increasing number of independent advisers. According to research conducted by consulting groups, the registered investment adviser model is more successful as it is a smaller and more tightly integrated groups. Taking a cue from that, the zillion dollar brokerages are making changes aimed at empowering, training and giving their brokers more control over day to day decisions over clients, growth, and resource allocation. Merrill Lynch has plans to restructure the brokerage leadership, emphasize more on productivity and training, and reduce the number of divisions. UBS also made similar changes last year.

There are plans underway to also automate investment advisory and make use of robos to cater to a younger clientele so that the brokers can be freed up to deal with high net worth clients. All in all, this gradual shift is geared towards taking things back to how they were before the financial crisis hit, when the field agents and managers had more autonomy to structure their branches, price and sell services, be less accountable to corporate headquarters, hold more power and sway.

man-and-woman-holding-money-300x300Broker Deborah D. Kelley is allegedly one of the key figures in the $184 billion New York pension fund “pay-for-play” bribery scandal. She was reportedly arrested in December 2016 in San Francisco on charges of securities fraud, conspiracy to commit securities fraud, and conspiracy to obstruct justice in an SEC investigation. This week she was barred by the Financial Industry Regulatory Authority (FINRA).

The salacious allegations in this scandal involves the NY retirement pension fund and Navnoor Kang, its former director of fixed income and portfolio strategy, not only made newspaper headlines but was reported in prominent magazines such as Vanity Fair. Allegedly, Mr. Kang received more than $100,000 in bribes, including prostitutes, bottle service, drugs, vacations and weekend trips, expensive watches, VIP tickets to concerts from Ms. Kelly and another broker Gregg Schonhorn, in exchange for promoting the interest of Deborah Kelley’s broker-dealer. It is reported that Navnoor Kang deposited $2 billion with Ms. Kelly’s broker-dealers. Wall Street Journal reportedly quoted U.S. attorney Preet Bharara calling this a “classic case of quid pro quo corruption.”

As per FINRA records, she was registered with Sterne, Agee & Leach Inc.in 2014 and subsequently with Stifel, Nicolaus & Co. Inc. after Stifel bought the former broker-dealer. She was reported fired by Stifel for bribing the pension fund manager with entertainment and gifts to further business opportunities and misrepresentation of these expenses, as noted in the FINRA proceedings that led to her disbarment.

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There is an interesting point in this week’s Wall Street Journal titled “Brokerage Files Don’t Give The Full Pictures,” which talks about the how brokerage firms and individual brokers are held to different standards, when it comes to their BrokerCheck records. BrokerCheck, the online search tool from FINRA for brokers and brokerages, reports arbitration decisions that are not in a securities firm’s favor but not the negotiated legal settlements, whereas every settlement in a broker’s record is clearly delineated. So why does this gap exist in reporting and how does it continue to happen?

FINRA is not a government body, but it is overseen by the Securities and Exchange Commission (SEC). Within 30 days of reaching a settlement, brokerage firms are obligated to report agreements to FINRA, if the amount meets a certain threshold. However, BrokerCheck records pull information from an SEC document named “Form BD” that doesn’t ask brokerage firms about negotiated settlements. The agreement that gets reported to FINRA in the event of a settlement is not currently a part of SEC approved list of documents. This loophole in communication and reporting allows brokerage firms to maintain clean BrokerCheck records, without disclosing settlements to investors. As far as brokers are concerned, the BrokerCheck information comes from a different FINRA form that does require brokerages to disclose if they paid settlements on behalf of any employees over $15,000. It should be noted that many or most settlement payouts for brokers are actually paid for by brokerage firms and these firms are listed as co-defendants or only defendants in the FINRA arbitration proceedings.

Many individuals in the securities industry feel that data about brokerage firms should be more transparent so that they can be ranked based on this information. There are others who are “shocked” by this gaping hole in the BrokerCheck that does not paint the “full picture”, as per the WSJ story. Those in favor of the current scenario, argue that brokerage firms settle for many reasons without admitting to wrongdoing, so reporting settlements would create an unfair perception about the brokerage firm in an investors’ mind.

Patrick Churchville of Rhode Island has been accused of orchestrating a $21 million Ponzi scheme and was recently sentenced to 7 years in prison by a federal judge, according to an Investment News report. Mr. Churchville is thefinancial-fraud-300x200 owner and president of ClearPath Wealth Management and according to SEC’s complaint, he allegedly diverted funds from investors to pay older investors, used their funds as collateral for loans or converted investments to benefit ClearPath Wealth Management. According to the news report, he allegedly used $2.5 million of borrowed money to buy a lavish waterfront home in Rhode Island.

Mr. Churchville started running his Ponzi scheme 2010 onwards and like in any Ponzi scheme, he added to his net worth at the cost of his victims, who lost their homes and all their savings. One of his victims was left on food stamps and needed heating assistance by the end of it, and others were forced back into the workforce in their retirement years. U.S. District Court Chief Judge William E. Smith called the whole scheme a “tragedy”. Churchville allegedly pleaded guilty to five counts of wire fraud and one of tax fraud for failing to pay more than $820,000 in taxes. He has also reportedly been ordered to pay restitution to his 114 victims although the number is unspecified.

Being victimized by financial fraud not only means lost savings but can completely wreak someone’s life and strain personal relationships. At Malecki Law, we regularly help victims of Ponzi scheme get justice and restitution. If you suspect a financial advisor or brokerage firm has been taking advantage of you or your loved ones, reach out for legal advice.

istock88023523small-crop-600x338-300x169According to the Consumer Financial Protection Bureau, 17 percent of Americans 65 and older, have already been the victims of financial exploitation.

A new study by the AARP Fraud Watch Network reveals that Americans who lose money to fraud typically exhibit a higher degree of confidence investing in unregulated investments and tend to trade more aggressively than other investors. The fraud watch network interviewed 200 victims of investment fraud and conducted 800 interviews with regular investors for this study that was commissioned a year earlier.

There has been a change in the way investors save for retirement. People are now more used to taking charge of their retirement since traditional pension plans have declined and technology has made it easier for average investors to enroll in trading and retirement accounts. The AARP study quotes Shadel, their lead researcher as saying “decline in traditional pensions has prompted millions of relatively inexperienced Americans to take on the job of investing their own money.” Technology has also made it easier for scammers to reach investors.

office_suit_corportate_237605_l-300x224The securities fraud attorneys at Malecki Law are interested in hearing from investors who have complaints against stockbroker Matthew Maczko.  Mr. Maczko was employed and registered with Wells Fargo Advisors, LLC, a national broker-dealer out of the firm’s Oakbrook, Illinois, from February 2008 to September 2016, according to his publicly available BrokerCheck, as maintained by the Financial Industry Regulatory Authority (FINRA).  He was previously registered with UBS Financial Services, Inc. from November 1998 to March 2008, according to BrokerCheck records.

In 2017, Mr. Maczko was permanently barred from association with any FINRA member broker-dealer by FINRA, after submitting a Letter of Acceptance, Waiver and Consent No. 2016050430201.  According to the AWC, Mr. Maczko violated NASD Rule 2310 and Rule 2111, both pertaining to suitability of investment recommendations, because from 2009 to 2016, Mr. Maczko “effected excessive transactions in four brokerage accounts of [a] customer … who is now 93 years old,” and “during this period, Maczko effected over 2800 transactions in these accounts that generated approximately $581,650 in commissions, $84,270 in other fees, and approximately $397,000 in trading losses.”  As the AWC went on, “[t]his level of trading was unsuitable.”

FINRA Suitability Rules require that recommendations made by the broker to the customer be suitable.  This means that the broker must consider the investor’s age, investment experience, age, tax status, other investments, as well as other factors when making a recommendation to buy or sell securities.

Recently, CNBC interviewed Jenice Malecki for their white collar crime series, “American Greed”. The episode tonight (Feb 13, 2017), by CNBC correspondent Scott Cohn, is focused on John Bravata, who ran a real estate Ponzi Scheme from 2006 to 2009, through his company BBC Equities LLC. He collected more than $50 million from investors, promising their money would be used to purchase real estate. However, most of it went into financing his lavish lifestyle. Being an experienced securities fraud lawyer and having handled high-profile real estate scams, Ms. Malecki was asked to share her expertise on-camera about real estate investment scams and what to watch out for.

In the video, Ms. Malecki cautions investors about typical real estate scams, who they target, the telltale signs of fraud and resources available for investor protection. This interview has already aired on CNBC and in over 27 NBC affiliated channels. It can also be viewed on http://www.cnbc.com/2017/02/10/the-greed-report-tempted-by-the-real-estate-market-investor-beware.html

We frequently represent individuals who have received an SEC Subpoena, and often the first question asked is, “Why did I get this subpoena? I did nothing wrong.”  The SEC investigates many kinds of misconduct, and the people they seek information and documents from (through the use of Subpoenas) very often are not “targets” of the investigation, but the SEC may believe they could be a “witness,” or may have useful information that could aid the investigation.  Understanding the common investigations the SEC may commence is a good first step to understanding what prompted the Subpoena.

According to the SEC, the most common types of investigations of potential securities violations include:

  • Misrepresentation or omission of important information about securities – when promoting the sale of securities, brokers, broker-dealers and other securities professionals should ensure that promotional materials accurately reflect the characteristics and risks of the securities.