Articles Posted in Problems at Broker Dealers

Windsor 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

According 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.

First 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.

The investment and securities fraud attorneys at Malecki Law are interested in hearing from investors who have purchased structured notes or other complex products from Merrill Lynch or its parent company, Bank of America.

According to a recent SEC press release, “Merrill Lynch has agreed to pay a $10 million penalty to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.” The issues surrounding the notes stemmed, at least in part, from disclosure of the fees paid by investors and the fee structure related to the “volatility index” to which the notes were linked, per the SEC.

For example, the notes reportedly were subject to a 2% sales commission and 0.75% annual fee. According to the SEC, for investors to earn back their original investment on the maturity date, the index would need to increase by at least 5.93%. The SEC also alleged that the offering materials failed to “adequately disclose” the 1.5% execution factor, which was an additional cost.

Generally speaking, it’s usually not a good thing when when a company is fined for similar conduct multiple times.

Just this month, UBS Financial Services, Inc. submitted a Letter of Acceptance, Waiver and Consent No. 2013038351701 (AWC) that detailed a $250,000 fine for failures in supervision regarding sales of mutual fund shares to investors.  According to the AWC, for a four year period, from approximately 2009 to 2013, UBS failed to provide sales charge waivers to customers entitled to waivers through rights of reimbursement.  The AWC detailed that this conduct created a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).

Mutual fund class A shares generally require the investor to pay an upfront sales charge, except where the mutual fund waives the charge, such as when the mutual fund is purchased with a right of reimbursement.  The AWC detailed that investors sometimes purchase class A shares with right of reimbursement when they reinvest proceeds from earlier redemptions of Class A shares in the same fund or fund family within a specific time period.

Malecki Law’s team of investment attorneys are interested in speaking with those who invested in AR Global REITs. Industry analysts and consultants believe that investors in a number of AR Global-sponsored real estate investment trusts (REITs) are in danger of having their distributions cut, per InvestmentNews.

Specifically, investors in American Realty Capital Global Trust II, American Realty Capital New York City REIT, American Finance Trust, American Realty Capital Hospitality Trust, American Realty Capital Retail Centers of America, Healthcare Trust, and Realty Finance Trust may be at risk, according to the report.

The problem is said to stem from the MFFO (modified funds from operations a/k/a cash flow) at seven of AR Global’s REITs. The MFFO of these seven funds reportedly failed to match or exceed their distributions. In simple terms, this would mean that the funds failed to take in as much as they were distributing. Such a situation has the potential to mean big trouble for investors including distribution cuts and rapid decline in asset value – i.e., less income and large losses to the principal.

The securities fraud attorneys at Malecki Law are interested in hearing from investors who have complaints against stockbroker Geri Delfino.  Ms. Delfino had been employed and registered with Ameriprise Financial Services, Inc., a broker-dealer, from October 2009 to November 2015, according to her publicly available BrokerCheck, as maintained by the Financial Industry Regulatory Authority.

Per her BrokerCheck report, Ms. Delfino was previously employed by Ameriprise Advisor Services, Inc. from 2006 to 2009, Advest, Inc. from 2000 to 2006, and A.G. Edwards & Sons, Inc. from 1991 to 2000.

Ms. Delfino was fined and suspended for 20 days from association with any FINRA member broker-dealer by FINRA according to a Letter of Acceptance, Waiver and Consent No. 2015047790401 (AWC).  According to the AWC, Ms. Delfino violated NASD Conduct Rule 2510(b) (Discretionary Accounts) and FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) for:

The securities fraud attorneys at Malecki Law are interested in hearing from investors who have complaints regarding former stockbroker Clark Gardner.  According to his BrokerCheck report maintained by the Financial Industry Regulatory Authority (“FINRA”), Mr. Gardner is no longer FINRA licensed to sell investments.  He has also reportedly been the subject of no less than six reportable events, including customer complaints and regulatory investigations.

Per FINRA, Mr. Gardner was permanently barred by both FINRA and the SEC from the financial services industry.  The FINRA investigation of Mr. Gardner reportedly surrounded the conversion of $243,000 of customer funds.  Per his BrokerCheck report, Mr. Gardner also served as an agent for a real estate investment company without required approval of his firm.

Mr. Gardner has been the subject of customer complaints as well.  Customers have alleged that Mr. Gardner breached fiduciary duties and recommended unsuitable investments.  According to FINRA records, one customer dispute is presently pending, while another was settled for $263,000.