Suitability

FINRA Fines Brokerage Firm Over Misleading Variable Annuities Disclosures and Failure to Supervise

October 12, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined brokerage firm Financial West Investment Group, Inc. d/b/a Financial West Group (Financial West Group) over allegations between March 2009 and May 2010, the firm did not provide accurate variable annuity disclosures to customers concerning certain fees and charges. FINRA also alleged that Financial West Group failed to have an adequate written supervisory procedure to ensure that customers received accurate disclosures about these fees and charges. Finally, FINRA alleged that Financial West Group did not adequately enforce its policies for reviewing emails. In resolving these allegations Financial West Group paid a $35,000 fine.

Financial West Group’s main offices are in Westlake Village, California. The firm has approximately 116 registered branch offices and employs 290 registered brokers.

FINRA alleged that between March 2009, and May 2010, the Financial West Group used forms called variable annuity disclosure and investment form, request to switch investments form, and the product comparison worksheet to inform customers of various features of deferred variable annuities. The forms included information concerning the potential surrender period and surrender charge, potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59 1/2, mortality and expense fees, the potential charges for and features of riders, the investment options, death benefits, payment options, and risks disclosures. However, according to FINRA, Financial West Group did not provide accurate disclosures to customers in 28 out of 93 (30%) of the variable annuity transactions and exchanges reviewed by the regulator.

FINRA Files Amended Complaint Against John Carris Investment LLC for Stock Manipulation and Unsuitable Offerings

October 10, 2013 | by Staff Attorney

On September 30, 2013, FINRA filed an amended complaint against John Carris Investments LLC (JCI), its founder George Carris and others. In the complaint, FINRA alleges JCI engaged in: stock manipulation, unsuitable self-offerings of securities, operating a securities business without sufficient net capital, use of firm funds to pay the expenses of principal officers at JCI, providing false tax documents, and failing to pay payroll taxes.

JCI is a Wall Street Investment Bank and wholly-owned subsidiary of Invictus Capital, Inc. (Invictus). In 2009, Carris formed JCI. Carris has served as JCI’s CEO, President, and Managing Director of Investment Banking since its inception. Shortly after forming JCI, Carris formed Invictus and transferred complete ownership of JCI to Invictus.

FINRA alleges that from May 1, 2010 through September 30, 2010, JCI’s head trader Jason Barter engaged in manipulative trading of Fibrocell Science, Inc. (Fibrocell), a biotechnology company specializing in skin and tissue rejuvenation. During that period, JCI acted as a placement agent for Fibrocell and sold shares of Fibrocell through unregistered PIPE deals. A PIPE deal is a private investment in public equity, which companies pursue when capital markets cannot provide financing and traditional alternatives do not exist for that issuer.

Former Waddell & Reed and Merrill Lynch Stockbroker Fined and Suspended for Misconduct

October 6, 2013 | by Staff Attorney

FINRA has fined Maryland financial adviser and investment counselor Jill Meredith Carr $10,000 and suspended her for two years from the securities industry. According to the letter of acceptance, waiver and consent (“AWC”) submitted by Ms. Carr, she entered the securities industry in 2007 with Merrill Lynch until her termination for “failure to meet performance standards” in 2008. She then worked for Waddell & Reed, Inc until her termination in July 2012 when she was terminated for forging customer signatures. Brokers and investment advisers the forge customer signatures constitute a form of securities fraud.

According to the AWC, from December 2011 through June 2012, Carr forged signatures of at least 15 Waddell & Reed customers on at least 24 forms. Carr also altered information on other account forms after the forms were signed by the customers. Specifically, in connection with firm-required suitability updates, Carr forged the signatures of at least six customers on at least 12 update forms without their knowledge, consent, or authorization. In addition, she forged at least five additional signatures, allegedly as an accommodation to those customers. By forging the signatures, FINRA found that Carr violated FINRA Rule 2010. Finra Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

Pursuant to FINRA Rules, brokerage firms rely on customers’ stated objectives and profiles to determine whether the investment objectives and the broker recommendations are consistent. It is important that investors and their brokers fully understand these objectives. It is imperative that these objectives be properly stated. Here, FINRA’s fine and suspension reflects the importance of these documents.

Retired Auto Executive Sues UBS for $30 Million for Investment Fraud Related to Puerto Rican Bonds

October 3, 2013 | by Staff Attorney

On October 1, 2013, Victor Gómez, Jr. a retired auto executive filed an action against UBS for investment fraud related to Puerto Rican bonds. According to the Caribbean News, this is the first of many legal actions expected to be filed in FINRA against UBS Financial Services, Inc. Mr. Gómez and his family are seeking $30 million in restitution for their investment losses, attorneys’ fees, punitive damages, and other costs. Gómez and his family claim that UBS designed an unsuitable investment strategy, never properly disclosed the risks, and implemented an “illicit and fraudulent scheme perpetrated to generate exorbitant profits… in utter disregard of the best interests of claimants, public interest and applicable laws and regulations.”

According to the Caribbean News, the statement of claim names: “UBS Financial Services Inc.; UBS Bank USA; UBS financial consultants and investment executives José M. Ramirez and Carlos Freire Borges; UBS senior officer Doel García; UBS Puerto Rico CEO Carlos Ubiñas; and other unidentified UBS officials.”

According to sources, the funds at issue were:

VSR Financial Services, Inc. and Donald J. Beary Fined Over Alternative Investment Sales

September 23, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), VSR Financial Services, Inc. (“VSR”), and Donald J. Beary (“Beary”) have reached a settlement concerning charges brought by the securities regulator that VSR violated customer concentration guidelines and otherwise failed to reasonably supervise its brokers in the sales of alternative investments. The settlement led to VSR paying a $550,000 fine and Beary being suspended from associating with a FINRA firm for 45 days and a $10,000 fine.

VSR is based in Overland Park, Kansas, has 211 branch offices, and employs approximately 460 registered personnel. Beary is a co-founder of VSR and is its executive vice-president, chairman of the board, and direct participation principal.

According to FINRA, from 2005 until 2010 VSR and Beary failed to adequately implement the firm’s supervisory procedures concerning concentration limits in customer accounts for alternative investments. The settlement details that VSR’s supervisory failures regarding concentration limits occurred because the firm used inaccurate statements reflecting the customer’s true concentration in alternative investments and because the firm used inaccurate risk ratings of products to increase allowable concentration levels.

Massachusetts Securities Regulator Subpoenaed 15 Brokerage Firms Over Products Sold to Senior Investors

September 21, 2013 | by Staff Attorney

In July 2013, William Galvin, the Massachusetts (MA) Secretary of the Commonwealth, began an investigation into “the marketing of complicated financial investments to older people.” In the process of the investigation, Galvin subpoenaed fifteen different brokerage firms in order to obtain information on investments that were sold to senior citizens in Massachusetts. The investigation sought to uncover the way the firms have sold “high-risk, esoteric products to seniors” as well as information on the firms’ compliance, supervision and training.

The firms that were included in the investigation were Morgan Stanley, LPL Financial, Merrill Lynch, UBS AG, Bank of America Corp., Fidelity Investments, Wells Fargo and Co., Charles Schwab Corp., and TD Ameritrade along with other firms. Galvin has stated that the investigation was not an indication of any wrongdoing on behalf of the brokerage firms. The purpose of the investigation was to get more information on brokers’ business practices in offering products to seniors and unsophisticated investors. Regulators have shown concern about “opaque products” advertised to unsophisticated investors looking for higher returns than what most interest rates have to offer. Brokers often pitch these types of products because they will usually get a higher commission rate than by selling other lower risk products such as mutual funds.

This recent investigation is a result of past inappropriate Real Estate Investment Trust (REIT) sales to seniors. Last year, the SEC probed the probe improper sale of REITs to seniors that led to five broker-dealers settling. The settlement for the improper REIT sales included $975,000 in fines and $8.6 million in restitution to the customers.

UBS Preliminarlily Settles Lehman Principal Prtoected Note Cases – Should You Hold Out?

September 14, 2013 | by Staff Attorney

On August 8, 2013, UBS agreed to pay $120,000,000 to settle claims related to the Lehman Principal Protected Note cases. According to Reuters, this is UBS’ second settlement in less than three weeks.

According to counsel, the $120,00,000 settlement represents a recovery of 13.4% of the total face value of the structured notes. The parties have stipulated to certify the case for the purpose of settlement. If the class action is approved it will resolve over $898 million in claims against UBS for the Lehman Securities sold by UBS from March 2007 through September 15, 2008 when Lehman filed for bankruptcy in the Southern District of New York.

The question for investors is whether they should take the settlement after approval by the court or reject the settlement and bring a claim individually against UBS. In an individual arbitration, the chances of getting more than a 13.4% recovery is fairly substantial. Many of the UBS Lehman Principal Protected Note cases that went to arbitration since 2009 have resulted in large awards for investors and many have settled before hearing.

Eric Foster Accused of Unauthorized Trading and Churning Customer Accounts

September 7, 2013 | by Staff Attorney

In April 2013, the Financial Industry Regulatory Authority (FINRA) requested that Eric Foster (Foster) provide information concerning possible securities laws violations. By July 2013, Foster failed to respond to FINRA’s requests and imposed a permanent bar from the securities industry.

The FINRA bar isn’t the first time Foster has been sanctioned by FINRA. In February 2012, Foster settled charges that he violated FINRA Rule 2110 by effecting unauthorized transactions in the account of a deceased customer. In so doing, Foster exercised discretion in the customer’s account without written authorization. The settlement resulted in a $12,471 fine and restitution and a three month suspension. In December 2011, Foster settled charges brought by Illinois Securities Department concerning allegations that he churned the account of a senior citizen earning large commissions for himself while reducing the equity in the account to zero

Foster was a registered representative of Halcyon Cabot Partners, Ltd. from July 2010 through June 2012. Previously, Foster was associated with Arjent Services, LLC from October 2010, until July 2010. Foster was also associated with Maxim Group LLC from October 2002 until October 2008.

Financial Advisors Have an Obligation to Provide Truthful Information When Selling Securities

September 6, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Scottie Brent Chitwood (Chitwood) from the securities industry over allegations that he sold clients variable annuities by making false and misleading representations concerning the securities features. Chitwood was also accused of exercising discretionary authority in clients’ accounts. FINRA’s action reinforces the regulator’s rules that brokers have an obligation to disclose truthful and balanced information in the sale of securities products to investors.

A variable annuity is a contract where an insurance company agrees to make periodic payments to an investor either immediately or at some future date. The purchase of a variable annuity contract either involves a single purchase payment or a series of purchase payments.

Variable annuities offer a range of investment options to invest in and the value of the investment will vary depending on the performance of the investment options selected. The investment options typically include mutual funds that invest in stocks and bonds. Variable annuities distribute periodic payments for the rest of the investor’s life (or any other person you designate). Most variable annuities encourage investors to remain invested for a period of years and discourage early termination through expensive surrender fees. The insurance company can charge investors in some cases up to 7% of the investment for early termination.

The Dangers of Low-Priced (Penny Stocks) Securities

September 3, 2013 | by Staff Attorney

A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a very small company, micro-cap or less than $100 million in market capitalization, and trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or OTC Link LLC. However, not all penny stocks trade over-the-counter and many trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can also include private companies with no active trading market.

Penny stocks are inherently risky due to several contributing factors. First, penny stocks may trade infrequently, meaning that it may become difficult to liquidate penny stock holdings once acquired. Second, it may be difficult to find accurate quotes for certain penny stocks. Therefore, it may be difficult or even impossible to accurately price certain penny stocks. Due to these risks, penny stock investors may lose their whole investment. When penny stock investing is combined with margin borrowing the results can be catastrophic for the investor.

If the inherent risks of penny stocks were not great enough, penny stocks are often used and manipulated for fraudulent purposes. One common scheme is the “pump and dump” scheme. The idea behind a pump and dump scheme is to create unfounded hype for a penny stock the pumper already owns. As the pumper’s victims buy into the hype additional purchases drive up the price of the stock artificially. The pumper then sells his shares for a large profit while those the pumper recommended the penny stock to quickly lose their money as the stock’s value decreases precipitously.