Articles Posted in Problem Brokers

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.

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.

A former Wells Fargo registered representative in Daytona, Ohio is facing charges by the Securities and Exchange Commission for defrauding investors out of over a million dollars in a fraudulent scheme that targeted seniors. The SEC filed a complaint against John Gregory Schmidt with the United States District Court for the Southern District of Ohio on Tuesday. Allegedly, Mr. Schmidt made unauthorized sales and withdrawals from variable annuities to use the proceeds for covering shortfalls in other customer accounts. While Mr. Schmidt allegedly received over $230,000 in commissions, his customers were unaware of the transactions. When the scheme unraveled, it is reported that involved investors discovered that the account balances provided by their trusted financial adviser were false. Our investor fraud attorneys are currently investigating into customer claims against Mr. Schmidt.

The SEC complaint alleges that John Gregory Schmidt sold securities from seven of his investors and transferred proceeds to other customer accounts. Most of the securities were variable annuities that required letters of authorization, which Mr. Schmidt is alleged to have forged without client consent. Instead of notifying certain clients of their dwindling account balances, Mr. Schmidt allegedly sent false account statements and permitted excessive withdrawals. Unbeknownst to the client with account shortfalls, it is charged that the received money was illegally retrieved from other customer accounts. The SEC claims that Mr. Schmidt’s misrepresentations violate federal securities laws, including Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.

It is important to note that John Gregory Schmidt’s alleged fraudulent actions appear to have targeted some of the most vulnerable people in society. Mr. Schmidt, who is 65 years old, ran a fraudulent scheme that targeted elderly victims not too far off from his age, according to the complaint. Several of his reported victims were suffering from medical conditions such as Alzheimer’s and other forms of dementia. Tragically, at least five of the defrauded investors have passed away and will never be able to see justice served.

Barred FINRA-registered broker Steve Pagartanis, of Suffolk County, N.Y, is facing charges by the SEC and the Suffolk County District Attorney’s Office for allegedly running a multi-million-dollar Ponzi Scheme that bilked long-term investors, many of them seniors, for 18 years. In May 2018, the SEC filed a civil complaint against Steven Pagartanis alleging that he solicited and sold securities using falsified statements; defrauding at minimum nine investors out of $8 million. Mr. Pagartanis allegedly told investors that he would invest their funds in a publicly-traded or private land development company. Steven Pagartanis was arrested on July 25, 2018, with charges related to securities fraud as well as mail and wire conspiracies in connection with this alleged Ponzi scheme. Before being barred from acting as a broker by FINRA, Steve Pagartanis (CRD#1958879) was most recently a registered broker with Lombard Securities Incorporated. Our securities fraud attorneys are currently investigating into Steve Pagartanis’s alleged Ponzi Scheme on behalf of investors who lost their irreplaceable life savings.

Victims claimed to have trusted Mr. Pagartanis after having done business with him for years and entrusted hundreds of thousands of dollars, including retirement and elder care earmarked money.  Mr. Pagartanis reportedly claimed that the money would purchase investments in Genesis Land Development. His victims claim that Mr. Pagartanis promised that their investments in the real estate development company would produce 4.5% in guaranteed interest with annual dividends. On the contrary, Mr. Pagartanis allegedly never invested the money and deposited it into his personal bank accounts, as also alleged in the SEC complaint. Now, victims of Mr. Pagartanis’s alleged Ponzi Scheme are left distraught, with no other choice but to hold the appropriate parties responsible – in particularly his brokerage firm Cadaret Grant & Co.

Our investor fraud attorneys see many parallels between Steve Pagartanis’s alleged fraudulent actions and typical Ponzi Scheme activity. A Ponzi Scheme is a kind of investment fraud in which a perpetrator pays “false returns” to existing investors using new deposits. Ponzi Scheme perpetrators will use some of the money to fund their lavish lifestyles. As is often the case in Ponzi Schemes, Steve Pagartanis relied on built up trust gained over the years from his mostly elderly clients. Eventually, Steve Pagartanis allegedly failed to make an expected payment to a client, which most probably unveiled the fraud. Ponzi schemes are almost always finally revealed when the fraudulent perpetrator could no longer make a payment, according to securities fraud attorneys.

The SEC charged New York-based FINRA regulated brokerage firm Alexander Capital L.P. (CRD # 40077)as well as two of its managers for failing to supervise three registered brokers, William C.  Gennity, Rocco Roveccio, and Laurence M. Torres last Friday. The alleged supervisory failures are concerning charges against the brokers for unsuitable recommendations, churning accounts, and executing unauthorized trades in September 2017. While the brokers profited from commissions, investors lost their hard-earned savings over violations of the antifraud provisions of the federal securities laws. According to the SEC, Alexander Capital L.P lacked reasonable supervisory policies and procedures that could have helped detect fraudulent practices by three brokers. In a separate order, the SEC also charged Alexander Capital managers, Philip A. Noto II and Barry T. Eisenberg for missing red flags and failing to adequately supervise to detect the alleged broker committed fraud. Consequently, investors lost substantial money over fraud that could have been prevented with reasonable policies and procedures to detect broker wrongdoings.

The parties agreed to settle the charges without admitting or denying the SEC’s findings. Alexander Capital has agreed to pay $193,775 of allegedly ill-gotten gains, $23,437 in interest, and a $193,775 penalty, which will be placed in a fund to be returned to harmed retail customers.  Philip A. Noto II agreed to a permanent supervisory bar and a $20,000 penalty.  Barry T. Eisenberg agreed to a five-year supervisory bar and a $15,000 penalty. Alexander Capital has agreed to hire an independent consultant to review its policies and procedures, according to the press release. Will Alexander Capital enforce the many reminders that the SEC released for brokerage firms to supervise account activities and protect consumers adequately? It remains to be seen, as old habits die hard.

The Securities and Exchange Commission’s recent charges against a New York-broker dealer Alexander Capital illustrates the agency’s crackdown on broker supervisory failures within the financial services industry. Our FINRA arbitration attorneys applaud the SEC’s commitment to holding securities firms accountable, but still think more needs to be done. After all, SEC has no tolerance for unscrupulous brokers, according to Andrew M. Calamari, Director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker-Dealer Taskforce. Nevertheless, FINRA arbitration attorneys continue to file numerous claims involving churning, unauthorized trading, and other types of securities fraud, which the SEC has never detected.

Wall Street is constantly crafting complex and volatile products that somehow end up in the investment accounts on Main Street.  The latest turbulence in the stock markets has already been in part attributed to one of the latest Wall Street machinations:  exchange-traded-products (ETPs) linked to volatile exchanges – specifically, products linked to the Chicago Board Options Exchange (CBOE) Volatile Index (VIX).  Today alone, the Dow Jones Industrial Average closed more than 1000 points down from yesterday, and due to the volatility that is still ongoing, the devastating fallout is largely unrealized and has left investors scrambling.

Since its inception in 1993, the VIX was one of the earlier attempts to create an index that broadly measured volatility in the market.  One such ETP linked to the VIX is Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN (ticker symbol XIV), which the issuer just announced it will be shutting down after losing most of its value earlier this week.  Products that may be at similar risk include Proshares SVXY, VelocityShares ZIV, iPATH XXV, and REX VolMaxx VMIN.  But the risks associated with these ETPs have been well known to professionals in the securities industry, and investors who were recommended these products should have received a complete and balanced disclosure of these risks at the time of purchase.

In October of 2017, the Financial Industry Regulatory Authority (FINRA) ordered Wells Fargo to pay $3.4 million in restitution to investors relating to unsuitable recommendations of volatility-linked ETPs.  FINRA also published a warning to other firms in Regulatory Notice 17-32 regarding sales practice obligations, stating that “many volatility-linked ETPs are highly likely to lose value over time” and “may be unsuitable to retail investors, particularly those who plan to use them as traditional buy-and-hold investments.”  This was not the first warning from the regulator.

Yesterday, a Financial Industry Regulatory Authority (FINRA) arbitration panel in Boca Raton, Florida awarded Malecki Law attorneys $397,823.00 for principal investment losses against Morgan Stanley & Co., LLC.  Malecki Law brought the case on behalf of an elderly and retired couple with conservative investment objectives on claims that Morgan Stanley failed to supervise their accounts and unsuitably over-concentrated their portfolio in risky oil and gas master limited partnerships (MLPs).  In addition to the compensatory damages, the panel also ordered Morgan Stanley to pay the claimants in this case 9% in interest, $15,000.00 in costs, attorneys’ fees, $11,812.50 in forum fees, and a $20,000.00 penalty for the firm’s late production of relevant documents at and just prior to hearing.

Malecki Law regularly brings claims on behalf of investors against unscrupulous conduct by brokers and brokerage firms, and holds them accountable for mismanaging investor retirement accounts.  Elderly investors such as these find themselves especially at risk from poor investment recommendations made by brokers and securities firms because senior citizens are typically out of the workforce and have much less time and ability to recoup their losses than younger investors.  This is pertinent to yesterday’s win because, in setting the damages figure, the arbitration panel rightfully did not deduct investment income (i.e., dividends), which the claimants earned while they had their accounts open with Morgan Stanley.

This is also a notable win for Malecki Law because the case involved the purchase of MLPs, which is a “hot investment” on Wall Street these days.  MLPs offer high yields, but are generally recognized as risky and volatile investments, typically within the oil and energy sector, and are not suitable for most retirement accounts or conservative investors looking to preserve their capital.  In May of last year, the Securities and Exchange Commission (SEC) issued an investor alert on MLPs to warn investors of the significant risks in these products, including unexpected tax consequences, fluctuations in distributions, and concentration exposure in the energy sector with acute sensitivity to shifts in the prices of oil and gas.

This is Part 2 of an article we posted last week on former NBA-great, Tim Duncan, where we introduced the investing lessons that could be gleaned from Duncan’s relationship with his former financial adviser, Charles A. Banks, who was permanently barred from the securities industry and is now serving a four-year prison term after pleading guilty to wire fraud.

For background on this story, it is a good idea to read Part 1 of this series, where we revealed our first lesson, which was to be wary of the financial adviser who constantly brings you deals.  While this might create the impression that your adviser is knowledgeable and has the inside scoop, it is frequently a sign of an adviser who is exposing you to unnecessary risk and trying to earn commissions or undisclosed fees that will eat away at your principal.

A second lesson from this sad story is to recognize a common fraud tactic, which may seem innocent, but should set off alarm bells and have you looking for a new financial adviser.  This is when an adviser asks a customer to sign a blank form or just a signature page, as Banks did with Duncan.  The adviser will often justify the practice as a time-saver and present it to the customer as a convenience, such as dropping blank forms in the mail with affixed post-it-notes that simply point the investor where to sign.  This request often sounds benign or reasonable to an investor, but it is in fact illegal and happens more often than many people realize.  Though this practice may seem harmless, signing forms in the absence of one’s adviser deprives the investor of an in-person interaction to ask useful questions and to have the adviser explain all the investment risks and hidden fees that may be associated with the investment.

Last month we learned that Tim Duncan’s financial adviser was sentenced by a federal court to four years in prison for defrauding the NBA legend of $7.5 million.  Duncan earned over $220 million during his playing career, so he is by no means financially ruined, but there are some good lessons to learn about investing and placing too much trust in the person who manages your money.

Tim Duncan is an accomplished, 15-time NBA All-Star and future Hall of Famer.  He retired in July 2016 after playing nineteen seasons of professional basketball with the San Antonio Spurs.  In today’s age of free agency and mega-million-dollar commercial endorsements, it is a rarity for a player to play his entire career with a single franchise.  As one of the greatest to ever play the game, Duncan could have sought greener pastures and taken his talents to the highest bidder in any city of his choosing.  Instead, he was noted for having taken yearly pay cuts to stay in San Antonio to allow the Spurs to remain under the league salary cap while paying for talent at other positions.  Duncan was generally known for his loyalty and being the consummate teammate and role model for fans and younger players.  His loyalty on the court perhaps says a lot about how he conducted himself off the court, where he showed similar trust and loyalty to the people in his daily life, including his financial adviser.

Last month, Duncan’s financial adviser, Charles A. Banks, IV, made headlines when a federal court in Texas issued a judgment against Banks, convicting him of wire fraud, and sentencing him to 48 months in prison followed by three years of supervised release.  The court also ordered Banks to pay $7.5 million in restitution.

Financial exploitation of the elderly by a financial advisor can take many shapes and forms, and it is indeed possible to recover one’s financial losses from the broker or financial institution who carried out and supervised the misconduct.  Wrongdoing by a financial professional can be difficult to expose because it often arises out of relationships built on trust, and can go undetected for many years by the affected senior and family members.

Some types of broker misconduct are easier to identify than others.  Cases of outright fraud, for instance, could include the broker forging an elderly customer’s signature, falsely representing the worth or activity in an account, omitting the risks of a particular investment, recommending and selling unnecessary investment products (e.g., certain annuities), or trading excessively in a customer account solely to generate commissions (otherwise known as “churning”).  Regardless of motive or intent, an investor’s financial losses from the misconduct can be no less catastrophic.  If anything, this should point to the incidence rate of financial abuse amongst the elderly to be more prevalent than many people realize.  Indeed, research has shown that American senior citizens lose over $36 billion per year from financial exploitation.  That number is only expected to rise with increasing life expectancy and the expanding demographic of senior citizens within the United States.

Financial elder abuse is also greatly underreported.  According to the National Adult Protective Services Association, only 1 in 44 cases of financial abuse is reported.  The National Center for Elder Abuse points to studies that have identified feelings of shame as being one reason for the underreporting, in part related to the embarrassment of having fallen victim to financial fraud, but also to the embarrassment of having to disclose that one is suffering from age-related memory loss or cognitive decline.  On this latter point, memory impairment of an elderly investor only adds to the underreporting of broker misconduct.