Suitability

Gana LLP Broker Spotlight: Pasquale “Pat” Vitucci Sales of Variable Annuities

April 27, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Pasquale “Pat” Vitucci (Vitucci) has been the subject of at least 19 customer complaints over the course of his career. Customers have filed complaints against Vitucci alleging that the broker made unsuitable investments primarily in variable annuity related products. Other claims concerning Vitucci’s handling of customer accounts include allegations of misrepresentations, breach of fiduciary duty, churning, and fraud. In total investors have complained of over $1 million in losses.

Vitucci has been registered with FINRA since 1992. From October 2005 until October 2008, Vitucci was registered with AIG Financial Advisors, Inc. Thereafter, Vitucci has been associated with National Planning Corporation (National Planning). According to public records Vitucci operates out of a DBA business called Vitucci & Associates Insurance Services.

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Thus, the product or investment strategy being recommended must be appropriate for the investor and the advisers must convey the potential risks and rewards before bringing it to an investor’s attention.

Former Ameriprise Advisor Jack McBride Discharged Over Soliciting Leveraged ETFs

April 22, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Jack McBride (McBride) has been the subject of at least 4 customer complaints over the course of his career. Customers have filed to recent complaints against McBride alleging that the broker made unsuitable investments in leveraged ETFs and the use of margin. McBride has been registered with FINRA since 1994. From that time until August 2014, McBride was registered with Ameriprise Financial Services, Inc. (Ameriprise). In August 2014, Ameriprise discharged McBride claiming that the broker violated the company’s policies relating to making a settlement and for soliciting prohibited securities.

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Part of the suitability requirement is that the broker must have a reasonable basis to believe, based on appropriate research and diligence, that all recommendations are suitable for at least some investors. Thus, the product or investment strategy being recommended must be appropriate for at least some investors and the advisers must convey the potential risks and rewards before bringing it to an investor’s attention.

In the case of Non-Traditional ETFs, these products contain drastically different risk qualities from traditional ETFs that most investors and many brokers are not aware of. While traditional ETFs simply seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.

Broker Spotlight: Wells Fargo Advisor Marcus Debaise

March 30, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Marcus Debaise (Debaise) has been the subject of at least 14 different customer complaints over the course of his career. Beginning in 2011 and continuing into 2015, customers have been filing complaints against Debaise alleging that the broker made unsuitable investments and unauthorized trading in speculative securities that were inappropriate for the customer.

Debaise has been registered with FINRA since 1993. From 2003 until present Debaise has been registered with Wells Fargo Advisors, LLC (Wells Fargo).

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Part of the suitability requirement is that the broker must have a reasonable basis to believe, based on appropriate research and diligence, that all recommendations are suitable for at least some investors. Thus, the product or investment strategy being recommended must be appropriate for at least some investors and the advisers must convey the potential risks and rewards before bringing it to an investor’s attention. Second, all brokers must have a reasonable basis to believe that the recommended investment strategy is suitable for the particular customer. The recommendation must be reasonable for the investor based upon the investor’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, and experience.

FINRA Sanctions Oriental Financial Over Concentrated Customer Accounts in Puerto Rico Bond Funds

March 27, 2015 | by Staff Attorney

This is the second regulatory action that our firm has tracked concerning brokerage firms recommending concentrated positions in Puerto Rico bond funds without having appropriate supervisory system and procedures designed to identify and review concentrated securities purchases in Puerto Rico closed-end funds.

As we reported, The Financial Industry Regulatory Authority (FINRA) sanctioned Popular Securities, Inc. (Popular Securities) alleging between July 1, 2011, and June 30, 2013, Popular failed to establish and enforce a supervisory system and procedures designed to identify and review concentrated securities purchases in Puerto Rico municipal bonds and Puerto Rico closed-end funds. Now in a similar action, FINRA alleged that between July 1, 2011, and June 30, 2013, Oriental Financial Services Corp. (Oriental) failed to establish, maintain, and enforce, supervisory systems and procedures to identify and review concentrated securities purchases in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds.

Oriental has been a F]NRA member since 1993 and is a subsidiary of OFG Bancorp. Oriental operates out of headquarters in San Juan, Puerto Rico and engages in a general securities business that focuses on Puerto Rico municipal securities and open and closed-end mutual funds. Oriental has 50 brokers located in 12 branch offices.

FINRA Files Complaint Against Broker Darnell Deans Over Undisclosed Tax Liens

March 23, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has filed a complaint against broker Darnell Deans (Deans) concerning allegations that while associated with Garden State Securities, Inc. (GSS), Deans willfully failed to amend his Form U4 documents to disclose three unsatisfied federal tax liens totaling approximately $254,995. FINRA also alleged that from in or about April 2011, through August 2011, Deans borrowed a total of $266,000 from two customers of the firm without seeking or obtaining the firm’s approval for the loans. In addition, FINRA alleged that in November 2011, Deans falsely represented to GSS in an Annual Attestation that he had not borrowed money from customers. Thereafter, in January 2012, FINRA alleged that Deans failed to disclose to GSS the extent of funds borrowed from two customers.

In January 1992, Deans first became registered with FINRA. From January 2005, through November 26, 2013, Deans was registered through GSS. On November 26, 2013, GSS filed a Form U5 terminating Deans’ registration stating that Deans was terminated due to management’s loss of confidence due to ongoing regulatory issues. Thereafter, Deans was associated with John Carris Investments LLC until June 2014. Currently, Deans is associated with brokerage firm BlackBook Capital LLC.

In addition to FINRA’s recent action, Deans has had three other regulatory actions filed against him, at least three customer complaints, and has one judgment and tax lien on record. These statistics are troubling because so many customer complaints, regulatory actions, and liens are rare. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. These disclosures do not necessarily have to include customer complaints but can include IRS tax liens, judgments, and even criminal matters. The number of brokers with multiple customer complaints is far smaller.

World Equity Group Supervisory Failures Explored Part II

March 18, 2015 | by Staff Attorney

As we previously reported, The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm World Equity Group, Inc. (World Equity) concerning at least seven different allegations of supervisory failures that occurred between 2009 through 2012. These failures included failures to implement an adequate supervisory system reasonably designed to detect and prevent potential rule violations concerning both internal processes and procedures and in the handling of customer accounts in the areas of suitability of transactions in non-traditional ETFs, private placements, and non-traded REITs.

FINRA alleged that World Equity failed to implement an adequate system to ensure the suitability of Non-Traditional ETFs. As a background, Non-Traditional ETFs are registered unit investment trusts or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark, index, commodity, or other instrument. Shares of ETFs are typically listed on national exchanges and trade at established market prices. Non-Traditional ETFs are different from traditional ETFs in that they return a multiple of the performance of the underlying index or benchmark or the inverse performance.

Non-Traditional ETFs may use swaps, futures contracts, and other derivative instruments in order to create leverage to achieve these objectives. In addition, most Non-Traditional ETFs are designed to achieve their stated objectives in one trading session. Between trading sessions the fund manager generally rebalances the fund’s holdings in order to meet the fund’s objectives. For most Non-Traditional ETFs the rebalancing happens on a daily basis. Further, because the correlation between a Non-Traditional ETF and its linked index or benchmark is inexact there is typically tracking error between a fund and its benchmark becomes compounded over longer periods of time. In addition, the tracking error effect becomes more pronounced during periods of volatility in the underlying index or benchmark. FINRA advised brokerage firms in June 2009 due to the effect of compounding the performance of Non-Traditional ETFs over longer periods of time can differ significantly from the performance of their underlying index or benchmark during the same period of time and because of these risks and the inherent complexity of the products, FINRA advised broker-dealers and their representatives that the products are typically not suitable for retail investors who plan to hold them for more than one trading session.

Broker Allen Green Alleged to Have Made Unsuitable Investment Recommendations Based a Theory of Economic Collapse

March 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has filed a complaint against broker Allen Green (Green) concerning allegations that Green violated FINRA’s suitability rule by making unsuitable recommendations to a disabled customer, and also by having no reasonable basis to recommend non-traditional exchange traded funds (Non-traditional ETFs) to his customers.

Green has been in the securities industry since 1976 and also has been a registered principal since 2003. From May 2006, until November 2009, Green was associated with Cullum & Burks Securities, Inc. Thereafter, from November 2009 until April 2013, Green was registered with Royal Securities Company (Royal Securities). According to FINRA, Green was the supervising principal for one of Royal Securities’ Michigan branch offices and did business in that branch under the name A Green Financial Group.

FINRA alleged in the complaint that Green believed that the world economy was on the precipice of catastrophe and that certain asset classes would increase in value due to the resulting “world chaos” that would result. As a result of his view, FINRA alleged that Green recommended to virtually all of his customers that they invest almost exclusively in securities with exposure to precious metals, natural resources, commodities, and energy as part of a comprehensive investment strategy.

Broker Investigation: Stephen Dealy’s Alternative Investment Recommendations

March 2, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Stephen Dealy (Dealy) concerning allegations that Dealy willfully failed to timely amend his Form U4 to disclose a federal tax lien. FINRA also alleged that Dealy failed to report written complaints he received from his customers to Investors Capital Corp. (ICC).

Dealy first became registered with FINRA in 1983. From November 21, 2001 to September 12, 2014, Dealy was registered through ICC. On September 12, 2014, ICC filed a Form U5 terminating Dealy’s registration with the firm.

According to Dealy’s public disclosures the broker has been subject to seven customer complaints. These statistics are alarming because multiple customer complaints on a broker’s record are exceedingly rare. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. FINRA’s disclosure records do not just cover customer complaints but also include IRS tax liens, judgments, and even criminal matters. Therefore, the number of brokers with multiple customer complaints is constitutes only a very small percentage of licensed brokers.

FINRA Sanctions Broker Douglas Campbell Jr. Over Unsuitable Investment Advice

February 26, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Douglas Campbell Jr. (Campbell) concerning allegations that between May 2008 and September 2008, while registered with Wedbush Morgan Securities, Inc. (Wedbush), he engaged in unsuitable trading a customer’s account by recommending purchases of three speculative private placement investments that were not consistent with the customer’s investment objectives, resulting in an overconcentration in the customer’s account. FINRA found that Campbell’s recommendations were made without reasonable grounds for believing that they were suitable for the customer.

In addition, according to Campbell’s public records four customers have filed complaints concerning Campbell’s investment advice. These statistics are troubling because multiple customer complaints on a broker’s record are rare. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. These disclosures do not necessarily have to include customer complaints but can include IRS tax liens, judgments, and even criminal matters. The number of brokers with multiple customer complaints is far smaller. The complaints against Campbell alleged fraud, breach of fiduciary duty, excessive trading, and unsuitable investments.

Campbell first became registered with FINRA in 1994. On July 9, 2007, Campbell became registered Wedbush. On November 29, 2012, Wedbush filed a Form U5 reporting that Campbell voluntarily terminated his employment on November 26, 2012.

FINRA Sanctions Felt & Company Over Leveraged ETF Recommendations to Clients

February 16, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Felt & Company (Felt) alleging that between January 2009, and September 2012, Felt failed to establish and supervisory system that was reasonably designed to ensure that sales leveraged or inverse exchange-traded funds (Non-Traditional ETFs) complied with all applicable securities laws.

Feltl is headquartered in Minneapolis, Minnesota, has approximately 114 registered representatives operating out of eight branch offices in Minnesota and Illinois. Felt derives revenue from securities commissions, underwriting, and investment company activity and has been a FINRA member since 1975. This most recent FINRA action is not the first time the regulatory has brought an action concerning issues of how Felt sells securities products to investors. As we previously reported, FINRA sanctioned Feltl and imposed a $1,000,000 fine concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements engaging in a penny stock business.

In the most recent disciplinary action, FINRA alleged that the securities laws requires a firm to have a reasonable basis for believing that a product is suitable for any customer before recommending any purchase of that product. In order to meet this requirement, a firm must understand the terms and features of the product including how they are designed to perform, how they achieve that objective, and the impact that market volatility on the product. In the case of Non-Traditional ETFs the use of leverage and the customer’s intended holding period are significant considerations in recommending these products.