Regulatory Audits & Investigations

Merrill Lynch Fined For Fair Pricing and Supervisory Violations

December 16, 2014 | Malecki Law Team

The Financial Industry Regulatory Authority (FINRA) has announced that Merrill Lynch has been fined $1.9 million and ordered to pay restitution in the amount of $540,000 for fair pricing violations as well as supervisory violations related to the purchase of certain distressed securities.

According to FINRA, more than 700 transactions in Motors Liquidation Company (MLC) Senior Notes with retail customers were affected over a two year period. FINRA found that “Merrill Lynch purchased MLC Notes at prices that were not fair to its retail customers.” Specifically, Merrill Lynch was found to have purchased the notes from retail customers for anywhere between 5.3% and 61.5% below market price, leaving customers significantly disadvantaged. Merrill Lynch would later selling those shared purchased from retail customers to other broker-dealers at the prevailing market price.

Another problem FINRA found was that Merrill Lynch failed to have an adequate supervisory system in place to detect whether the prices paid to retail customers on the MLC Notes were fair and consistent with prevailing market prices.

Citigroup Fined for ETF Prospectus Failures

December 15, 2014 | Malecki Law Team

Citigroup, Inc. has reportedly agreed to pay a $3 million fine for failing to properly deliver prospectuses to some customers. Specifically, according to the Financial Industry Regulatory Authority (FINRA), Citigroup failed to deliver prospectuses to customers who bought shares in one or more of 160 exchange traded funds (ETFs) in late 2010. It has also been said that Citi may have not delivered prospectuses related to more than 1.5 million ETF purchases between 2009 and early 2011. Citigroup was also fined by the New York Stock Exchange in 2007 for similar issues. FINRA, according to reports, said Citigroup failed to have proper procedures in place to supervise the process.

This is the second such snafu by a major American bank resulting in a fine this year. Just this past September, Morgan Stanley said that it would pay for the losses incurred by customers who purchased certain mutual funds, after the bank admitted that it failed to make prospectuses for those funds available on its website. In total, this is believed to have cost Morgan Stanley roughly $50 million.

Financial firms have significant duties to their customers – risk disclosure being one of the most important. Transparency, including risk disclosure, is critical to the efficient functioning of the markets. So, when major financial firms fail to fulfill their duties, meaningful fines should be imposed. Whether or not the fines in these instances are meaningful remains up for debate.

Are Some Customers Paying Too Much In Fees? The SEC Cracks Down on Linkbrokers

August 15, 2014 | Malecki Law Team

“Is my stockbroker charging me too much in commissions and fees?” This is a common question many investors frequently have. Unfortunately, all too often, the answer to this question is “Yes.”

In fact, just yesterday, the SEC announced that it had fined a New York based broker-dealer, Linkbrokers (an affiliate of London-based ICAP), $14 million for over-charging its customers in the form of markups (and markdowns), among other things.

Markups are the difference between the lower price a broker-dealer can buy an investment for and the higher price charged to a retail customer when they buy investments directly from the broker-dealer’s inventory, rather than on the open market. For example, if a broker-dealer were able to buy a stock at $10 per share and charge a retail customer $11 for that same share, the markup would be $1. Markups are common in the financial services industry, but to be acceptable, they must not be excessive and must be appropriately disclosed to the customer.

FINRA Files LPL Financial for Failures to Supervise Alternative Investments

March 27, 2014 | Malecki Law Team

LPL Financial LLC has been hit again for supervisory failures stemming from the recommendation of non-traded real estate investment trusts (REITs), as well as other illiquid investments, begging the question whether the fines are large enough to deter future bad conduct. According to a news release dated March 24, 2014, the Financial Industry Regulatory Authority (FINRA) announced that LPL Financial has been fined $950,000 for the firm’s failures in supervision over alternative investments, including non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid pass-through investments.

LPL Financial submitted a Letter of Acceptance, Waiver and Consent No. 2011027170901 (AWC), in which it admitted to “fail[ing] to have a reasonable supervisory system and procedures to identify and determine whether purchases of [alternative investments] caused a customer’s account to be unsuitably concentrated in Alternative Investments in contravention of LPL, prospectus or certain state suitability standards.” LPL also admitted in the AWC that though it had a computer system to assist and supervision, this computer system did not consistently identify alternative investments that fell outside of the firm’s suitability guidelines. Additionally, LPL stated that its written compliance and written supervisory procedures failed to achieve compliance with NASD Rule 2310 and state suitability standards.

NASD Rule 2310 has since been superseded by FINRA Rule 2111. The current rule establishes the industry standard that FINRA members and their employees must have a reasonable basis to believe their recommendations are suitable for their customers. The Rule further dictates that the firm must establish suitability for each customer by considering 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, though this list is not exclusive.

Jenice Malecki Of Malecki Law Heads To Washington To Meet With Congressmen And Senators About Investor Protection

March 13, 2014 | Malecki Law Team

Jenice Malecki of Malecki Law will be in Washington, D.C. tomorrow to meet with Congressmen and Senators along with others from the Public Investors Arbitration Bar Association (PIABA) to advocate for the Investor Choice Act and federal legislation to increase transparency and accountability from our financial regulators.

Ms. Malecki will be meeting with Rep. John Dingell (D-MI), Senator Kirsten Gillibrand (D-NY), Rep. Stephen Lynch (D-MA), Senator Charles Schumer (D-NY), and Rep. Blaine Luetkemeyer (R-MO).

The primary significance of the Investor Choice Act will be the elimination of pre-dispute arbitration agreements that are commonly used in broker-dealer and investment advisor contracts. These agreements force customers who sue their broker, advisor or firm to pursue their claims only in arbitration. By eliminating these agreements, customers who have a dispute with their advisor, broker, or firm will have the option of electing to sue in arbitration or go to court and have their case heard by a jury.

Berthel Fisher and PNC Fined In Connection With The Sale Of ETFs

February 25, 2014 | Malecki Law Team

Just yesterday, FINRA announced that it has fined Iowa-based broker-dealer Berthel Fisher $775,000 for failures to adequately train and supervise brokers selling alternative investments, such as real estate investment trusts (“REITs”), and non-traditional exchange traded funds (“ETFs”), including leveraged and inverse ETFs.

In addition to REITs and ETFs, Berthel brokers also reportedly sold managed futures, oil and gas investments, equipment leasing programs and business developments companies, all while having “inadequate supervisory systems and written procedures for sales” of these investments.

Firms are required to have sufficient supervisory systems and written procedures for the sale of such investments to help ensure that these potentially risky and illiquid investments are only sold to investors for whom they are suitable and appropriate. Oftentimes, these investments are not appropriate for your average investor.

All Eyes On The SEC After Recent Losses

February 21, 2014 | Malecki Law Team

In recent weeks, attention has turned to the Securities and Exchange Commission‘s declining success rate when going to trial against alleged wrongdoers. Publications such as the New York Times and Wall Street Journal have run multiple articles recently about this surprising decline. Per the Wall Street Journal, the SEC’s success rate has dropped to 55% since October, as opposed to the more than 75% success rate in the three consecutive years prior.

While the cases at the center of this decline were in the works well before Mary Jo White took the helm at the SEC, many are beginning to speculate how the Commission will react. Ms. White recently touted the then 80% success rate last year, citing it as a potential reason why attorneys counsel their clients to settle rather than face trial. However, this may be on the verge of changing. Emboldened by the newfound success of defendants in defending trials against the Commission, those who may find themselves in the SEC’s crosshairs may begin to opt to go to trial.

Recent cases, such as the insider-trading investigation and trial of billionaire Dallas Mavericks owner, Mark Cuban, have only intensified the public interest in the Commission and the work it does to investigate violations of the securities laws.

I Just Got An SEC Subpoena: Now What Happens?

February 7, 2014 | Malecki Law Team

The recent string of cases brought by the Securities and Exchange Commission in connection with the US Attorney’s Office against members of SAC Capital for insider trading has shone a bright light on the world of SEC investigations. Though all financial professionals surely hope that they will never be involved in an SEC investigation, the truth of the matter is that many unfortunately will.

Receiving a subpoena from any government agency can be a worrisome event in anyone’s life, but for a financial professional, receiving a subpoena from the Securities and Exchange Commission can be especially intimidating. More often than not, the recipient may be confused as to, “Why is the SEC contacting me?”

Individuals are typically contacted by the SEC for two reasons: 1) You are the subject of its investigation; or 2) The SEC believes you may have valuable information related to its investigation of an entity or someone else.

Jenice Malecki to Appear on Fox Business Channel

October 21, 2013 | Malecki Law Team

Jenice Malecki of Malecki Law will be appearing at 10:45 am on Varney & Co. on Fox Business on Tuesday, October 22, to discuss the proposed $13 billion J.P. Morgan Chase settlement.

Ms. Malecki will be discussing whether J.P. Morgan and others should be surprised that the firm is being subjected to penalties relating to conduct that occurred at Bear Stearns and Washington Mutual, which J.P. Morgan acquired during the recent financial crisis.

Ms. Malecki will speak on central issues at the heart of the present debate such as the role of the government in these two acquisitions, including what promises, if any, were made to J.P. Morgan by government officials, as well as the overall price paid for the two companies relative to their actual value.

Jenice Malecki to Appear on Fox Business News with Dennis Kneale

October 14, 2013 | Malecki Law Team

Jenice Malecki of Malecki Law will be appearing on Fox Business News at 12pm today, speaking with Dennis Kneale about whether or not banks, such as JP Morgan, should be getting amnesty from regulators.

In the fallout from the financial crisis, banks, such as JP Morgan have seen their legal fees related to defending complaints from both customers and the SEC, along with other regulators, rise substantially. JP Morgan shocked many in the marketplace when it recently revealed that its “litigation reserve” was $23 billion, and that it had paid out roughly $8 billion in recent settlements and judgments.

In light of this revelation, some have called for amnesty to be provided to large banks, in an effort to relieve them of these substantial legal burdens and jumpstart the markets by freeing up large reserves of capital.