Articles Posted in Investors Topics

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Securities Industry Background

The securities industry is one of the most regulated industries in the United States. Statutes, common law, and federal regulations all govern the conduct of securities firms and their representatives. Securities firms must register with the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulated organization (SRO) that protects investors by ensuring that the securities industry operates honestly and fairly. An SRO is an organization that has power to create and enforce industry regulations on its own. This means that FINRA has the authority to create and enforce its rules on securities firms that register with FINRA. A broker-dealer is a securities firm that must register with FINRA. Broker-dealers engage in the business of buying and selling securities. Broker-dealers also offer services such as trade execution, selling securities out of inventory, and lending. Since all broker-dealers and its registered representatives (its individual brokers) must register with FINRA, FINRA’s rules and regulations apply to broker-dealers. If you notice all your investments declined at the same time, it may be a clue that your broker engaged in misconduct. Your brokerage firm has a duty to supervise its brokers to detect and prevent misconduct. You may have a failure to supervise claim. You need a New York Failure to Supervise Lawyer like the lawyers at Malecki Law to review your portfolio, at no cost.

Failure to Supervise Broker Misconduct

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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.

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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.

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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.

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Few would dispute that Cryptocurrency – whether Bitcoin, Ethereum, or the thousands of other smaller coins – is a speculative and risky investment. The volatility alone in these coins was showcased this past weekend, with Bitcoin suddenly plunging over 25% from nearly $57,000 to just over $42,000 per unit. This is mere weeks after Bitcoin had dropped from its all-time high of roughly $69,000 in early November. Needless to say, investing in crypto is not for the faint of heart and certainly not the type of investment you would see in the portfolio of a risk-averse retiree. Yet it is possible that retirees and conservative investors who rely on financial advisors to manage their retirement assets are receiving exposure to Bitcoin and other cryptocurrencies without even realizing it.

Crypto is a polarizing topic, with some insisting that it is the future, others distrusting it as a Ponzi-type pump and dump, and many more who have no understanding of what it is at all. World governments have traditionally been reluctant to adopt crypto because they see it as a threat to their central banks and control over their fiat currencies, but approaches to regulation vary.  China has outright banned crypto, El Salvador has fully adopted Bitcoin to allow its citizens to shop and pay taxes with, and most other countries (including the United States) are still figuring out how to regulate it.

Financial institutions have been even slower at the notion of adoption because the nature of blockchain transactions poses a threat to the “middleman” place of these institutions in brokering everyday global transactions. Jamie Dimon, the CEO of JPMorgan Chase, has been famously on record for nearly a decade, repeatedly calling Bitcoin “worthless,” “fool’s gold,” and a “fraud.” Yet now it is becoming commonplace for retailers to accept certain cryptocurrencies as payment directly from their customers, with no more hassle than it is to process a credit card or any other electronic payment.

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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.”

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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.

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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.

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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.

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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.”

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