Articles Posted in elder fraud

The Public Investors Advocate Bar Association (PIABA) will be welcoming back the organization’s former board member, Jenice Malecki, as a moderator for its Mid-Year Meeting and one-day continuing legal education (CLE) program entitled Getting Grandma’s Nest Egg Back.  The program kicks off on April 21, 2022, from 12 PM to 6 PM, and will be held via Zoom for registered participants.  The CLE program is designed for securities arbitration practitioners, including attorneys, experts, consultants, mediators, educators, but it is also open to the general public.

Ms. Malecki will be moderating the program finale, Strategies and Techniques in Dealing with FINRA Arbitrations Involving Senior Citizens. The panel will feature securities litigator Sandra Grannum from the law firm Faegre Drinker and Professor Christine Lazaro, Director of the Securities Arbitration Clinic at St. John’s University School of Law. The experienced panel of lawyers will delve into strategies and techniques such as client and witness preparation, cross examination of brokers and registered investment advisors (RIAs), tactics commonly employed by defense firms, and what to consider in arbitration when dealing with senior citizen claims specifically.

Financial elder abuse is a topic that is near and dear to Ms. Malecki, who has long been passionate about advocating for retirees who have been taken advantage of or have lost their retirement savings owing to brokerage firms and financial professionals who did not properly manage or supervise their retirement accounts.  For nearly 30 years, Ms. Malecki has successfully brought numerous lawsuits on behalf of seniors and retirees who have lost their financial nest eggs, recovering tens of millions of investment dollars on their behalf.

Yesterday, Malecki Law filed its official response to FINRA’s proposed changes to FINRA Rule 3240, in which FINRA seeks to modify the five current exceptions to the general rule that prohibits any “registered person” with a brokerage firm, from borrowing or lending to their customers. The rule applies to registered persons, which is most typically the account’s stockbroker, but applies to any licensed person with the firm. While FINRA has proposed this rule to “narrow the scope” of certain exceptions to the rule, Malecki Law filed its comment because of concerns that some of the modifications do not go far enough and still leaves room for possible abuse of the customer.

The five existing exceptions that currently permit borrowing or lending arrangements with a customer under Rule 3240 are if the customer is (1) a member of the registered person’s immediate family; (2) if the customer is a financial institution; (3) if the customer is also a registered person with the same firm; (4) if the lending arrangement is based on a personal relationship with the customer such that the arrangement would not exist had the personal relationship not existed in the first place; and (5) if the lending arrangements is based on a business relationship external to the broker-customer relationship.

Malecki Law is in favor of Rule 3240’s general prohibition against borrowing or lending to customers, because, as noted in Malecki Law’s filed comment, “there are thousands of brokers and advisors in America,” and therefore plenty “available to take over the debtor or lender’s investment account until the loan is repaid.” So while we support any proposal that narrows the rule, we believe that the inherent conflicts of interest in allowing such arrangements, even with a narrowed set of exceptions, could be entirely avoided in the first place.

This week, Malecki Law filed its second FINRA arbitration lawsuit against Henley & Company, LLC on behalf of a group of retirees who lost their money in an apparent Ponzi Scheme.  Their arbitration alleges that they were victimized by the brokerage firm’s inadequate supervision over its registered representative, Philip Incorvia, by allowing him to run his alleged Ponzi scheme unchecked out of a Henley branch office.

It is alleged that for nearly fifteen years, Henley failed to supervise Mr. Incorvia as he sold fictitious investments in Jefferson Resources and Vanderbilt Realty out of Henley’s Shoreham, New York office.  The scheme was uncovered when he died in August of 2021.  Investors not only trusted Mr. Incorvia, but their trust was bolstered because Henley’s documents prominently featured a reassuring connection to Jefferson Resources, lending it a sign of legitimacy.  For example, Henley featured Jefferson on much of its correspondence sent to customers, including monthly statements, tax documents, and general letterhead.  Malecki Law filed its first lawsuit on behalf of a retiree in October of 2021, claiming losses of $2.5 million. Since then, more Henley customers have come forward after demanding answers and failing to receive financial restitution from Henley.

The five investors who are part of the second group lawsuit, filed this week, are claiming losses in excess of $900,000, and are all elderly retirees from New York, New Jersey, Massachusetts, and Florida. FINRA has already granted the group expedited status to the proceedings due to their senior age, which should help fast track a recovery. Some of the investors in the group were already delayed in learning about the scheme because it appears Henley failed to notify them of the fraud, which several of its corporate officers named in the lawsuit were believed to have known about for several weeks or months following Mr. Incorvia’s death. In November 2021, it is alleged that Henley further sent out a misleading letter to its customers, suggesting that they could recover their lost investment funds through an insurance policy benefitting Mr. Incorvia’s personal estate. Henley’s letter failed to mention that the investors seeking a recovery against the estate would likely not have legal standing to bring a claim, since the alleged investments were in the names of a companies, not Mr. Incorvia personally. The letter also omitted that Henley had apparently already sought to claim the proceeds of the policy for itself under contractual indemnification and contribution clauses within Henley’s own employment agreements with Mr. Incorvia.

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.”

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.

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.

In March 2020 Oil prices had their worst day since 1991, plunging to multi-year lows. Tensions between Russia and Saudi Arabia and OPEC’s failure to strike a deal were escalated by the global economic slowdown spurred by COVID-19 resulting in oil’s worst day since 1991. With oil’s and the energy markets substantial price plunge the investment fraud attorneys at Malecki Law announce the firm’s investigation into potential securities law claims against broker-dealers relating to the improper concentration or oil and gas in portfolios, as well as the sale of energy related structured notes, Exchange Traded Funds (ETFs), and Master Limited Partnerships (MLPs).  Malecki Law has successfully prosecuted a number of these cases, including obtaining awards of attorneys’ fees and costs for investors.

Malecki Law is interested in hearing from investors who were recommended concentrated positions in oil and gas, as well as those recommended futures in Oil and Gas, MLPs or energy sector ETFs. Investors have lost millions in these products as the energy markets dropped.  As prices have continued to slide, losses have compounded. The energy market plunge is terrible for those whose financial advisors recommended that investors stay in and “ride it out.”

Unfortunately, many energy sector investments are risky investments that can be inappropriate for typical “mom and pop” investors, as well as those heading to or in retirement.  Unfortunately, there are some financial advisors and brokers that sell them to their clients anyway, without fully disclosing the potentially devastating risks.

The Department of Justice coordinated the largest elder fraud sweep by filing cases and consumer actions related to financial scams targeting or disproportionately affecting seniors nationwide. In their announcement yesterday, the DOJ claimed that their civil, as well as criminal actions, filed with the support of law enforcement, involve claims of three-fourths of a billion in monetary losses and millions of alleged victims. Elder financial exploitation, the illegal misappropriation of an old person’s funds, is destroying millions of lives. News of the DOJ elder fraud sweep comes a month after the Consumer Financial Bureau released a report with data indicating an increase in reported incidences involving elder financial exploitation. While the reported elder financial exploitation prevalence might shock some, our investor fraud lawyers are very familiar with this growing epidemic.

Elder financial fraud manifests in many ways through a variety of scam artists from Ponzi Scheme perpetrators to relatives. The DOJ’s recent prosecution focus is tech support fraud, which is the most commonly reported fraud that the elderly reported to the Consumer Sentinel Network. Other types of popular financial scams affecting seniors are investment schemes, identity theft, internet phishing, grandparent scam, lottery scams and more, according to the National Adult Protective Services Association. Additionally, older individuals lose their life savings, investments or retirement money from unscrupulous brokers or financial advisors. Seniors get conned into making inappropriate investments because of their greater tendency to trust financial professionals. Worst of all, seniors defrauded at broker-dealers do not have the time to remake money earned throughout their lifetime.

The Consumer Financial Bureau analyzed data from Suspicious Activity Reports filed between April 2013 and December 2017 to shed more awareness on the issues of elder financial exploitation. Broker-dealers and other financial institutions file suspicious activity reports with the U.S Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) in compliance with the federal Bank Secrecy Act.  The study found that suspicious activity reports referencing financial exploitation quadrupled within these few years. In 2017, the financial institutions reported $1.7 billion in 63,500 suspicious activities reports. The average loss indicated on elder financial exploitation suspicious activities reports was $34,200, but that amount varied depending on the type of account, specific age group, and other factors.

We have previously written on the concept of “churning,” which is a fraud perpetrated by brokers who buy and sell securities for the primary purpose of generating a commission, and where that activity would be considered excessive in light of the investor’s investment goals.  But is it possible to have a churning claim when a broker sells you an insurance product or recommends swapping out one variable annuity policy for another?  And can a single transaction be considered “excessive” in the context of a churning claim?  The answer to both of these questions is yes.

The law appears to provide an opening for churning claims when it comes to investors, and in particular retirees, who find themselves “stuck” with an illiquid annuity in their portfolio.  Retirees, who tend to need access to capital more than other segments of the population (due to not working and the increased medical costs associated with getting sick and old), are often sold unsuitable variable annuities, which can tie up retirement funds for decades.  Technically the investor can get of the policy, but not without paying significant IRS tax penalties and steep surrender charges, sometimes as high as 10% to 15%.  Sadly, these costs and product features are often misrepresented and go undisclosed at the point of sale.

While not all annuities are considered securities under the law, variable annuities certainly are securities.  The SEC requires the seller of a variable annuity to possess a Series 6 or 7 brokerage license with the Financial Industry and Regulatory Authority (FINRA).  Variable annuities can be distinguished from fixed annuities in that their returns are not fixed, but rather determined by the performance of the stock market.  One characteristic of a variable annuity policy is that you get to choose a fund to invest in, much like you would with a mutual fund.  Variable annuities are highly complex investment products.  They are also costly to investors, in part because of the high commissions they generate for the brokers who sell them.  Regardless of whether you were sold a variable annuity or some other type, it should be noted that FINRA requires its member brokerage firms to monitor all products sold by their brokers.

Wall Street is constantly crafting complex and volatile products that somehow end up in the investment accounts on Main Street.  The latest turbulence in the stock markets has already been in part attributed to one of the latest Wall Street machinations:  exchange-traded-products (ETPs) linked to volatile exchanges – specifically, products linked to the Chicago Board Options Exchange (CBOE) Volatile Index (VIX).  Today alone, the Dow Jones Industrial Average closed more than 1000 points down from yesterday, and due to the volatility that is still ongoing, the devastating fallout is largely unrealized and has left investors scrambling.

Since its inception in 1993, the VIX was one of the earlier attempts to create an index that broadly measured volatility in the market.  One such ETP linked to the VIX is Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN (ticker symbol XIV), which the issuer just announced it will be shutting down after losing most of its value earlier this week.  Products that may be at similar risk include Proshares SVXY, VelocityShares ZIV, iPATH XXV, and REX VolMaxx VMIN.  But the risks associated with these ETPs have been well known to professionals in the securities industry, and investors who were recommended these products should have received a complete and balanced disclosure of these risks at the time of purchase.

In October of 2017, the Financial Industry Regulatory Authority (FINRA) ordered Wells Fargo to pay $3.4 million in restitution to investors relating to unsuitable recommendations of volatility-linked ETPs.  FINRA also published a warning to other firms in Regulatory Notice 17-32 regarding sales practice obligations, stating that “many volatility-linked ETPs are highly likely to lose value over time” and “may be unsuitable to retail investors, particularly those who plan to use them as traditional buy-and-hold investments.”  This was not the first warning from the regulator.

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