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Malecki Law filed an expedited FINRA arbitration complaint today on behalf of a retired couple from New York alleging that their brokerage firm Henley & Company LLC failed to supervise its recently deceased, registered representative Philip Incorvia and the Henley branch office he worked out of.  The complaint claims losses of approximately $2.5 million and that Henley essentially allowed Mr. Incorvia’s Ponzi scheme to flourish since about the time he joined Henley in 2006.  Through these alleged supervisory failures and extreme negligence, the complaint alleges that Henley effectively promoted Mr. Incorvia’s fraudulent practices, including allowing him to freely run his own business, Jefferson Resources, Inc., out of the satellite branch office of Henley’s affiliate, SEC-registered investment advisory firm, Henley & Company Wealth Management, LLC, located at 10 Beatty Road, Shoreham, New York.  Mr. Incorvia operated his Ponzi scheme out of this Jefferson entity housed right inside a Henley office, soliciting investor funds away from investor accounts at Henley to be invested directly into private “alternative” (i.e., fictitious) investments with Jefferson.  Mr. Incorvia’s recent passing is what caused the Ponzi scheme to unravel.  A Henley executive named in the complaint has further admitted to the existence of numerous other Henley customers who are only just discovering that they have been victimized as well.

The complaint alleges that Henley knew about the existence of Jefferson being run out of its own office but failed to follow industry rules to both report and supervise the activity. According to Henley’s BrokerCheck Report published by the Financial Industry Regulatory Authority (FINRA), the defendant brokerage arm of the firm (Henley & Company LLC) apparently failed to disclose the existence of its10 Beatty Road satellite office to FINRA.  However, Henley’s advisory arm (Henley & Company Wealth Management, regulated by the SEC) did disclose it as an operational branch office in a public ADV filing to the SEC.  The ADV filing further disclosed Henley’s awareness of Jefferson by reporting Mr. Incorvia’s association with Jefferson as its “President.” According to BrokerCheck, both Henley firms are under common supervisory control, have the same main office address in Uniondale, New York, and are owned by the same CEO, Francis P. Gemino, with common oversight by their managing director, Michael J. Laderer.  Both Gemino and Laderer are named in the lawsuit as liable control persons.

FINRA’s supervisory rules require all brokerage firms to disclose and report all outside business activities of its registered representatives, further requiring firms to audit and supervise those businesses, especially if they are small branch offices. Both FINRA and the SEC have made clear that supervision of small, satellite branch offices require the same level of supervision as a main office.  The SEC, for instance, takes the position that geographically dispersed offices staffed by only a few people are more at risk of fraud because “[t]heir distance from compliance and supervisory personnel can make it easier for registered representatives [like Mr. Incorvia] to carry out and conceal violations of the securities laws.”

It is usually a bad sign when a retiree or the typical conservative investor suffers investment losses and brings a case to us where their broker was trading options.  In such instances, it at least bodes well for a customer’s legal case when the investor has limited investing knowledge yet has somehow been approved by their brokerage firm for options trading.  It is a sign that the investor may have been misled by a broker who was not properly supervised by the firm, as firms have a duty to know their customers and recommend investment strategies that are suitable to each investor’s risk tolerance and objectives. Very generally, options are not considered safe for conservative investors, but there are circumstances where they could be.

Options are considered high risk because they are derivatives of an underlying stock price, which gives investors a completely separate asset class of investment to speculate in.  The speculation is a bet that not only tries to predict whether the stock price will go up or down to a particular price (known as a “strike price”), but whether it will reach or exceed that level within a specified timeframe (i.e., by the option contract’s expiration date).  As the time frame gets closer and closer to expiration, the value of the options contract decays and becomes worth less and less over time, until it expires worthless, which is what happens with most options contracts. Moreover, when buying a stock, you simply pay the price of the stock.  When buying an option contract, you pay a premium in addition to the price of the stock (should you decide or have the ability to later exercise that option).  Therefore, buying shares in a specific stock is almost always a safer strategy than buying options for that same security.

Options differ from other asset classes in that they give the buyer (or seller) the right, but not the obligation, to buy (or sell) an underlying stock at a specific price on or before a specific date. It is the premium paid on an option that gives the purchaser the right (but not obligation) to later buy or sell, no different than placing a down payment on a home that you intend to later purchase at the agreed upon price. You could walk away from the purchase later and you only lose the premium.  So by granting an investor a right, rather than an obligation, to transact in a certain security, options provide investors with the opportunity to speculate on the future price movement of that security. Although options allow investors to hedge, add cash flow, and leverage returns, options are inherently risky product because they are complex products that are wholly based on price speculation. It is, therefore, highly critical that your broker discuss all applicable risks with you before having an options trading strategy deployed in your account.

Malecki Law is currently representing clients and investigating allegations against the brokerage and investment advisory firm Henley & Company, LLC and its recently deceased financial adviser, Philip Incorvia.  Public records show Mr. Incorvia openly and notoriously operated Jefferson Resources Inc. since 1992 (nearly 30 years, while being registered as a FINRA Series 7 licensed broker with Henley & Company – using Henley & Company as the website address for the company).  Mr. Incorvia was employed approximately 15 years with Henley and Company, operating both out of its offices in Shoreham and Uniondale, New York.  Malecki Law is looking for whistleblowers, witnesses, and other victims.

Malecki Law’s investigation relates to a possible Ponzi scheme and/or misappropriation of funds involving many investors and potentially many millions of dollars in losses.  The losses occurred across a number of purported “investments,” including but not limited to Jefferson Resources Inc., Vanderbilt Realty Investors, Inc., and JRI Hedge Fund. The investments were purporting to be mutual funds, hedge funds, and index funds, but it is believed that they were fictitious.  Some were “income producing” while others rolled over.

A Ponzi scheme is a fictitious investment or scam, in which the Ponzi operator typically uses investor money for personal use and non-investment related purposes.  Earlier investors are typically given “returns” which consist of principal coming from newer investors.  Ponzi schemes tend to collapse when there are no more new investors to tap into, which often happens during adverse market conditions.  In this case, it is believed that there was no one left to continue the Ponzi scheme when Mr. Incorvia passed away in August 2012, so it collapsed.

Jenice L. Malecki, Esq., founder of Malecki Law in 1999, was appointed today as co-chair of the New York State Bar Association Commercial & Federal Litigation Section’s Securities Arbitration Committee.  Ms. Malecki has over 30 years of experience in securities arbitration and regulation, as well as whistleblowing claims and commercial arbitration and litigation. Having also been appointed to the FINRA board advisory group called the National Arbitration and Mediation Committee, as well as having been on the board of the Public Investors Arbitration Bar Association board, Ms. Malecki is uniquely qualified to lead this committee.  Ms. Malecki has represented clients around the country and the world, including clients from Europe, Asia, Israel, Hong Kong, Puerto Rico, Mexico and South America.  This broad representation has given Ms. Malecki in-depth expertise in arbitrations, mediations, settlements, and hearings – both live and over Zoom – as directed in court, at FINRA and before regulatory bodies.  Ms. Malecki has also worked on high profile class action cases and appeared on various media shows including but not limited to Wall Street Journal Live, ABC’s Eyewitness News and NBC’s Today Show.  All of this demonstrates Ms. Malecki’s knowledge and passion for securities work.

The New York State Bar Association (NYSBA) was founded in 1876 in an effort to cultivate and develop the law. Educating the public, as well as evolving with the changes of the legal profession, are part of the mission. The NYSBA promotes and champions equal justice through state and federal legislation. With over 70,000 members, the NYSBA attempts to nurture the science of jurisprudence while also encouraging changes in the law to effectively arbitrate justice.

Within the NYSBA, a committee was created in 1988 to continue to develop effective representation as well as encourage improvements to the law in areas of commercial and federal litigation. The committee works to foster healthy relationships between various administrative bodies, litigators, and judges to stimulate and encourage research, and collaborative thought on issues that affect commercial and federal litigation. Regulating and promoting legislation that would affect commercial and federal litigation. The extensive network will assist in providing resources for legal educational programs as well as other resources that inform on topics relevant to commercial and federal litigation.

Investors are still watching which way the market is ready to turn after yesterday’s 600-point drop in the Dow Jones Industrial average, the biggest one-day drop in over two months. While world markets appeared to be reacting to the prospect of loan defaults by the Evergrande Group – China’s second largest real estate company and the world’s largest property developer –retail investors, and retirees in particular, should keep in mind that this might be the beginning of something bigger. Given that U.S. equities remain at historic highs, portfolios still have a long way to fall.  It is still unclear what ripple effect Evergrande will have even within China, as the Chinese government has yet to formally decide on whether it will bail out Evergrande or let it fail.  But both scenarios are fueling fears of contagion within the U.S. and world markets. Some are calling this China’s “Lehman’s moment,” despite Evergrande’s debt only being about roughly half of the $600 billion in liabilities that Lehman had when it defaulted.  There are rumblings, however, that Evergrande is the canary in the coal mine for China’s numerous other property companies, representing an outsized portion in driving China’s economy and GDP.  The net effect on retail investors in the U.S., thus, depends to some degree on the level of Chinese investment and debt holdings by U.S. companies and financial institutions.

HSBC, BlackRock, and J.P. Morgan have been said to have significant exposure to the Chinese market generally, as do many individual U.S. companies, ranging from Wynn Resorts to Apple.  As always, retail investors who are overconcentrated in any single company or market sector face the biggest risk.  While the stock of many of these companies might seem relatively “safe” over the long term, not every investor can wait for the stock market to rebound.  Seniors and retirees are a prime example, as this is a group regularly identified by U.S. regulators (e.g., FINRA and the SEC) as being vulnerable because they are typically saddled with higher expenses (e.g., medical and age-related expenses) at a time when they need liquidity and are no longer working or earning an income. For this reason, stockbrokers and financial advisors have a legal duty to retirees to recommend investments and an investment strategy that is suitable for this stage of life and the possibility that the stock market will not just continue to rise in perpetuity.

For retirees, overconcentration of an investment portfolio is often the culprit of an investment strategy or recommendation gone wrong.  As we have written in this space before, brokers and financial advisors have long been required to have a reasonable basis for recommending an investment or strategy.  And as of June 30, 2020, brokerage firms have had to comply with a new SEC rule, Regulation Best Interest (Reg BI), which further requires every recommendation to be in a customer’s best interests.  Overconcentrating a retiree’s investment portfolio in largely equities (or worse, a single equity) is typically not in a retiree’s best interests and is what makes a portfolio most vulnerable to significant market events like Evergrande. Even though regulators do their best to raise the public’s awareness of this fact, retail enthusiasm during a bull market often drowns out the well-worn refrain to not put all your eggs in one basket.  FINRA’s “Concentrate on Concentration Risk” publication is just one such warning.

A Cum Laude graduate alumni of New York Law School, Jenice L. Malecki, Esq.,  has taken on a mentor and adjunct professorial role as a professor in the Securities Arbitration Seminar and Field Placement. While at New York Law School, Professor Malecki was a member of the International Law Journal and a teaching assistant.  She was part of a novel program at the time, when at Manhattanville College in Westchester, she was part of a BA/JD program, earning law school credits in undergraduate school.  Now coming full circle and giving back, Professor Malecki has expended her previous role as a frequent guest lecturer and moot court judge for the Securities Arbitration Clinic at New York Law School, as well as other law schools including Fordham, Brooklyn Law School, Pace Law School, Yale Law School and Columbia Law School. Since founding New York Law School in 1999, Professor Malecki has regularly hired students from New York Law School as summer and school-year interns.  Now, student receive an opportunity to work and receive academic credit while being mentored, supervised, and encouraged to develop a deep understanding of securities litigation and arbitration strategy.

The Securities and Arbitration Field Seminar teaches students how to interact with prospective clients, conduct client interviews, tackle legal analysis, draft pleadings as well as represent clients in arbitration proceedings before FINRA. The course involves both seminars and fieldwork experience. They engage in vigorous research, investigation and fact finding, as well as sit in on strategy discussions, write memoranda, briefs and pleadings, as well as assist in the review of discovery and case organization.  Practical experience is invaluable to students, who can “hit the ground running” when they graduate with experience.

New York Law School was founded in 1891, and has a long history of educating young lawyers that work in the heart of New York City’s legal, government, and financial networks. An independent law school in Tribeca, New York City, New York Law School embraces the motto “We are New York’s Law School” through providing various methods for achieving a vibrant legal education. New York Law School was one of the first schools to offer a Juris Doctorate  evening program, as well as built a 235,000 square foot campus in the heart of lower Manhattan near the state and Federal courts to offer opportunities to students in all walks and stages of life. Students are able to interact and work with mentor attorneys, securities arbitration attorneys experienced in the field. Experiential learning is a critical aspect of New York Law School and its teaching method, encouraging students to foster and perfect their legal analysis and skills early on.

Being a financial professional – i.e., a registered representative (RR) – regulated by the Financial Industry Regulatory Authority (FINRA) is not easy.  When misconduct is alleged against the RR in a complaint to FINRA, whether brought by a customer or the employing brokerage firm, the system that is set up to resolve such allegations and disputes generally treats the RR, at least initially, as “guilty until proven innocent.”  Good luck finding a “neutral” fact-finder willing to listen; instead, you will often find an ambitious FINRA staffer, looking for another notch in his or her belt to help their stats and upward mobility.  If and when FINRA decides to bring charges against the RR, it helps to have an attorney who can negotiate a reduced punishment against the RR.

To protect investors and market participants, RRs must abide by the securities laws and FINRA’s rules of conduct.  But even when a financial professional follows those rules, every RR knows that they remain at the mercy of both customers and their firms, who, with little effort, whether fairly or unfairly, can very easily file a public complaint to put other customers or firms on notice about the RR.

If a customer files a complaint or arbitration against the RR, the complaint is reported to and logged on the RR’s public record of disclosure within the Central Registration Depository (CRD).  Any person with Internet access can then view the pending allegations against the RR by visiting BrokerCheck.FINRA.org, where those allegations can additionally surface with a Google search.

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.

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