New York Securities Fraud Lawyers Blog

JP Morgan Investigated By SEC and Other Authorities Over Sale of Proprietary Products

May 8, 2015 | Malecki Law Team

Is it okay for a broker-dealer to use bonuses and other incentives to encourage its financial advisors to steer customers into “in house” and proprietary funds that may not be right for them just to generate more fees for the firm? Or does this practice improperly (and illegally) incentivize the financial advisor to betray his customer’s trust for his and his firm’s benefit – thereby compromising the integrity of the relationship?

The SEC is asking just those types of questions about the practices of JP Morgan, according to recent reports. Per InvestmentNews, the SEC and other regulators have subpoenaed and otherwise inquired of JP Morgan about the firm’s sales practices. Specifically, the reports indicate that the focus seems to be on conflicts of interest related to the sales of mutual funds and other proprietary products to customers. The SEC is reportedly looking into whether JP Morgan breached duties to its customers and/or applicable laws by unfairly and/or illegally marketing its in house investment products.

The sale of in-house proprietary products can be a very lucrative business for large “wire houses” as they are known in the industry. Wire houses include such familiar names as JP Morgan, Merrill Lynch, Citigroup, Wells Fargo, etc. By performing all of the structuring, issuing, lending and selling for their proprietary funds internally, a wire house is able to capture all of the associated fees, commissions and charges. Therefore, it is important that regulators review the sales of such in house products, to make sure they are being sold fairly and legally to customers.

Malecki Law Announces Investigation of Former LPL Financial Broker Charles Fackrell

May 8, 2015 | Malecki Law Team

On the heels of an announcement from the Financial Industry Regulatory Authority (FINRA) that LPL Financial LLC has been fined approximately $12 million as a result of lax supervision, FINRA barred former LPL broker Charles Fackrell as a result of him refusing to comply with FINRA’s request for information. Mr. Fackrell was employed by LPL Financial in North Carolina from 2010 through 2014, according to a review of publicly available records.

According to a Letter of Acceptance, Waiver and Consent No. 20140437052 (AWC), the results of a FINRA investigation into Mr. Fackrell’s activities while employed at LPL Financial allegedly uncovered securities rule violations for selling private securities offerings.

In the AWC, Mr. Fackrell consented to the finding that he violated FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade). Rule 2010 requires that all FINRA members shall observe high standards of commercial honor and just and equitable principles of trade.

FINRA Alleges Substantial Fraud Claims Against Avenir Financial Group

May 6, 2015 | Malecki Law Team

Senior-aged investors continue to dominate securities related news coming out of the Financial Industry Regulatory Authority (FINRA). Though Avenir Financial Group, a New York-based broker-dealer, has only been a FINRA member for three years, the regulator has alleged substantial fraud claims against the firm, the firm’s Chief Executive Officer and Chief Compliance Officer Michael Clemens and several registered representatives.

In a New Release dated April 27, 2015, FINRA alleged that Avenir and registered representative Karim Ibrahim (a/k/a Chris Allen) defrauded a 92 year old customer of the firm by selling equity interests in the firm based on misleading and fraudulent terms. FINRA alleged that Mr. Ibrahim was aware that the firm was financially struggling, yet offered 5% of the company for $250,000, a valuation that was materially misleading because other investors had previously been offered lower prices and there was no basis for the change in the prices. FINRA alleged that Mr. Clemens aided and abetted the fraud by instructing Mr. Ibrahim regarding the proposed sale to the senior-aged customer.

In the related FINRA Complaint, FINRA detailed that Avenir “inexplicably” increased the equity share offerings. For example, the Complaint stated that a one percent share increased from an initial offer of $2,600 to a third offering costing $50,000. During this time, Avenir was allegedly suspended from operating a securities business when its net capital decreased below regulatory thresholds, and the firm faced an approximate $200,000 margin call that would have closed the firm had it not been for the investor who purchased the third offering.

LPL Financial Settles Supervisory Failure Charges with FINRA for $11.7 Million

May 6, 2015 | Malecki Law Team

LPL Financial agreed to pay more than $11 million to settle charges in connection with a Financial Industry Regulatory Authority (FINRA) investigation into the firm, as recently reported in the Wall Street Journal. According to the Letter of Acceptance Waiver and Consent filed with FINRA, LPL Financial was alleged to have supervisory failures, related to non-traditional products such as exchange traded funds (ETFs), variable annuities, and non-traded real estate investment trusts (REITs).

LPL allegedly failed to deliver over 14 million trade confirmations in addition to failing to properly monitor and report trades. Of the amount collected, $1.7 million is reportedly restitution for customers, while LPL Financial was fined an additional $10 million.

Vigilant supervision over the sale of non-traditional investments is especially important because public customers are typically unfamiliar with the products being sold to them. In addition, many non-traditional products have higher commissions (meaning a bigger incentive for a broker to sell such products) than their more traditional counterparts.

Broker Stuart Conley Accepts Censure and Fine for Failing to Obtain Prior Written Authorization For His Discretionary Trading

May 1, 2015 | Malecki Law Team

Formality is substance in the business of investing; casual account management is not allowed. Either you discuss every trade with your broker, or your broker obtains written discretionary power, with no exceptions!

The Financial Industry Regulatory Authority (FINRA) accepted on April 27, 2015 a Letter of Acceptance, Waiver and Consent No. 2013037694701 (AWC) from Stuart Conley, a former broker of UBS Financial Services Inc. and Further Lane Securities, L.P. for placing discretionary trades in 21 separate accounts. It was address by the AWC that Mr. Conley allegedly failed to obtain prior written consent from the account owners to make discretionary trades.

Failing to obtain prior written consent violated FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) and Rule 2510 (Discretionary Accounts). Rule 2010 requires that all FINRA members shall observe high standards of commercial honor and just and equitable principles of trade. Rule 2510 prohibits brokers from exercising discretionary power in a customer’s account without first obtaining written authorization from that customer and the employing broker-dealer.

FINRA Files Complaint Against Lawrence LaBine

April 30, 2015 | Malecki Law Team

Unfortunately, the elderly and the inexperienced investors are oftentimes the ones who find themselves victimized by unscrupulous and predatory brokers. Foreign persons – from Europe, South America, and elsewhere – also appear to be increasingly victimized by such U.S.-based brokers as well.

On April 28, 2015 the Financial Industry Regulatory Authority Department of Enforcement filed a complaint against Mr. Lawrence LaBine. According to the Complaint, Mr. Labine is accused of having violated NASD Rules 2310 and 2110 and FINRA Rule 2010 in making unsuitable recommendations to customers, Section 17(a) of the Securities Act and FINRA Rule 2010 in making misrepresentations and omissions concerning Domin-8 and D8, and Section 10(b) of the Exchange Act, Rule 10b-5 thereunder and FINRA Rules 2020 and 2010 by making fraudulent misrepresentations and omissions concerning Domin-8 and D8.

The Complaint alleges that Mr. LaBine made the subject fraudulent misrepresentations and omissions to customers, as well as unsuitable investment recommendations to customers while registered with DeWaay Financial Network. Many of Mr. LaBine’s customers at DeWaay to whom he sold unsuitable investments were said to be elderly and/or inexperienced investors.

What is an 8210 Request and What Do I Do If I Get One?

April 29, 2015 | Malecki Law Team

Back in February, I wrote a piece on what to do when you get an SEC subpoena. SEC subpoenas are only part of the securities regulatory landscape. While the SEC can and will subpoena anyone – registered or unregistered – who is potentially the target of or may have helpful information related to an SEC investigation, FINRA registered representatives are additionally subject to FINRA inquiries via FINRA Rule 8210.

FINRA Rule 8210 allows FINRA investigators to essentially “subpoena” a person – i.e., require that they testify on the record and/or compel them to produce documents – without actually ever getting a subpoena. Instead, FINRA uses what is commonly (and not surprisingly) referred to as an “8210 Request.”

8210 Requests are similar to SEC subpoenas in their function, but differ slightly in practice. FINRA investigators will regularly tell parties that FINRA is not the government, but merely a private member organization. Why is that significant? Some may say that it’s significant because FINRA cannot actually “require” someone to come testify under a threat of contempt or jailtime; that your response is, in a way, “voluntary.”

FINRA Orders RBC Capital Markets, LLC to Pay $1.4 Million for Failing to Supervise Unsuitable Sales of Reverse Convertible Securities

April 27, 2015 | Malecki Law Team

In what appears to be another example of broker-dealers continuing to ensure that the wrong speculative securities are sold to the wrong investors, the Financial Industry Regulatory Authority (FINRA) announced in a News Release on April 23, 2015 that RBC Capital Markets, LLC was fined approximately $1 million and ordered to pay restitution of approximately $400,000 for the firm’s failure to supervise the unsuitable sale of reverse convertible securities to public investors. According to FINRA Letter of Acceptance, Waiver and Consent No. 2010022918701 (AWC), a reverse convertible securities are “a complex structured product” that are interest-bearing notes in which principal repayment is linked to the performance of an underlying asset like a stock, a basket of stocks, or an index like the S&P 500.

In the News Release, FINRA’s Chief of Enforcement is quoted as stating: “[s]ecurities firms must ensure that their brokers understand the inherent risks associated with the complex products they are selling, and be able to determine if they are suitable for investors before recommending them to retail customers. When the firm establishes suitability guidelines, it must police the transactions to ensure they appropriately meet their own criteria.”

According to the AWC, RBC had faulty policies and procedures in place that did not appropriately supervise the recommendation of reverse convertibles to public investors. RBC’s failure to supervise the recommendation of reverse convertibles also occurred because the policies and procedures in place were not effectively enforced, according to the AWC. The AWC detailed that RBC failed to detect that more than a quarter of transactions in reverse convertibles “were unsuitable” and were inappropriately recommended to public investors with lower than necessary income, net assets, net worth and/or investment experience, or risk tolerances.

FINRA Fines H. Beck, Inc. for Insufficient Supervision

April 24, 2015 | Malecki Law Team

Just this past month, H. Beck, Inc. of Bethesda, Maryland submitted a Letter of Acceptance Waiver and Consent (“AWC”) to settle alleged FINRA Rule violations concerning the failures in the firm’s supervisory system and written supervisory procedures. H. Beck is said to have more than 800 registered representatives based out of over 460 registered branch offices.

Specifically, it was alleged in the AWC that the firm failed to maintain a supervisory system reasonably designed to ensure that customers received certain sales charge discounts. H.Beck was also alleged to have insufficient supervisory procedures governing the use of consolidated reports with customers, leading to inaccurate information being sent to customers.

According to the AWC, H. Beck failed to “identify and apply sales charge discounts to customers with eligible purchases of UITs.” A UIT, or uniform investment trust, is a type of investment company that offers undivided interests in a portfolio of securities. These interests are frequently called “units.”

FINRA Bars Wells Fargo Broker Aaron Parthemer for Outside Business Activities and Loans to Clients

April 24, 2015 | Malecki Law Team

Was this a case of a broker who did “too much” for his clients, Aaron Parthemer’s attorney claimed in an InvestmentNews news article dated April 23, 2015? One thing is sure: the Financial Industry Regulatory Authority (FINRA) has barred Aaron Parthemer from associating with any FINRA member broker-dealer in any capacity for violating industry rules by participating in private securities transactions, outside business activities, and for making loans to his clients, according to FINRA Letter of Acceptance, Waiver and Consent No. 2011030405801 (AWC). Each of these items alone could be sufficient for termination of a broker from their employing broker-dealer. The conduct detailed in the AWC spanned a time when Mr. Parthemer was employed and licensed to recommend the purchase and sale of securities by Morgan Stanley Smith Barney LLC from June 2009 through October 2011, and from October 2011 through March 2013 with Wells Fargo Advisors, LLC.

According to the InvestmentNews article, Mr. Parthemer was a Miami “socialite” who was a financial advisor to a number of NFL and NBA players and had his picture taken with such celebrities as Chris Brown and Nicki Minaj. According to the AWC, Mr. Parthemer was barred for a number of securities industry violations, including involvement in outside business activities in violation of FINRA Rules 3270 and 2010 and NASD Rule 3030. The AWC detailed that Mr. Parthemer worked as a President and Chief Executive Officer of a Miami nightclub (identified by the InvestmentNews article as “Club Play”) and also marketed an international tequila brand. Brokers are permitted to operate outside business activities if they are disclosed and approved by their employing broker-dealer. Disclosure and approval is required in order to ensure that inappropriate securities transactions do not occur outside the supervision of the broker-dealer.

Mr. Parthemer was also barred for providing approximately $400,000 in loans to certain securities customers, in violation of FINRA Rule 3240. Rule 3240 makes it clear that loans to or from clients are only permitted in certain limited circumstances where disclosure is made to the employing broker-dealer and such loan is approved. Supervision by broker-dealers is necessary, again to ensure that there are no violations of securities laws or industry rules occurring. The AWC noted that the loans made by Mr. Parthemer were never disclosed to Wells Fargo.