Investors Topics

“Sophisticated” Investor Represented by Malecki Law Awarded over $200,000 in a 2X Non-Traditional ETF Product Case against Network 1 Financial Securities and its 2X Twin Brothers

October 29, 2019 | Malecki Law Team

Last week, a New York City panel of arbitrators with the Financial Industry Regulatory Authority (FINRA) unanimously awarded an investor represented by Malecki Law over $200,000 in damages, plus attorneys’ fees of $67,000 and 5% interest dating back to May 2018. The panel’s award found the New Jersey-based brokerage firm Network 1 Financial Securities Inc. to be liable in connection with the investor’s allegations of unsuitable investment recommendations, misrepresentations (NY General Business Law § 349), and failure to supervise its broker/financial adviser, Robert Ciaccio, who now has 7 disclosures on his public FINRA BrokerCheck disciplinary record (5 customer complaints and 2 regulatory censures). The investment at issue was Proshares Ultra Bloomberg Crude Oil 2X (otherwise known by its stock symbol UCO), which Mr. Ciaccio recommended to the investor but failed to disclose the numerous risks associated with this product, which belongs to a group of products known as Non-Traditional Exchange Traded Funds (or Non-Traditional ETFs).

FINRA, the Securities and Exchange Commission (SEC), and other regulators have repeatedly warned firms against selling Non-Traditional ETFs because they are difficult to understand and carry risks that are not easily understood by the typical investor. Unlike a simple investment like a stock or bond, Non-Traditional ETFs are fee-laden, structured products, built with derivatives and complex mathematical formulas, which, in “simplest” terms, offer leverage and are designed to perform inversely to an outside benchmark index (e.g., the S&P 500, VIX, etc.). Noting the popularity of these high-risk, high-cost products, FINRA has issued numerous investor alerts and warnings to member brokerage firms about Non-Traditional ETFs, stating:

“While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets…. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met.”

Ponzi Schemes On the Rise?

October 2, 2019 | Malecki Law Team

With the highly-publicized Bernie Madoff Ponzi scheme, which resulted in an ABC mini-series and the HBO original movie, Wizard of Lies, investors might tend to think that Ponzis are a thing of the past. But Ponzi schemes are alive and well, and may even be on the rise. According to a New York Times report from last week, the United States Securities and Exchange Commission (SEC) has prosecuted 50 percent more Ponzi cases in the last 10 years since the Madoff scheme was busted, affecting over 4 million investors in 291 Ponzi cases, ultimately costing investors more than $31 billion in losses.

This week, the SEC filed charges against yet another Ponzi fraudster, James T. Booth, who the SEC alleges to have conducted a multi-year scheme, defrauding approximately 40 investors out of up to $10 million. The SEC complaint alleges that Mr. Booth fabricated elaborate account statements for his clients, many of whom were seniors and unsophisticated investors who utilized Mr. Booth to manage their retirement savings. Mr. Booth is 74 years old and resides in Norwalk Connecticut, and he is the founder of Booth Financial Associates, a firm originally created by Booth to sell advisory services and insurance products.

Mr. Booth was also a financial advisor registered with the investment advisory and brokerage firm LPL Financial LLC, a firm that is registered with the SEC and the Financial Industry Regulatory Authority (FINRA). Over time, Mr. Booth would solicit his customers from LPL to wire money away from LPL to invest in opportunities elsewhere, with promises of safer investments or higher returns.

Recovering Customer Financial Losses from UBS’s Yield Enhancement Strategy (“YES”)

August 29, 2019 | Malecki Law Team

The investment and securities fraud attorneys at Malecki Law are currently investigating UBS’s Yield Enhancement Strategy (“YES”) for the purpose of investor recoveries. Our attorneys are interested in hearing from investors and others who have information and/or have experienced losses due to UBS YES or other complex yield enhancing investments regardless of the brokerage firm.

It appears that the YES strategy may have been sold to UBS clients as a conservative and low-risk investment strategy that would provide them with an increased yield (income) in their portfolio. In fact, in our opinion, the strategy was an esoteric leveraged options strategy that utilized an options strategy known as the Iron Condor, which is inherently risky as it relies on consistent stability in the markets.

USB YES employing the esoteric Iron Condor strategy uses a leveraged options strategy in a client’s portfolio. UBS would use the client’s assets as collateral in a margin account then execute four different options trades, simultaneously selling calls and puts in an attempt to generate income and buying calls and puts in an attempt to hedge risk. This resulted in the creation of a price spread. If the price of the index or security the options were a derivative of stayed within the spread it would produce a premium to the investor. However, the excessive volatility experienced by the markets recently and most notably in the fourth quarter of 2018 blew through these spreads resulting in serious losses to investors.

Nomura Securities Agrees to $25-million Settlement for Allegedly Misleading Investors about Mortgage-Backed Securities

July 18, 2019 | Malecki Law Team

FINRA-registered brokerage firm, Nomura Securities International, Inc., will pay over $25 million to settle the SEC’s allegations that its supervisory shortcomings permitted traders to defraud customers in transactions involving mortgage-backed securities. In two related enforcement actions, the SEC details how five former Nomura brokers allegedly made misrepresentations to customers while selling non-agency commercial real estate (CMBS) and residential mortgage-backed securities (RMBS) between 2010 and 2014. As part of the settlement, Nomura will pay $20.7 million to RMBS customers and $4.2 million to CMBS customers as reimbursement for profits obtained from the brokers’ misrepresentations along with a$1.5 million regulatory fine. Our investor fraud lawyers highlight this case as an example of the potential fraud that could occur in markets as opaque as that for mortgage-backed securities.

According to the SEC, Nomura traders allegedly mislead customers about the cost of the securities and the profit the firm would receive from transactions. Notably, the traders reportedly inflated the prices of securities by sometimes even doubling the actual cost. The SEC also alleges that the Nomura brokers would sometimes claim to still be in negotiations with a third party while already having the mortgage-backed securities in their possession. The traders were able to get away with their misrepresentations because the secondary trading market for mortgage-backed securities does not make trade prices public. Therefore, customers can only rely on the words of their financial professionals. The trust should have been safeguarded by proper oversight by the brokerage firm. However, Nomura’s alleged “weak” supervisory procedures enabled otherwise discernible and preventable fraud to go undetected.

Mortgage-backed securities are fixed-income investments collateralized by a pool of residential or commercial real estate loans. The creation process of these asset-backed securities entails banks selling mortgages to an entity that securitizes the pool for sale to investors. Entities that issue mortgage-backed securities could be a federal government agency, government-sponsored enterprise, or a securities firm. Investing in mortgage-backed securities entitles the investor to the interest payments and principal paid by the original burrower. Investors can expect a coupon rate, known as the yield, equivalent to the borrower’s payments to their mortgage. The amount of risk involved in mortgage-backed securities depends on the issuer. Mortgage-backed securities issued by the Government National Mortgage Association, a U.S government agency guarantee that investors receive timely payments. However, private institution-issued mortgage-backed securities do not have such protections.

Former Broker Jovannie Aquino Barred for Allegedly Churning Customer Accounts

June 20, 2019 | Malecki Law Team

Former Windsor Capital broker, Jovannie Aquino has been barred from working in the industry by the Securities and Exchange Commission after allegedly churning his retail customers’ accounts. The SEC further alleged that Mr. Aquino executed trades in client’s accounts during his time as a registered representative at Windsor Capital between May 2014 and November 2017. While at least seven customers incurred at least $881,000 in losses, Mr. Aquino generated $935,000 in profits, according to the SEC. A recent administrative proceeding order issued by the SEC reveals that Mr. Aquino consented to a final judgment enjoining him from future violations. Our securities attorneys have investigated into the SEC’s findings on Jovannie and many other brokers accused of engaging in fraud involving churning claims.

According to the SEC’s complaint, Mr. Aquino allegedly gained control of these customer accounts through cold-calls using publicly-available databases. Once Mr. Aquino held these seven customer accounts, he reportedly recommended a series of frequent, short term-trades. Even though the customer accounts were non-discretionary, Mr. Aquino allegedly made trades without their explicit permission. Allegedly, Mr. Aquino profited through excessive markups/markdowns, commissions, and other fees from churning these accounts.

Churning is when a broker frequently trades in a customer’s account to profit from the commissions. Although there is no exact formula to demonstrate churning, the securities industry informally considers turnover rates and cost-to-equity ratios to be indicative of this behavior. The average turnover rate, defined as the percentage of securities replaced in a given year was 28.9 for these customer accounts. Such a number is well above the minimum of 6, that usually suggests excessive trading. Additionally, the average annualized cost-to-equity, the break-even ratio for Mr. Aquino’s seven customer accounts was 87%. Based on that metric, the customers’ portfolio values would have to increase by at least 87% on average to see any profits.

San Diego-Based Investment Advisor with Criminal Past Allegedly Defrauds Investors in Ponzi Scheme

May 3, 2019 | Malecki Law Team

San Diego-based investment advisor, Christopher Dougherty has been arrested for allegedly defrauding mostly senior investors in a multi-million-dollar Ponzi Scheme. The District Attorney’s office charged Mr. Dougherty with 82 felonies that include grand theft, financial elder abuse and securities fraud for activity between 2015 and 2018. According to allegations, Dougherty offered his clients the “opportunity” to invest in his private companies and non-existent tax-free private placements, promising around 5% in quarterly dividends. Meanwhile, Dougherty allegedly used investor money for his expenses and to pay some falsified “returns” to maintain the scam. For this alleged conduct, the SEC has charged Christopher Dougherty, along with his entities, C&D Professional Services, JTA Farm Enterprises, and JTA Real Estate Holdings for securities laws violations. Upon investigation, our securities fraud lawyers find many similarities between the alleged activities and other Ponzi Schemes.

A Ponzi Scheme is a type of investment fraud that uses investors’ money to pay falsified “returns” to other investors. The falsified returns provide the investors with the illusion that their money is producing genuine profits from investments. In reality, Ponzi Scheme perpetrators use the money meant for investments on personal expenses and maintaining the fraud, as suggested with this case. Ponzi Schemers usually gain the trust of their unsuspecting victims to get the funds. All Ponzi Schemes end when the perpetrator is not able to pay the investors their requested money, as seen with Mr. Dougherty. Eventually, there are not enough new funds coming in that can be used to maintain the Ponzi Scheme.

The SEC complaint alleges that Mr. Dougherty raised over $7 million through providing fraudulent advisory services through his firm, C&D Professional Services, Inc. Investors were allegedly offered the opportunity to invest in his organic beef ranch, a marijuana cultivation plan, and real estate holdings. Rather than using the investor funds to generate profits, Mr. Dougherty allegedly just shuffled the money around at his discretion. Mr. Dougherty allegedly used received investor funds to pay falsified returns to others, including payments to anyone who complained. Additionally, Dougherty spent the money on traveling, home remodeling, college tuition, and other personal expenses.

Broker Alert! FINRA Suspended Corey Lee Mireau for Allegedly Burrowing Customer Money

April 26, 2019 | Malecki Law Team

Former Ameriprise Financial Services, Inc broker Corey Lee Mireau (CRD#3046777) has recently been suspended for two years from the industry after having agreed to the entry of findings alleging his failure to disclose loans from customers, private securities transactions, and outside business activities. As part of his letter of Acceptance, Waiver, and Consent, (“AWC”), Mr. Mireau will also pay a $15,000 fine and $154,458.85 in restitution to one of the clients that he borrowed money from without approval. Malecki Law’s securities lawyer team has been investigating into Corey Lee Mireau’s blemished background as well as his alleged violations of securities regulations including FINRA Rules 3240, FINRA Rule 3270, NASD Rule 3040 and subsequently FINRA Rule 2010.

The AWC claims that Mr. Mireau burrowed money from two of his Ameriprise Financial Services customers, without complying with relevant FINRA rules and internal firm policies. In September 2013, Mr. Mireau allegedly borrowed $150,000 from a customer and invested most of the money in a wholesale company in the e-cigarette business. A broker generally should not borrow money from their customers without the arrangement meeting requirements set forth by FINRA Rule 3240(A) and following firm required procedures. Furthermore, Mr. Mireau should have sought written approval for using the borrowed money in a private securities transaction under NASD Rule 3040. In May 2017, Mr. Mireau allegedly borrowed $500 from another customer and also failed to disclose the details to Ameriprise Financial.

In addition to the aforementioned, Mr. Mireau allegedly provided consulting services to a customer in 2014 and 2015, which would have been considered an outside business activity under the law. According to FINRA Rule 3270, brokers must provide disclosure and seek approval for outside business activities. Specifically, “No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member.” However, Mr. Mireau allegedly did not provide written notice, and instead made false statements in multiple annual compliance questionnaires with Ameriprise Financial.

Texas Christian Radio Host Allegedly Runs $19.6 million Ponzi Scheme Targeting Christian Senior Retirees

March 14, 2019 | Malecki Law Team

A Texas former financial advisor, Christian radio host, author, and self-identified “Money Doctor” Neil Gallagher has been arrested and charged by the SEC for allegedly running a $19.6 million Ponzi Scheme targeting elderly retirees, according to reports. Between December 2014 and January 2019, Gallagher allegedly used religion to solicit and misappropriate the funds of 60 senior investors. The recently unsealed SEC civil complaint alleges that William Neil “Doc” Gallagher using his companies, Gallagher Financial Group and W. Neil Gallagher, Ph. D Agency, Inc. promised guaranteed-risk free returns in a non-existent investment product titled, “Diversified Growth and Income Strategy Account.” Instead of investing the money as promised, Gallagher allegedly used their money to fund his lifestyle and pay falsified returns to other investors, in a typical Ponzi-Scheme fashion. Our Ponzi fraud law team finds the details of the egregious allegations in the SEC complaint horrible, but not atypical in affinity frauds.

Securities attorney Jenice Malecki has extensive knowledge on similarly alleged affinity frauds, having provided her insight on a religious-based Ponzi Scheme to CNBC’s white-collar crime show, American Greed. Religious fraud is a type of affinity fraud, in which the perpetrator target members of identifiable groups, with shared commonalities like race, age, and religion. The FBI has been investigating affinity fraud instances amounting to billions of dollars in projected losses. Additionally, the true prevalence of affinity fraud cannot be fully counted as group members tend to not report the activity to authorities for proper legal redress, especially within religious communities. In some states, like Utah, affinity fraud is so common that the legislature has an online white-color crime register. Fraudsters often target religious communities because of the members’ shared trust, even without the relevant facts. Religious investors are at an even higher risk when the fraudster intertwines their religious values with their deceitful sales pitch, as seen in the activity alleged here.

According to the SEC complaint, Gallagher allegedly raised at least $19.6 million from investors while pretending to be a licensed professional, despite that no longer being the truth. Gallagher allegedly offered an investment product that could provide returns that ranged between 5% and 8% each year. The complaint details that the investment product was supposed to be comprised of U.S Treasury Securities, publicly-traded stock, fixed-index annuities, life settlements, and mutual-fund shares, but Gallagher only purchased a single $75,000 annuity. It further alleges that instead of making genuine investments, Gallagher is alleged to have used $5.8 million to repay investors and $3.2 million for his own personal expenses. As of January 31, 2019, Gallagher allegedly depleted nearly all of the millions provided by his elderly victims who ranged in age between 62 and 91 years old. Our investor fraud team finds it to be in particularly devastating that victims of alleged Gallagher’s Ponzi Scheme are unlikely to re-earn their stolen funds.

The DOJ Announces Largest Elder Fraud Sweep After Reports of Increasing Elder Financial Exploitation

March 8, 2019 | Malecki Law Team

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.

FINRA Broker Charged for Churning Multiple Accounts, Even on the Day of a Customer’s Death

February 28, 2019 | Malecki Law Team

Formerly registered broker James Bradly Schwartz is facing charges in a FINRA disciplinary proceeding for allegedly churning customers’ accounts while a registered broker employed with Aegis Capital Corp between August 2014 and May 2016. In this quite brief period, Schwartz allegedly executed around 535 trades in these customer accounts, many of which were unauthorized. The FINRA complaint alleges that Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as FINRA rules 2010, 2011 and 2020. His alleged victims include a married couple, engineer, estate executer and a deceased individual. It is alleged that Schwartz even made unauthorized and excessive trades while one of the victims was dying in the hospital. Our securities law team is appalled to hear that possibly two unauthorized transactions were made in this customer’s account less than an hour after he passed away.

Churning is a fraudulent activity in which the broker makes excessive trades in light of the customer’s investment objectives. Common signs of churning in investment accounts are high broker commissions and significant investor losses. While Mr. Schwartz’s customers allegedly lost at least $660,000, Schwartz is reported as having pocketed over $194,000 sales credits and commissions, with annualized turnover rates ranged from 19.9 to 54.7 and annualized cost-to-equity ratios between 87% and 120%. These percentages are above average for their proclaimed non-speculative investment objectives. In an alleged effort to conceal his purported nefarious activities, Schwartz allegedly traded on a riskless principal basis. Trading on a reckless principal basis does not explicitly report the commission costs on customer’s account statements. Our securities attorneys believe that if such measures to hide his activity is true, Schwartz most likely acted with intent to defraud, which fulfilling the churning legal requirement of “scienter”.

This current FINRA disciplinary proceeding is not the first time that Schwartz has been accused of fraudulent activity. In his 18 years in the securities industry, Schwartz accumulated 12 disclosures on his official CRD records, publicly available on Broker Check. Each of the nine customer disputes mentioned on Schwartz’s BrokerCheck reference at least one allegation pertaining to unsuitability, unauthorized trading, or churning. Our New York securities attorneys encourage investors to think twice before working with brokers that have that many negative disclosures mentioned on their records. Even before Schwartz was a registered representative with Aegis Capital Corp for three years in June 2013, he procured a seemingly shady record that should have raised many flags. It is a matter of grave concern that Schwartz may have continued to gain new employment after so many customers made some of the same allegations.