Articles Posted in Problems at Broker Dealers

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.

The SEC settlement indicates that Merrill Lynch sent millions of dollars in customer orders to other broker-dealers for execution while purposely concealing their activity as part of their so-called “masking.” practice. For five years, Merrill Lynch had routed some orders to broker-dealers referred to as “ELP”s, or “Electronic Liquidity Partners.” Merrill Lynch was routing their customer orders into smaller “child orders” for execution at ELPs and other external entities. Meanwhile, Merrill Lynch hid the involvement of ELPs and informed customers that all transactions occurred within the firm. The SEC alleged that Merrill Lynch created false reports; altered code to reconfigure FIX messaging systems; modified Transaction Cost Analysis reports and more to Merrill Lynch as the execution venue incorrectly. Did customers experience bad executions? Why create false reports?

Bank of America’s Merrill Lynch, Pierce, Fenner and Smith Incorporated has agreed to pay a $42 million-dollar settlement Securities and Exchange Commission for federal securities laws violations according to an Order Instituting Administrative and Cease-and-Desist Proceedings. According to the SEC’s order released Tuesday, Merrill Lynch admitted to fraudulently deceiving clients about the handling of their millions of orders to buy and trade stock. The Securities and Exchange Commission finds that Merrill Lynch “willfully violated” Sections 17(a)(2) and 17(a)(3) of the Securities Act. The case is an unfortunate reminder of the risks that even the most careful investors deal with when trusting financial institutions.

Merrill Lynch Pierce, Fenner and Smith Incorporated is a FINRA registered brokerage firm and investment advisor with 1559 total disclosures according to (CRD #7691) records on BrokerCheck. Although a Delaware corporation, Merrill Lynch’s principal offices are in Bryant Park, New York. Merrill Lynch’s business conduct includes mutual fund retail, investment advisory services; retailing corporate equity securities; selling variable life insurance or annuities, along with other securities and non-securities transactions.

Can’t imagine having a retirement brokerage account drained in a case of preventable identity theft? Such an unimaginable misfortune is a devastating reality for an investor alleging in a FINRA arbitration complaint that he had the entirety of his account at Invesco stolen, without any help or recompense from the brokerage firm.  An unidentified perpetrator used this unsuspecting investor’s private identifying information to access and steal money from a 401k retirement account. Malecki Law securities fraud attorneys recently filed a claim against Invesco Distributors Inc, on behalf of this investor alleging their failure to safeguard their client’s assets pursuant to FINRA Rules, SEC Regulations, and securities laws.

This foreseeable fraud initiated when, just around the busy Christmas holiday season, an unidentified individual accessed our client’s Invesco retirement 401k. The perpetrator changed the email address and phone number, which had previously been on file for ten years. Within days, the perpetrator stole funds totaling over $100,000 from the investor’s Invesco 401k brokerage account. The perpetrator also successfully took a loan against the 401k account and transferred money to a bank account not owned by our client. Furthermore, Invesco transferred $25,000 to the IRS as a penalty for borrowing against the 401(k) accounts. Amazingly, the investor learned of these unauthorized account transactions only from checking Invesco’s account portal.

Invesco Distributors, Inc. is an indirect wholly owned subsidiary of Invesco Ltd, according to their official website. Invesco Ltd. announced in a recent press release that their firm manages an estimated $972.8 billion in client assets. Based in Texas, Invesco Distributors Inc., is their U.S distributor of mutual funds, exchange-traded funds, institutional money market funds and other retail products. As a FINRA registered broker-dealer, Invesco Distributors Inc. is expected to comply with required industry practices, statutes, rules, and regulations. FINRA rules, SEC regulations and securities laws exist to encourage brokerage firms to protect their investor’s information.

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.

The short answer is no.

When a customer opens an investment account with a brokerage firm, he or she is typically given the option to choose between a discretionary or non-discretionary account.  A discretionary account gives the assigned broker or financial advisor the latitude, or discretion, to buy or sell securities in the account without the customer’s prior authorization.  In non-discretionary accounts, a broker does not have that discretion and must obtain the customer’s permission prior to each transaction.

For reasons that may seem obvious, discretionary accounts are somewhat of a rarity in the brokerage world, in part because they require much more supervisory oversight than non-discretionary accounts.  Discretionary accounts are naturally prone to a higher risk for abuse or mismanagement of funds, as there is less customer input and oversight of the trading.  Thus it should be no surprise that the securities laws for discretionary accounts are especially geared towards investor protection.

fraud-look-closelyWindsor Street Capital (formerly known as Meyers Associates) and its anti-money laundering (AML) officer, John D. Telfer, have been charged with securities violations by SEC, according to a recent report.  Windsor allegedly failed to report at least $24.8 million in questionable penny stock sales.  The violations cited by the SEC relate to the unregistered sale of hundreds of millions with insufficient due diligence, per InvestmentNews.

The suspicious transactions allegedly date back to June 2013 and resulted in nearly $500,000 in commissions and fees for Windsor, according to the SEC.  InvestmentNews reports that Mr. Telfer has been charged with aiding and abetting by virtue of his alleged failure to properly monitor the transactions at issue.

Brokers offer financial advice to and transact a variety of securities on behalf of millions of investor households. Millions of Americans rely on their brokers to make complex long-term decisions about their retirement and long-term savings plans. Consumer Federation of America (CFA) published a report this week, “Financial Advisor or Investment Salesperson?: Brokers & Insurers Want To Have It Both Ways” that takes a look at when is an “advisor” really an advisor and when are they being salespersons. According to this report, people saving for retirement lose an estimated $17 billion a year or more as the result of the excess costs associated with conflicted retirement advice.

As per the report, it examined 25 brokerage firms, their services and marketing messages and found ambiguity in the way they market themselves to consumers and the way they defend themselves in an arbitration. They present their services to be advice-centric and themselves as trusted advisors in their marketing messages. According to the report, these were the common findings:

  • No website was found to have referred to their financial professionals as salespeople but as reliable advisors indicating that they have a level of sophistication and expertise

visions-from-im-5-1466265-225x300According to news reports, the SEC has fined UBS more than $15 million for its failures to properly supervise employees who sold complex investment products to unsophisticated and inexperienced clients of the firm. Complex products are traditionally reserved for only sophisticated investors who have a full understanding of the product and are appreciative and willing to take the risks involved. These are not typically appropriate or suitable for unsophisticated “mom and pop” investors.

Nonetheless, reports indicated that UBS’s financial advisors sold more than half a billion dollars’ worth of these complex products to more than 8,000 inexperienced investors. Making matters worse, reports reveal that many of these investors had moderate or conservative risk profiles. The products sold to investors are said to have included reverse convertible notes, some of which had derivatives that were tied to implied volatility.

This is not new for UBS, which just paid $19.5 million last year in connection with the firm’s sale of complex structured notes.

BN-LT369_1712mo_P_20151217084436First Wells Fargo, now Morgan Stanley.

On the heels of Wells Fargo’s cross-selling scandal, the broker-dealer Morgan Stanley has been accused of inappropriately promoting  “securities based loans” to customers, according to an article published in the Wall Street Journal on October 3, 2016.  The complaint, filed by Massachusetts securities regulators, alleges that Morgan Stanley’s lax compliance and supervisory oversight led the broker-dealer to breach their own fiduciary duties owed to their wealth management customers by pushing the loans and minimizing the risks associated with the accounts.

If the allegations turn out to be true, the Massachusetts allegations would further exemplify the conflict of interest between broker-dealers pushing risky products on their clients without providing the balanced view of the products that industry rules require, which could be breaches of duties to certain of their customers.  At the very least, FINRA Rule 2111 requires that broker-dealers ensure that recommendations of products are suitable for each customer, which requires a careful assessment of each customer’s respective investment objectives, risk tolerance, age, tax bracket, other investments, liquidity needs, as well as other factors.