Problems at Broker Dealers

FINRA Censures EDI Financial, Inc. related to the Solicitation and Sale of Private Placements

April 23, 2015 | Malecki Law Team

EDI Financial, Inc. in Irving, Texas has been censured and fined $100,000 by the Financial Industry Regulatory Authority, according to a recent report issued by FINRA. According to the report, EDI Financial entered into a Letter of Acceptance Waiver and Consent (“AWC”) with FINRA consenting to the fine and censure along with the entry of findings that it failed to “adopt and implement supervisory systems and procedures necessary to achieve compliance with the firm’s suitability obligations.” According to FINRA, the failures of the firm’s supervisory system related to the solicitation and sale of private placements, specifically customer suitability.

Firms and their registered representatives have an obligation to ensure that all investments recommended to their customers are suitable (in other words, appropriate) for the customer. Firms have an obligation to consider things such as the customer’s risk tolerance, age, income, and investment objective, among others.

Notwithstanding this obligation, it was alleged that “despite the risk and illiquidity of private placements” EDI failed to have appropriate supervisory procedures in place with respect to the proportion of a customer’s assets that could be put in the private placement. This is known in the industry as “concentration.”

JP Morgan Securities LLC Financial Advisor and Broker Michael Oppenheim Charged with $20 Million Fraud by SEC

April 21, 2015 | Malecki Law Team

The Securities and Exchange Commission (SEC) announced on April 16, 2015 that it filed a complaint in the United States District Court for the Southern District of New York alleging that Michael J. Oppenheim defrauded former clients out of $20 million dollars. Mr. Oppenheim was previously employed and licensed to recommend the purchase and sale of securities by JP Morgan Securities LLC, according to his publicly available FINRA CRD Report.

According to the SEC’s announcement and complaint, Mr. Oppenheim used his position as a financial advisor to convince two former clients to withdraw approximately $12 million from their accounts and give the money to him upon false promises that the money would be invested in “safe and secure municipal bonds for their accounts.” However, the SEC complaint alleges that Mr. Oppenheim instead invested the ill-gotten money into either his own brokerage account or that of his wife, and subsequently lost the bulk of the funds in a risky options trading strategy.

The SEC complaint goes on to allege that after losing the investors’ money, he created fake account statements to make it look as though the money was not lost. He also allegedly transferred money between other investors’ accounts to replenish money he stole earlier. In total, the SEC complaint alleges that approximately $20 million was taken from Mr. Oppenheim’s clients’ accounts from March 2011 through October 2014, which, if true, would have been while he was licensed by JP Morgan Securities LLC to recommend securities transactions to public investors.

FINRA Fines H. Beck, Inc., LaSalle St. Securities, LLC, and J.P. Turner & Company, LLC for Failing to Supervise Consolidated Reports

April 17, 2015 | Malecki Law Team

The Financial Industry Regulatory Authority (FINRA) announced on March 30, 2015 that it fined H. Beck, Inc., LaSalle St. Securities, LLC, and J.P. Turner & Company, LLC for failing to supervise consolidated reports. These consolidated reports were provided to public customers, according to the announcement.

According to FINRA, “[a] consolidated report is a single document that combines information regarding most or all of a customer’s financial holdings, regardless of where those assets are held,” and does not replace monthly reports received from the firm.

In the announcement, FINRA cited to FINRA Regulatory Notice 10-19. A regulatory Notice is used by FINRA to remind its members of obligations required by FINRA Rules and securities laws. In Regulatory Notice 10-19, FINRA made clear that:

MetLife Broker Andre Paul Young Suspended By FINRA

April 16, 2015 | Malecki Law Team

A Letter of Acceptance Waiver and Consent was recently accepted by FINRA’s Department of Enforcement from Andre Paul Young. Mr. Young was accused of borrowing more than $200,000 from customers in violation of FINRA rules while a registered representative of MetLife Securities, Inc. Specifically, Mr. Young was accused of violating NASD Rule 2370, FINRA Rule 3240 and FINRA Rule 2010.

It was alleged that from June 2010 through June 2012, Mr. Young borrowed roughly $208,000 from two MetLife Securities customers for personal expenses, including those associated with the settlement of certain estate matters. Per the AWC, the customers issued five checks from their MetLife Securities brokerage account payable to a bank account number for an account owned by Mr. Young.

Per FINRA, this conduct was in violation of MetLife Securities policies and FINRA Rules. FINRA Rule 3240 (and formerly NASD Rule 2370) expressly prohibits brokers from borrowing funds from customers. In addition to those violations, Mr. Young allegedly failed to timely and completely respond to requests for documents and information in violation of FINRA Rule 8210.

FINRA Fines Oppenheimer & Co., Inc. $3.75 Million for Failing to Supervise Broker

April 14, 2015 | Malecki Law Team

The Financial Industry Regulatory Authority (FINRA) announced on March 26, 2015 that it fined Oppenheimer & Co., Inc. for failing to supervise Mark Hotton, a former broker who allegedly stole money from his clients accounts and excessively traded their accounts. FINRA had already barred Mr. Hotton from the securities industry in 2013.

According to FINRA’s announcement, Oppenheimer & Co., Inc. failed to supervise Mr. Hotton in many respects, including during his hire and during his employment, as well as failed to supervise the accounts he was trading. Oppenheimer & Co., Inc. failed to supervise Mr. Hotton during his hire by failing to consider 12 prior reportable events that occurred in Mr. Hotton’s past, including criminal events and seven customer complaints, according to FINRA.

FINRA also announced that Oppenheimer & Co., Inc. failed to supervise Mr. Hotton during his employment by failing to subject him to heightened supervision despite learning that his business partners had allegedly sued him for fraud resulting in several million dollars’ damages. Oppenheimer & Co., Inc. may have been required to subject Mr. Hotton to heightened supervision, a more expensive and time-consuming manner of supervision, because of the number of past customer complaints against him while employed at other firms or while at Oppenheimer & Co., Inc. To may matters worse, FINRA noted that Oppenheimer & Co., Inc. further failed to supervise Mr. Hotton by failing to investigate “red flags” in correspondences and wire requests that could have signaled potential violations of securities laws and industry rules. FINRA alleged that Mr. Hotton was wiring funds out of customers’ accounts to accounts he owned or controlled.

FINRA Censures And Fines Merrill Lynch For Financial Industry Rule Violations

February 23, 2015 | Malecki Law Team

The Financial Industry Regulatory Authority recently censured Merrill Lynch Pierce Fenner & Smith and fined the firm $100,000, sanctions to which the firm consented. These sanctions relate to Merrill Lynch’s alleged violation of several industry rules, including FINRA Rules 4370 and 2010. FINRA alleged that Merrill Lynch “failed to send required regulatory disclosures and notices in connection with the opening of approximately 12,989 [f]irm accounts” from early 2010 to early 2011.

This does not appear to be Merrill Lynch’s first such brush with the regulators over related violations. In 2012, Merrill Lynch was fined $2.8 million by FINRA amid allegations the firm overcharged customers more than $32 million due to an inadequate supervisory system in place at the firm. FINRA also specifically alleged that the Merrill Lynch failed to send necessary business continuity plans to more than 16,000 customers and failed to send required margin risk disclosure statements to nearly 7,000 customers over several years.

Margin can be a risky proposition for investors because it involves borrowing money from the firm for the purpose of “leveraging” positions in the account. While margin can boost profits in the portfolio, it can also magnify losses. For this reason, margin is typically unsuitable for most investors, especially those is with limited investment experience and those who cannot afford to incur significant losses.

UBS Puerto Rico Held Meeting Telling Financial Advisors to Sell UBS Closed-End Bond Funds Despite Concerns

February 6, 2015 | Malecki Law Team

Reuters reported on February 6, 2015 that UBS in Puerto Rico held a meeting during which executives of the firm, including Miguel Ferrer, then the Chairman of UBS Financial Services Inc. of Puerto Rico, threatened financial advisors to sell UBS originated Puerto Rico closed-end bond funds despite the brokers’ and their customers’ growing concerns about “low liquidity, excessive leverage, oversupply and instability.” According to the Reuters article, Mr. Ferrer found “unacceptable” the view of UBS financial advisors who were wary of recommending UBS funds that were loaded with debt of the Puerto Rican government.

According to the Reuters article, in a recording made by an attendee of the meeting, Mr. Ferrer reprimanded the brokers to focus on the positive aspects of the products available or “get a new job,” continuing that it was “bullshit” for brokers to claim that there were no products to sell. Portions of the recorded meeting are available online in the Reuters article.

At the time of the recording, according to Reuters, many of UBS’s funds were highly concentrated in Puerto Rico’s debt at a time when there were concerns about the size of that debt and the weakness of the overall economy. This recording may be beneficial to both claimants and brokers who each have hundreds of millions of dollars in damages because their claims generally alleged that there was a lack of disclosure regarding the attendant risks of bond funds underwritten by UBS.

Expungement is Often One of the Only Tools Available to Brokers When Their Record is Tarnished by a Firm’s Proprietary Products Failure

February 5, 2015 | Malecki Law Team

In instances where a broker-dealer’s proprietary products fail, the brokers who are tasked with selling those failed products often suffer many customer complaints. In these situations, the brokers often are given faulty due diligence, research and information by the firm, and sometimes even forced to sell their employing firm’s product with their jobs threatened. Brokers have sued firms on these types of allegations, including former Morgan Keegan brokers. A similar situation occurred with the auction rate securities debacle that began in 2008. More recently, it appears due diligence failures and pressure may have been causes of problems for UBS brokers selling UBS Puerto Rico’s closed-end bond funds, leading to a substantial amount of customer complaints that have tarnished the reputations of many brokers in Puerto Rico.

Brokers with many customer complaints from failed products often have few options for cleaning up their professional record, which is publicly available through the Financial Industry Regulatory Authority’s (FINRA’s) CRD or Brokercheck system. One of the options involves expungement, where the broker initiates a claim against either the broker’s firm or customer requesting that a FINRA arbitration panel “expunge” or remove the customer’s complaint from the broker’s CRD record. A broker may also claim monetary damages, including damages for defamation for untrue statements that are made on a broker’s U-4 or U-5.

As mentioned in previous posts, once a firm’s product fails and the brokers get too many customer complaints, the employing firm may not want to keep them employed. It may be very difficult for brokers to obtain jobs elsewhere in the industry because once a broker gets 2 to 3 complaints, they required heightened supervision, something most broker-dealers avoid if possible.

Broker-Dealers May Be Held Liable, If Found To Have Misled Brokers About a Product

January 26, 2015 | Malecki Law Team

Broker-dealers may be held liable to brokers who they threatened, misled, and/or lied to about the features and relative safety of an investment sold to their customers.

The stockbroker and broker-dealer relationship can be characterized as one of agent-principal, respectively. While many understand that an agent has a duty to his or her principal, frequently overlooked in this capacity is the duty of the principal to the agent.

In the securities world, it is known that a broker has certain and specific obligations to his firm both contractually and as agent. Yet many industry participants are unaware of the duties the firm can be said to have to its brokers beyond those bargained for in their employment contracts.

Brokers in Product Cases Can Be Victims Too

January 23, 2015 | Malecki Law Team

It is no secret on Wall Street today of what is happening in Puerto Rico in connection with the devastation of the UBS Puerto Rican Closed End Bond Funds. For many on the island and others in the 50 states, it is a whopper of a problem.

Any time there is a complete catastrophe with a product, such as there is in Puerto Rico, two sets of victims emerge.

The first is the investors who were likely misled and as a result have lost significant portions of their life savings.