Articles Posted in Securities Fraud & Unsuitable Investments

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.

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.”

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.

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.

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.

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.”

In August 2020, the Securities and Exchange Commission (SEC) adopted amendments to expand the definition of an “accredited investor.”  Adding these new expansive conditions as to who may qualify as an accredited investor will allow more investors to participate in private investment offerings, creating both more opportunity and more risk.  The goal of the SEC with this expansion was to both simplify and amplify investor opportunities, investor protections, and capital formation.

Traditionally, an accredited investor can be a business or individual that is qualified to trade unregistered, privately traded securities (i.e., not traded on a public stock exchange) by fulfilling specified minimum requirements such as net worth, income, assets, and trading experience or authority. Typically, issuers of unregistered securities are limited to sell only to accredited investors because they are considered more able to handle the associated risks.  While every investment has risk, non-public investments carry additional risk of having low liquidity, meaning it can be incredibly difficult to find a buyer if the investment goes south.

Accredited investors are important players in the securities industry because they provide liquidity and funds to new and unregistered investments in need of capital.  Historically, an accredited investor can be a bank, a private business, an organization, a director, or any individual who  typically has a separate or combined net worth of $1 million dollars.

Malecki Law is currently investigating allegations regarding a Ponzi scheme targeted by several regulators, including the Commodity Futures Trading Commission (CFTC), which filed a civil enforcement action against Avinash Singh and nine others, including Daniel Cologero and Randy Rosseau, who reside in Florida, and Hemraj Singh, from New Jersey, concerning allegations of an almost $5 million-dollar multi-level Ponzi scheme.  We are specifically interested in speaking to any affected investors in Highrise Advantage, LLC or other related investments discussed below. Upon information and belief, Mr. Singh may have been working closely with Equity Trust Company and one or more of its representatives, including Anthony (“Tony”) Sopko, who may have been helping to bring new investors into the scheme.

Mr. Singh is accused of misappropriating funds fraudulently solicited by him and his co-defendants.  They allegedly used their network of contacts to prey on those within their communities.  One individual charged, Surujpaul Sahdeo, was a priest who may have used his company, SR&B Enterprises, to prey on the Guyanese community and community church-goers, allegedly using their donations to fund the Ponzi scheme through Mr. Singh, who is alleged to have been a main point of contact for recruiting many investors. It is alleged that all of the funds were funneled through commodity pools set up to funnel the fraudulently solicited funds– Highrise Advantage, LLC., Green Knight Investments, LLC, Bull Run Advantage, LLC, and King Royalty, LLC.

Firms like Equity Trust Company have supervisory duties that require them to monitor both the internal and external business activities of their employees like Mr. Sopko.   This is significant because Ponzi victims often do not know who to turn to, as Ponzi funds are often spent and heavily depleted by the time a Ponzi scheme falls apart and is discovered.  Nevertheless, Malecki Law has decades of experience in successfully recovering millions of dollars from financial firms, such as those Malecki Law sued and successfully recovered from in Ponzi schemes perpetrated by Hector May and Robert Van Zandt.

Filing a claim for most investors is a walk over a new bridge and involves doing something they have never done before: filing a “lawsuit.” Most people never wanted to have anything to do with the law, but if you lost your life savings, you really do not have much of a choice but to fight to get it back.    The stress you may feel engaging in this process can be mitigated by understanding what lies ahead to prepare yourself mentally, emotionally and physically – by getting your evidence lined up.   Outlined below is the process of filing a claim in arbitration through the final days of trial, which will hopefully bring ease to questions you may have regarding investor arbitrations.

In today’s world, many people invest their money as a way to increase their income.  Some choose to invest on their own, while others use brokers and investment advisors.  As with any job, unfortunately in these professions, bad apples do exist.  Where wrongdoers exist, they cause harm to their clients and to their clients’ investment accounts.  If this happens, clients can sue their broker by filing an arbitration claim within the dispute resolution forum of the Financial Industry Regulatory Authority (FINRA) – the only forum for retail investors to sue brokers and brokerage firms.  The initial claim papers filed details the party or parties that have wronged you, specifies the relevant facts of the events leading up to and causing the harm in your investment account(s), and lists the remedies requested.  When deciding on whether to file an arbitration claim with FINRA, Malecki Law’s FINRA arbitration attorneys can help discuss the merits of your claims and frame them in what is known as a “Statement of Claim,” like a complaint pleading in court.

Once a Statement of Claim arbitration has been filed with FINRA, the party or parties you are suing, also known as the “respondent(s),” have 45 days to file a response, which is called the “Statement of Answer.”  The Answer will typically include relevant facts, supporting documents, and defenses from the perspective of the broker or firm you are suing.  One can anticipate that in the Answer the respondent(s) will try to discredit your claims.  Malecki Law is skilled and very familiar with debunking these typical defenses, as well responding to any creative new tricks.  After reading the Answer, you have the opportunity to amend your Statement of Claim if you feel something should be changed from your originally filed claim.

U.S. oil prices have been on a roller coaster ride over the last few weeks, at one point dropping below $0 for the first time in history to -$37.63 a barrel.  Oil has since rebounded from its subzero levels, but it remains questionable as to whether it can stay there.  It begs the question, what does this mean for investors and the U.S. oil market generally?

When prices cratered below zero, there were those that weighed in that it was nothing to worry about.  After all, the subzero price drop really had more to do with the expiration of contracts for oil futures.  It was explained that the current demand for oil is so low that producers would rather put their oil in storage and then sell it at some point in the future.  Placing additional strain on the market, the U.S. is running out of places to store it, with backlogs of oil tankers from Saudi Arabia out at sea and being turned away from U.S. shipping ports.

The U.S. has traditionally been a net importer of oil, but with the emergence of oil fracking, the U.S. at one point in 2019 surpassed Saudi Arabia as the world’s top oil exporter.  This trend towards parity gave many observers of the U.S. oil market a feeling of confidence that the U.S. was a rising oil power, with President Trump going so far as describing the U.S. level of participation as “energy dominance.”  But as pointed out by professionals, increased participation in the market has little to do with control over the market.  For instance, the price of U.S. oil recently began to spiral down when Russia and Saudi Arabia started to increase their production levels.  U.S. oil prices teetered even further, and then below zero, when the global and U.S. economic response to the spread of Covid-19 began to take shape – every state being under some level of a stay-at-home order, with fewer cars on the road, fewer people travelling by air, and U.S. oil workers in Texas and elsewhere being laid off in the tens of thousands.  The pumps have stopped and oil companies are already declaring bankruptcy, with likely more to follow.

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