Securities Fraud

Barry Connell Accused by SEC of Misappropriating $5 Million of Client Funds

May 31, 2017 | by Staff Attorney

The investment lawyers of Gana Weinstein LLP are investigating allegations by The Securities and Exchange Commission (SEC) finding that former Morgan Stanley broker Barry Connell (Connell) working out of the Ridgewood, New Jersey office misappropriated about $5 million from clients. After a customer complained of about $2,500,000 in unauthorized fund transfers in November 2016 Morgan Stanley terminated Connell about a week later. Morgan Stanley terminated Connell on ground that there were “Allegations regarding unauthorized withdrawals and transfers of funds from client’s household accounts to third-party payees, which appear to be for the benefit of the former registered representative.” Thereafter, Connell was barred by the Financial Industry Regulatory Authority (FINRA) for failing to provide documents and information related to Morgan Stanley’s statement.

In February 2017, the SEC alleged that Connell stole money from investors to settle a private lawsuit among other misuses. Connell was alleged to have engaged in misappropriation of approximately $5 million from investment advisory clients. The SEC found that from approximately December 2015 through November 2016, Connell carried out his scheme primarily by moving funds between client accounts and then sending wire transfers and checks from the accounts to third parties for his own benefit. The SEC stated that over the course of approximately 11 months Connell made more than 100 unauthorized transactions through forms falsely representing that he had received verbal client authorizations for the transactions. The SEC changed that this conduct was the engaging in transactions, acts, practices and courses of business that constitute violations of Section 206(1) and Section 206(2) of the Investment Advisers Act of 1940.

Connell entered the securities industry in 1998. Since May 2008, Connell was associated with Morgan Stanley.

FINRA Bars Advisor Michael Babyak Over the Sale of Unapproved Investments

May 13, 2017 | by Staff Attorney

Our firm is investigating claims made by The Financial Industry Regulatory Authority (FINRA) against broker Michael Babyak (Babyak), formerly associated with brokerage firms LPL Financial LLC (LPL) and Leigh Baldwin & Co., LLC (Leigh Baldwin). According to brokercheck, Babyak consented to the sanction that he participated in private securities transactions involving customers of a member firm without first providing the firm written or oral notice of his activities. FINRA findings stated that Babyak had the customers invest a total of $4,250,000 into a limited liability company that he had created.

Babyak is then alleged to have assisted in wiring funds from the firm’s accounts to the borrower and the limited liability company’s bank account and signed the loan agreement and related security agreement on behalf of the company he created. FINRA alleged that Babyak then caused the company to loan the $4.25 million to a third party for the benefit of his customers. FINRA also discovered that Babyak arranged for the company to use funds repaid from the $4.25 million loan to extend loans on behalf of the customers to two additional borrowers.

The providing of loans or selling of notes and other investments outside of a brokerage firm constitutes impermissible private securities transactions – a practice known in the industry as “selling away”. Often times brokers who engage in this practice use outside businesses in order to market their securities.

FINRA Bars Michael Siegel For Failing to Cooperate with Regulatory Investigation

February 4, 2017 | by Staff Attorney

Our securities fraud attorneys are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against Michael Siegel (Siegel) formerly associated with National Securities Corporation – d/b/a HudsonPoint Capital – alleging Siegel engaged in a number of securities law violations including that the broker made unsuitable investments, unauthorized trading, and churning (excessive trading) among other claims. The claim filed in July 2016 seeks $2,016,064 in damages.

Thereafter, FINRA barred Siegel from the securities industry alleging that the broker failed to respond to the regulator’s requests for documents and information.

When brokers engage in excessive trading, sometimes referred to as churning, the broker will typical trade in and out of securities, sometimes even the same stock, many times over a short period of time. Often times the account will completely “turnover” every month with different securities. This type of investment trading activity in the client’s account serves no reasonable purpose for the investor and is engaged in only to profit the broker through the generation of commissions created by the trades. Churning is considered a species of securities fraud. The elements of the claim are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.

Brian Egan Barred By FINRA for Trading in Accounts Away From His Firm

January 25, 2017 | by Staff Attorney

Our securities fraud attorneys are investigating a complaint filed by The Financial Industry Regulatory Authority (FINRA) against Brian Egan (Egan) formerly associated with Independent Financial Group LLC (Independent Financial) alleging that the broker failed to disclose his trading activity in client accounts away from the firm. According to brokercheck records Egan has been subject to one employment termination for cause by Independent Financial in July 2015 for failing disclose personal trading in accounts away from the firm.

In August 2016 FINRA sanctioned Egan alleging that he consented to the entry of findings that Egan maintained and/or held trading authority in a total of 87 brokerage accounts for himself and over 60 customers at another brokerage firm. The customer accounts over which he held trading authority included both Egan’s family members and customers of his CPA business. FINRA found that Egan did not notify Independent Financial of his involvement in these accounts when he became associated with the firm, or at any other time. FINRA found that Egan exercised his trading authority in the accounts at the other firm to execute trades and to transfer funds and securities from certain of the customer accounts to his own accounts.

In the industry the term selling away refers to when a financial advisor solicits investments in companies, promissory notes, or other securities that are not pre-approved by the broker’s affiliated firm. However, even though when these incidents occur the brokerage firm claims ignorance of their advisor’s activities the firm is obligated under the FINRA rules to properly monitor and supervise its employees in order to detect and prevent brokers from offering investments in this fashion. In order to properly supervise their brokers each firm is required to have procedures in order to monitor the activities of each advisor’s activities and interaction with the public. Selling away misconduct often occurs where brokerage firms either fail to put in place a reasonable supervisory system or fail to actually implement that system. Supervisory failures allow brokers to engage in unsupervised misconduct that can include all manner improper conduct including selling away.

Oil Linked Investments Loss Recovery – iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) and VelocityShares 3x Long Crude Oil ETN (UWTI)

November 29, 2016 | by Staff Attorney

Our firm is investigating potential securities claims against brokerage firms for sales practice violations related to the recommendations of oil & gas and commodities products such as exchange traded notes (ETNs), structured notes, private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and individual stocks.

One investment that advisors may be recommending to clients in order to gain exposure to oil is the iPath S&P GSCI Crude Oil Total Return Index ETN (Symbol: OIL). OIL is a speculative ETN that attempts to “reflect[] the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract.” Brokers may be recommending OIL for long-term holding when, in fact, OIL is a risky ETN that is only appropriate for short-term investment speculation on the price direction of oil.

As Morningstar has written, “Due to the extremely specialized exposure of the fund, investors should only consider it for a small position in the satellite portion of a broadly diversified portfolio.” MorningStar also explained how the futures invested in the fund make the investment inappropriate for long-term holdings and how the price of the fund is not related to the price of oil. “For example, in 2013 OIL increased 5.6%, close to WTI’s spot price gain of 6.9% for the year. However, over the trailing five-year period OIL lost 1% annualized, compared with an annualized gain of more than 20% for spot WTI over the same period.”

Centaurus Financial Broker David White Has Complaints Over Alternative Investments

November 26, 2016 | by Staff Attorney

Our investment attorneys are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against David White (White) currently associated with Centaurus Financial, Inc. (Centaurus) alleging unsuitable investments and breach of fiduciary duty among other claims. According to brokercheck records White has been subject to eleven customer complaints. Many of the complaints involve direct participation products (DPPs) such as non-traded real estate investment trusts (REITs) and other alternative investments.

Our firm has experience representing investment fraud victims with these investments against Centaurus. See Gana Weinstein LLP Wins Arbitration Award On Behalf of Client Against Centaurus Financial. In that case, the Claimant alleged that the broker involved invested over $2,000,000 in exclusively high cost products and 50% of those investments were in alternative investments such as private placements, oil and gas partnerships, and REITs. The other 50% was invested in variable and equity-indexed annuities. The panel found that “the investments Hashemian recommended while at Centaurus were not suitable and in [Claimant’s] best interests. [Claimant] also provided sufficient evidence to meet her burden of proof to support her allegations in her Statement of Claim that the actions by Hashemian, for which Centaurus is responsible, constitute fraudulent and negligently made material misrepresentations and omitted material information in the sale of the investments to [Claimant].” Award Can Be Found Here.

Our firm has represented many clients in illiquid alternative investments products. All of these investments come with high costs and have historically underperformed even safe benchmarks, like U.S. treasury bonds. For example, products like oil and gas partnerships, REITs, and other alternative investments are only appropriate for a narrow band of investors under certain conditions due to the high costs, illiquidity, and huge redemption charges of the products, if they can be redeemed at all. However, due to the high commissions brokers earn on these products they sell them to investors who cannot profit from them and have created a large market for a failed product. Further, investor often fail to understand that they have lost money in these illiquid investments until many years after investing. In sum, for all of their costs and risks, investors in these programs are in no way additionally compensated for the loss of liquidity, risks, or cost.

Broker John Cangialosi Sanctioned by Multiple Regulators

November 18, 2016 | by Staff Attorney

Investment attorneys at Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against John Cangialosi (Cangialosi) alleging unsuitable investments, fraudulent and negligent acts, breach of contractual requirements, churning, and negligent misrepresentation among other claims. According to brokercheck records Cangialosi has been subject to five customer complaints, two financial disclosure – one bankruptcy and one tax liens, one employment separation for cause, and two regulatory events.

In April 2013, FINRA found that Cangialosi violated FINRA rules that require the timely disclosure judgments or liens. In this case FINRA found that Cangialosi failed to timely disclose six liens and fined him $5,000 and suspended Cangialosi for three months. In January 2016 the state of Michigan denied Cangialosi’s application to engage in securities business in the state on the grounds that Cangialosi engaged in dishonest and unethical practices within the last 10 years supporting the denial of his registration application.

In 2009 J.P. Turner & Company, LLC permitted Cangialosi to resign after allegations were made that the broker engaged in unauthorized trading in a client’s account.

Raymond James and Broker Joel Burstein Accused of Aiding $350 Million Fraud

November 12, 2016 | by Staff Attorney

Records kept by The Financial Industry Regulatory Authority’s (FINRA) concerning broker Joel Burstein Jr. (Burstein) reveal ten recently filed customer complaints. The customer complaints against Burstein involve claims of common law fraud, negligence, violation of Florida Statute 726 (fraudulent transfers), aiding and abetting, unsuitable recommendations, and breach of fiduciary duty among other claims. These claims allege hundreds of millions in investor losses.

The claims appear to be related to actions taken by the Securities and Exchange Commission (SEC) in a fraud complaint against Ariel Quiros and William Stenger alleging that they and their companies made false statements and omitted key information while raising more than $350 million from investors to construct ski resort facilities and a biomedical research facility in Vermont.

Raymond James was then named in a lawsuit filed by the SEC-appointed receiver. According to news sources, investors were told they were investing projects connected to Jay Peak Inc. ski resort operated by Mr. Quiros and Mr. Stenger. While investor money was supposed to be used for to finance specific projects the operators, in Ponzi scheme fashion, used money from investors in later projects to fund deficits in earlier projects.

Financial Advisor Rabinder “Ravi” Deshmukh Has Customer Complaints

October 4, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating a customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against broker Rabinder “Ravi” Deshmukh (Deshmukh). According to BrokerCheck records Deshmukh has been subject to at least four customer complaints. The customer complaints against Deshmukh allege securities law violations that including unsuitable investments and excessive margin among other claims.

The most recent claim was filed in June March 2016 and alleges that from 2008 to 2015, the customer was recommended and sold unsuitable, highly concentrated positions in speculative securities. In addition, the customer also alleged that they were recommended to trade on margin and seek compensatory and punitive damages in the amount of $9 million. The complaint is currently pending.

Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client. In order to make a suitable recommendation the broker must meet certain requirements. First, there must be reasonable basis for the recommendation the product or security based upon the broker’s investigation and due diligence into the investment’s properties including its benefits, risks, tax consequences, and other relevant factors. Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.

Invest in High Risk Contingent Convertible (CoCo) Bonds?

June 1, 2016 | by Staff Attorney

In a recent Wall Street Journal Article, it was reported that UBS Group AG sold $1.5 billion of contingent convertible (CoCo) bonds. According to the article, UBS received about $8 billion of orders for the sale. These bonds will pay an interest rate of 6.875% and last summer UBS sold $1.6 billion of CoCos at the same rate. The UBS deal was the first CoCo sale since mid-January due to price drops in February due to worries that Deutsche Bank AG might have missed an interest payment on one of its CoCo bonds.

What exactly are CoCo’s and why should investors be concerned. CoCos have been a growing type of debt issued by mostly European issuers. European lenders have sold around 100 billion in CoCos since 2012.

CoCos bear many of the same traits as hybrid preferred securities that were popular right up to the financial crisis. Like hybrid preferred stock, CoCo’s act as hybrid debt/equity investments. When times are good they behave like debt providing no growth to investors and only interest payments. When times get rough these investments behave like equity because investors are unlikely to see returns in the event of bankruptcy. As a result these investments tend to crash in lock step with a company’s equity.