Articles Posted in Stock Fraud

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.”

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.

On July 20, 2020, the Securities and Exchange Commission brought investment advisor and former registered representative Michael “Barry” Carter up on multiple federal charges relating to the alleged misappropriation of over $6 million in funds.  Mr. Carter allegedly stole this money from his brokerage customers, including nearly $1 million from one elderly client, defrauding them in the process in an effort to remain undetected.  His alleged fraudulent acts occurred between the fall of 2007 and spring of 2019 while working at Morgan Stanley, with over 40% of the misappropriation occurring in the last five years, all to sustain his extravagant lifestyle.

Mr. Carter was reportedly fired from Morgan Stanley in the summer of 2019 for misappropriation of funds.  Later that fall, FINRA launched an investigation into his alleged crimes and he was then barred by FINRA for refusing to turn over documents relating to the alleged misappropriations.

Additionally, the state of Maryland reportedly brought criminal charges against Mr. Carter, to which he has already pled guilty to the investment advisory fraud charges and wire fraud; as part of his plea agreement he will, according to prosecutors, be required to pay back about $4.3 million, the total net proceeds of his illegal activities.

Many clients are asking whether FINRA arbitration claims can be brought against a bank and/or its employees for losses sustained in their investment accounts.  The answer is yes.  There are more than 5,000 commercial banks in the United States.  Along with traditional banking services, many of these banks also provide in house “financial advisors.”  In order to charge their customers more, these bank branch financial advisors encourage bank customers to invest their savings with them.  Now more than ever, bank customers are being pressured into using these services, and their life savings are being invested rather than saved.  This can lead to losses in customer accounts, where customers would have been better off keeping their funds in a savings account.  Malecki Law’s FINRA arbitration attorneys have handled many cases involving claims where customers lost money investing with a commercial bank financial advisor.

Up until Congress repealed the Glass Steagall act in 1999, commercial banks, banks that take in cash deposits and make loans, could not offer investment services.  The Glass Steagall Act separated commercial banks and investments banks and prohibited commercial banks from providing any investment service to its customers.  Once the act was repealed, in order to make greater profit, banks took advantage and began offering these services.  Although banks often incentivize their customers to use these services, such as offering lower fees or free checking, the bank’s investment services, however, are not free.

Investing funds with a bank is no safer than investing funds through an online or traditional brokerage firm.  Customers ordinarily use banks for savings, checking, CDs, and, sometimes, securing a mortgage or other type of loan.  These types of accounts are a bank’s specialty and are FDIC insured, meaning that these are vehicles designed to prevent the loss of money in customer accounts.  Contrarily, investments are not a bank’s specialty and investing with a bank’s financial advisor, similar to making an investment in an online or traditional brokerage account, comes with risk, often incurring higher fees than an online or traditional brokerage account.  Moreover, not only do the investment products offered at banks charge higher fees, but the quality and diversity of investment products is limited, which increases risk to the customer’s investments.

Can a Broker-Dealer Firm be Sued for Failure to Supervise a Broker?

Broker-dealers, also known as brokerage firms, are routinely sued for “failure to supervise” claims.  The Financial Industry Regulatory Authority (FINRA), the organization which regulates broker-dealers and their employees, has a series of rules requiring broker-dealers to establish and maintain a supervisory system to supervise its brokers and other employees, as well as to monitor all trading activity to ensure compliance with applicable securities laws and regulations.  In many of our clients’ cases, the brokerage firm’s lack of supervision and failure to properly supervise a broker’s misconduct has directly and indirectly impacted our clients’ accounts, causing losses.  Malecki Law’s FINRA arbitration attorneys have handled many cases against brokerage firms in New York (and across the country) for failure to supervise and have received favorable monetary awards and settlements for our clients.

A supervisory system that cannot reasonably surveil and detect trades that violate securities laws and deceptive trade practices does not meet FINRA’s minimum requirement of proper supervision.  Moreover, proper supervision also requires a firm supervisor to approve a broker’s daily trades, as well as to systematically review clients’ accounts for wrongful trading activity such as recommending unsuitable investments, trading without proper authority from the customer, or charging high commissions that make it virtually impossible for the customer to make any sort of profit.

Investors often ask whether a clearing firm can be liable for losses sustained in their accounts.  The answer is “yes.”  Traditionally, clearing firms, also known as clearing houses, are financial institutions established to handle the confirmation, settlement, and delivery of transactions.  To ensure its clients’ transactions are made in a prompt and efficient manner, the clearing firm acts as a middle-man and is essentially the buyer and seller in the transactions.  To attract business and compete with other clearing firms, clearing firms offer an ever-expanding suite of services that go beyond mere routine clearing functions, which often brings them to be actively and directly involved in the actions of brokerage firms and their brokers.  Courts have held that clearing firms that extend services beyond “mere ministerial or routine functions” can be liable to an investor for a broker-dealer or broker’s misdeeds.

On behalf of several investor clients, Malecki Law’s FINRA arbitration attorneys are currently investigating cases involving claims against Pershing, LLC, a clearing house, and its introducing brokerage firm client, Insight Securities, Inc.  The claims involve an SEC-censured entity, Biscayne Capital.  Our clients sustained losses in their accounts due, in part, to Pershing’s alleged negligent supervision of transactions through its shared platform with Insight.

In relationships like this, the introducing firm and clearing firm have a clearing agreement, usually giving the clearing firm discretion to terminate any account, the responsibility to notify the introducing broker of suspicious activity, and to provide training or trained employees to look out for misconduct.  Usually the clearing firm has the responsibility to conduct regulatory monitoring of SEC Financial Responsibility Rules and to be directly involved in Anti-Money Laundering oversight.  Thus, with these heightened responsibilities, a clearing firm can move beyond its ministerial and routine clearing functions.

Predicated on fear of a global slowdown and the uncertainty around coronavirus, the stock has experienced extreme volatility as it heads into bear territory. While it may be expected for even the bluest of blue-chip stocks to experience volatility,  investors should pay particular attention to their entire investment portfolios as it is in violate market climates that broker misconduct may reveal itself, especially as it relates to your investment objectives and suitability.

When the market suddenly drops, investment portfolios will reflect not only the fluctuations, but also the risks inherent inparticular strategies and investments. All securities carry risk, but some investment products have more than others. Risk tolerance refers to the level of uncertainty in investment performance that is acceptable to the investor. An investor’s risk tolerance is reflective of their financial situation, needs, age, objectives, time requirements, and other considerations. Generally, investors can be categorized within varying levels of conservative, moderate, or aggressive. The types of investments in an investor’s portfolio should reflect their risk tolerance. The changes that investors noticed in their portfolio during market shifts could be indicative of where their portfolio falls on this spectrum.

Investors with the lower risk tolerances should have a conservative investment strategy in place that shields their portfolio from significant declines in market downturns. The goal of conservative investors is to prioritize principal protection and liquidity over risky appreciation. A conservative investment portfolio will be mainly comprised of safer, low-risk fixed-income investments, such as bonds and certificates of deposits. While low-risk investments do not generate the highest returns, the chances of losing principal are much lower. Older individuals closer to retirement should have investment profiles that reflect a more conservative investment portfolio. It is a huge red flag for any conservative investors to have noticed a complete decline in their portfolio from the market downturn.

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.”

While marijuana-related investments grow in popularity, the SEC has reportedly received more associated complaints from investors. As a result, the Securities and Exchange Commission warns individuals to be mindful of certain risks before investing in marijuana-related companies. The SEC released an investor alert with this warning after medical marijuana company owner, Richard Greenlaw settled charges for allegedly offering and selling unregistered securities to 59 investors.  Signs of fraud reportedly include unlicensed, unregistered sellers; guaranteed returns; and unsolicited offers. Chiefly, Richard Greenlaw was not registered nor licensed to sell his marijuana-related investments with the Securities and Exchange Commission.

The SEC complaint, filed with the United States District Court of Maine charged the owner of NECS, Richard Greenlaw and his 20 cannabis-related entities for violating the registration provisions of federal securities laws. The 20 cannabis-related entities charged in the SEC complaint are NECS LLC, MaineCS LLC, VTCS LLC, MassCS LLC, NHCS LLC, RICS LLC, CTCS LLC, FLCS LLC, ILCS LLC, IACS LLC, LOUCS LLC, MICS LLC, MNCS LLC, NDCS LLC, NJCS LLC, NYCS LLC, OHCS LLC, PennCS LLC, UPCS LLC, and WICS LLC. It is alleged that Richard Greenlaw posted advertisements on Craigslist to offer and sell subscription agreements for securities in his companies. In response to these charges, Mr. Greenlaw agreed to pay $400,000 and accept permanent injunctions from further violations of  Section 5(a) and 5(c) of the Securities Act of 1933.

Federal securities laws mandate that any offer and sale of a security must be registered with the SEC. A company registers a security by filing financial statements, business descriptions and other legally required information with the SEC. Otherwise, the securities offering must be found to be subject to exemption under Securities Act 1933. Offerings of securities that can be exempt include those of limited size, intrastate, private and more. Exemption requirements may also require that securities be only sold to accredited investors. Thus, investment salespersons would be prohibited from selling exempted securities to any investors who do not meet the requirements. In this case, Mr. Greenlaw’s marijuana-related investments were not registered nor qualified for exemption.

You may ask yourself when the market swings whether your investment losses are temporary, permanent, due to the market swings or due to something else.  When the market is good, a rising tide lifts all boats, as they say, but when the market is down, the truth may be revealed.

Whether you are a conservative, moderate or speculative investor, when the wind has been removed from the sails, you really see what your investments are made of, if anything.

If you are a conservative investor, your investments should not generally ride with market swings.  The beauty of being conservative is wide diversification in fixed income and a bit of equities.

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