Articles Posted in Suitability

shutterstock_184430612The 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.

shutterstock_66745735As 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.

shutterstock_133100114The 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.

shutterstock_189496604The 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.

shutterstock_140186524The 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.

shutterstock_103476707The 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.

shutterstock_172034843Recently, the law office of Gana Weinstein LLP filed a claim (Complaint) on behalf of its client against Fidelity Brokerage Services (Fidelity) alleging that Fidelity was negligent when one of its registered representatives made an unsuitable recommendation to the client.  The client purchased a stock in the company Lakeland Industries (Ticker Symbol: LAKE) believing that the stock was overvalued and initiated a short position to attempt to profit from the stock’s decline.

A short position allows an investor to sell an investment that the investor does not actually possess. Instead, the investor receives the cash proceeds from the sale and then is obligated, at a future date, to buy back the shares borrowed.  If the value of the stock declines over time then the investor can buy back the stock at a cheaper price than what the investor sold the stock for, making a profit on the difference. Conversely, if the stock’s value increases the investor will have to buy back the stock at a higher value and would lose money.

From October 1, 2014, through October 10, 2014, the client sold short 10,100 shares of LAKE in his Fidelity account. Over the next few days the shares of LAKE increased causing margin calls in the client’s account. The client alleged that he had already added funds to his account to cover previous margin calls. The client wanted to hold the LAKE position and made it clear to Fidelity that he would continue to add funds to cover any margin calls to avoid having his LAKE position liquidated by Fidelity.

shutterstock_132704474A strengthening dollar and increased global supply of oil has sent crude oil prices tumbling in the second half of 2014. Recently, crude futures for delivery in February 2015 fell to $52.69 a barrel, the lowest finish since April 2009. Some experts are saying that if production volume continues to be as high as it currently is and demand growth weak that the return to $100 a barrel is years away.

As a result, in recent months investors have contacted our firm about being concentrated in various oil and gas exposed investments including private placements, stocks, and ETFs. On the private placement side alone the Securities Exchange Commission (SEC), has stated that since 2008, approximately 4,000 oil and gas private placements have sought to raise nearly $122 billion in investor capital. However, these oil and gas private placements suffer from enormous risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk.

In addition, investor accounts may be overconcentrated in oil and gas stocks or ETFs. Some of these ETFs may be leveraged or non-traditional ETFs. These leveraged ETFs seek to increase the return on the oil and gas index by using leverage to amplify returns exposing the investor to greater volatility during an already volatile period in the oil market. Below are some of oil and gas related ETFs.

shutterstock_175000886The Financial Industry Regulatory Authority (FINRA) recently 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.

Popular has been a FINRA member since 1980, is headquartered in San Juan, Puerto Rico and engages in a general securities business, including customer purchases and sales of Puerto Rico municipal securities and open and closed-end mutual funds. The Firm has approximately 120 registered representatives located in its 9 branch offices.

Puerto Rico Bond Funds were sold as providing Puerto Rico residents with various tax benefits including exemption from US. estate and gift taxes. In addition, the Puerto Rico Bond Funds offered a triple tax benefit to investors. However, in December 2012, Puerto Rico general obligation and related bonds ratings were downgraded. Then, six months later in June 2013, the Puerto Rico Power Authority (PREPA) revenue bonds ratings were also downgraded.

shutterstock_188995727Broker Kenneth Popek (Popek) has had four customer complaints filed against him over his career as a financial advisor. That many claims 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. In Popek’s case the broker has four customer complaints and one bankruptcy.

Popek was registered with Ameriprise Financial Services, Inc. from December 2006 until May 2008. Thereafter, Popek was registered and still is registered with Calton & Associates, Inc.

One of Popek’s complaints went to hearing where a panel awarded the customers $342,956 concerning allegations of suitability, misrepresentations, churning, and breach of fiduciary duty. According to the award the causes of action involved, in part, investments in General Motors, Lehman Brothers, and Washington Mutual stocks that all went bust.

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