Investors Topics

Berthel Fisher and PNC Fined In Connection With The Sale Of ETFs

February 25, 2014 | Malecki Law Team

Just yesterday, FINRA announced that it has fined Iowa-based broker-dealer Berthel Fisher $775,000 for failures to adequately train and supervise brokers selling alternative investments, such as real estate investment trusts (“REITs”), and non-traditional exchange traded funds (“ETFs”), including leveraged and inverse ETFs.

In addition to REITs and ETFs, Berthel brokers also reportedly sold managed futures, oil and gas investments, equipment leasing programs and business developments companies, all while having “inadequate supervisory systems and written procedures for sales” of these investments.

Firms are required to have sufficient supervisory systems and written procedures for the sale of such investments to help ensure that these potentially risky and illiquid investments are only sold to investors for whom they are suitable and appropriate. Oftentimes, these investments are not appropriate for your average investor.

Credit Suisse Group AG Admits to Providing Brokerage and Investment Advisory Services Without Registering with the SEC

February 24, 2014 | Malecki Law Team

Money makes the world go ’round and apparently also makes Credit Suisse employees work faster or slower, as the case may be. The Wall Street Journal reported on Friday February 21, 2014 that Credit Suisse Group AG (Credit Suisse) agreed to pay $196 million to settle charges brought by the Securities and Exchange Commission that it provided brokerage and investment services to U.S. clients without registering with the SEC. According to the SEC’s Order, Credit Suisse willfully violated the Exchange Act and Investment Advisors Act by failing to register, in violation of Section 15 of the Securities Exchange Act of 1934 and Section 203 of the Investment Advisors Act of 1940. The SEC announced in a news release on Friday that Credit Suisse admitted to the violations.

In the Order, the SEC noted that Credit Suisse apparently knew the services its relationship managers were providing across borders to U.S. clients was improper, and set up a properly registered entity to transfer the U.S. business. However, the Order went on to detail that the transfers took far more time than was initially planned, partly because Credit Suisse did not properly incentivize its employees to timely transfer the accounts. This, in addition to other wrongful conduct led the Commission to conclude that Credit Suisse failed to implement its own policies and procedures to efficiently move the accounts. The Order and the WSJ article both noted that Credit Suisse has subsidiaries that are properly registered to provide both brokerage business and investment advisory business to U.S. clients. Until the bank completed its exit from its cross-border business, it continued to charge brokerage and advisory fees to the U.S. clients it served.

Registration by brokers, dealers and investment advisors with the SEC or state regulators is a bedrock principle of the securities laws and is designed to protect investors. Section 203 of the Investment Advisors Act regulates and requires registration of brokers, dealers and investment advisors, with limited exception. The SEC regularly fines individuals and entities such as Credit Suisse for failing to follow these laws.

Buyers Should Beware when Considering Investments Involving Bitcoin

February 12, 2014 | Malecki Law Team

Bitcoin, and the exchanges that provide a space for trading Bitcoin, have received a lot of press lately. The Wall Street Journal reported on February 11, 2014 that the price of a Bitcoin dropped to approximately $650. This would be a significant drop from a trading high of over $1,100 per Bitcoin in mid-December 2013, according to CoinDesk’s Bitcoin Price Index.

As the Journal reported, the Slovenia-based Bitcoin-trading exchange Bitstamp halted customer withdrawals while Bulgaria-based BTC-e had delays in crediting transactions. This, apparently, came as a result of a hacker attack on the exchanges. Recently, Mt. Gox, a Tokyo-based Bitcoin trading exchange recently reported that it was halting withdrawals for a period of time after it discovered a software glitch that “could give rogue traders a way to falsify transactions,” as reported by the Journal. Incidentally, according to Wired, Mt. Gox stands for “Magic: The Gathering Online Exchange” and prior to 2011 was a digital trading exchange for Magic playing cards. According to that Wired article, in 2011, the website was changed to handle transactions exchanging Bitcoin.

Back in 2011, it was reported by Daily Tech that Mt. Gox was forced to shut down trading and “roll back” trades after 478 accounts were allegedly hacked, resulting in the withdrawal of a total of 25,000 Bitcoins. Mt. Gox reportedly informed investors that they “assume no responsibility should your funds be stolen by someone using your password,” and that the hacker made off with only 1,000 of the Bitcoins stolen. According to the Daily Tech article, the hacker gained access to the investors’ passwords by hacking Mt. Gox’s database.

Steep Market Selloffs May Uncover Risks in Accounts Such as Adverse Consequences of Margin

January 27, 2014 | Malecki Law Team

It was reported by Bloomberg News on Friday January 24, 2014 that there was a “massive selloff” in emerging markets that led to a decline of approximately 2% to the Dow Jones Industrial Average and S&P 500. It is during such fast and sudden selloffs that underlying problems in public investors’ brokerage accounts are typically uncovered.

At Malecki Law, we have seen an increase in claims arising from margin in investors’ accounts. Overwhelmingly, investors were not informed about the risks of buying securities on margin and were only told that they could make more money by leveraging their accounts to buy more securities. However, without fully understanding the risks of products and services such as margin, public investors cannot make a fully informed decision about whether it is suitable for them.

Margin is essentially a loan from the brokerage firm to the investor. The effect of margin is not similar to that of a typical home mortgage, because the securities or cash in the investor’s brokerage account serves as collateral for the loan and large market drops can cause margin calls, request for more money or collateral or a sell-off of positions. Investors may use margin to increase their purchasing power or “buying power,” as some brokers like to say. However, it is very important that the investor is fully informed of all risks associated with the use of margin, including that they can lose more than they borrow.

Leveraged and Inverse ETFs Can Spell Trouble for Investors Who Buy Them and Brokerage Firms Who Sell Them

January 15, 2014 | Malecki Law Team

Just this past week, two brokerages units of Stifel Financial were ordered by the Financial Industry Regulatory Authority (“FINRA”) to pay more than $1 million related to the sale of leveraged and inverse exchange-traded funds (“ETFs”). Of the more than $1 million to be paid, $550,000 comes in the form of a fine to be split by Stifel, Nicolaus & Co., Inc. and Century Securities Associates Inc. The firms were also ordered to pay more than $475,000 in restitution to 65 customers to compensate them for losses incurred on ETF purchases.

According to the Wall Street Journal, FINRA said that some of the brokers who were selling the ETFs did not have a full understanding of the products they were selling, including the risks associated with them.

Brokerage firms can be fined and/or sued when they allow their brokers to sell unsuitable, or inappropriate, investments to customers, especially when the brokers have not been properly trained. Industry regulations require that a broker understand both the product they are selling and the customer to whom they are selling the product. Most importantly a broker must understand the risks of the products being sold and appreciate the customer’s ability (or inability) to tolerate risk. Brokerage firms are also required to train their brokers properly, including what qualifies as a suitable, or appropriate, recommendation to a customer.

REIT Investment on the Rise – But Is That a Good Thing?

October 1, 2013 | Malecki Law Team

As reported recently by the Wall Street Journal, investment in non-traded Real Estate Investment Trusts (“REITs”) is at an all-time high and poised to continue to rise. Some estimates anticipate more than $18 billion to be invested in non-traded REITs by the end of this year.

Solicited with the prospect of annual yields of more than 6%, income-seeking investors have had their hard-earned savings steered into non-traded REITs, oftentimes without a complete disclosure of the risks involved. Many brokers and financial advisors pitch REIT investments to their retirement and near-retirement aged customers, emphasizing the perceived “safety” of real estate investment coupled with the higher than normal annual yield, but do not fully explain the associated risks and bloated commissions (as high as 15% in some cases).

What many investors are not told is that because these investments are not publically traded, while the REIT itself may report to them a specific value for their shares, the actual value of their investment may not be readily available – and could even be 10-20% lower if sold on secondary markets. This discount is often caused by the illiquidity of the investment. In other words, sellers are forced to sell for less than what they paid in order to get out of the investment (also called liquidating the investment).

Criminal Charges Filed Against SAC Capital Adisors

August 2, 2013 | Malecki Law Team

As has been widely reported, Criminal charges were filed against SAC Capital Advisors LP, with accusations that the hedge-fund firm is guilty of a decade long “scheme” of insider trading. In total, prosecutors charged SAC Capital and its business units with a total of four counts of securities fraud and one count of wire fraud. The charges come after a multiyear investigation by the FBI, prosecutors, and the SEC. The government is also accusing former SAC portfolio manager, Richard Lee, of conspiracy to commit securities fraud. The indictment comes only a short time after SAC agreed to a $616 million settlement of insider-trading charges.

Civilly, prosecutors are looking to have SAC and any of its affiliated corporate entities surrender all of their assets. SAC manages some $14 billion in assets, a majority of which does not come from outside investors.

In a separate civil action, the SEC is seeking a lifetime ban for Steven A. Cohen, who started SAC twenty-one years ago with roughly $20 million of personal funds, from managing client money. Mr. Cohen has not been charged criminally but denies any allegation of wrongdoing. Before the financial crisis of 2008, SAC held over $16 billion in assets and reportedly charged some of the highest fees in the business – 3% annually on the total investment, plus as much as 50% of whatever profits the firm generates.

Maxwell B. Smith Sentenced for Running a New Jersey Ponzi Scheme: Investors Should Look to His Brokerage Firm for Relief

June 12, 2013 | Malecki Law Team

Maxwell B. Smith was sentenced to serve the next seven years in federal prison for operating a $9 million Ponzi scheme. Maxwell sold investments as a fund that made loans to nursing homes. Smith had previously plead guilty to several counts of mail fraud as well as money laundering.

It is believed that Smith was employed as a financial professional at several financial firms in New Jersey, where he provided financial advice to his clients, many of whom may have lost money to his Ponzi scheme, Health Care Financial Partners (“HCFP”), purportedly a fund with hundreds of millions of dollars in assets. Investors even received a prospectus guaranteeing 7.5% to 9% per year, tax free. Investors could buy bonds in amounts ranging from $25,000 to $300,000.

Investors may not know that broker-dealers, like the ones that it is believed registered Mr. Smith, have a duty to supervise their employees. As a result, in situations like these, investors may be entitled to recover against the financial firms that employed the financial advisor for failing to supervise their employee.

LPL Reportedly Under Fire From State Regulators

April 1, 2013 | Malecki Law Team

The broker-dealer LPL, Linsco Private Ledger, has been in the news a lot recently – for all the wrong reasons. LPL was even recently featured in The New York Times for its frequent “tangles” with state and federal regulators.

LPL is the nation’s fourth largest brokerage firm, with more than 13,000 brokers who currently service over 4 million customers. LPL attracts brokers from other brokerage firms by reportedly paying a higher percentage of the commissions generated directly to the broker – roughly 80% at LPL versus as low as 15-25% elsewhere. While this model can be very lucrative for well-minded brokers, this model can also attract deceitful brokers who do not have their clients’ best interests in mind and seek to skirt the law.

LPL’s network of brokers is very spread out by brokerage firm standards, with many brokers operating out of an office of only one or two individuals – versus other brokerage firms which may have up to several hundred brokers under one roof.

Jenice Malecki of Malecki Law Speaks with the Wall Street Journal About “Ending Up In Arbitration”

March 20, 2013 | Malecki Law Team

Securities attorney Jenice Malecki spoke recently with Wealth Management at wsj.com‘s Caitlin Nish about what makes a strong investor claim against a broker and the steps that lead up to brokers having to defend themselves in arbitration.

To watch the video click here.

Investors who have lost money because of bad advice, unsuitable investment recommendations and misconduct by their financial advisor may seek to recover their losses through arbitration.