Securities Lawyers Blog

Broker Investigation: Churning Claims Against Mark Kaplan

August 19, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Mark Kaplan (Kaplan) has been the subject of at least four customer complaints and one termination. The customer complaints against Kaplan allege a number of securities law violations including that the broker made unsuitable investments, churning (excessive trading), unauthorized trading, breach of fiduciary duty, misrepresentations and false statements, among other claims

Kaplan entered the securities industry in 1989. From September 2005, until June 2009, Kaplan was registered with Citigroup Global Markets Inc. (Citigroup). From June 2009, until April 2011, Kaplan was associated with Morgan Stanley Smith Barney (Morgan Stanley). In March 2011, Morgan Stanley filed a notice of Termination Form U-5 stating that Kaplan was discharged because of a customer complaint that was made against Kaplan. The firm also stated that it had other concerns regarding activity in client accounts. In response, Kaplan stated that the allegations by Morgan Stanley were unfounded and that the firm had approved all of the activity in client accounts. Since March 2011, Kaplan has been associated with Vanderbilt Securities, LLC.

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Many of the claims against Kaplan involving claims of churning and excessive trading. When brokers engage in churning the investment trading activity in the client’s account serves no reasonable purpose for the investor and is transacted to profit the broker through the generation of commission payments. The elements to establish a churning claim, which is considered a species of securities fraud, 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.

FINRA Bars Former H.D. Vest Broker Richard Whitley

August 18, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Richard Whitley (Whitley) has been the subject of at least 13 customer complaints and one regulatory action that has resulted in Whitley being barred. FINRA launched an investigation into claims that Whitley recommended unsuitable investments to customers. In addition, to the regulatory bar from the agency, customer complaints against Whitley allege a number of securities law violations including that the broker made unsuitable investments, breach of fiduciary duty, misrepresentations and false statements, among other claims

Whitley entered the securities industry in 1982. From 1992, until August 2014, Whitley was registered with H.D. Vest Investment Services (HD Vest). In June 2015, Whitley was barred by FINRA from the financial services industry after failing to respond to the agencies investigation into claims

Advisers have an obligation to deal fairly with investors and that obligation includes making suitable investment recommendations. In order to make suitable recommendations the broker must have a reasonable basis for recommending the product or security based upon the broker’s investigation of the investments properties including its costs, benefits, risks, tax consequences, and other relevant factors. In addition, the broker must also understand the customer’s specific investment objectives to determine whether or not the specific product or security being recommended is appropriate for the customer based upon their needs.

Broker Spotlight: Citigroup Broker David Honingstock

August 18, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker David Honingstock (Honingstock) has been the subject of at least two customer complaints, two financial disclosures, and three judgments and/or liens. The customer complaints against Honingstock allege a number of securities law violations including that the broker made unsuitable investments, breach of fiduciary duty, misrepresentations and false statements, among other claims

In addition to these claims, Honingstock declared bankruptcy in October 2014 in New York. In addition, Honingstock former brokerage firm, Morgan Stanley, initiated an action against the broker alleging a debt of $1,635,123 owed to the firm that in a compromise settlement was reduced to $218,000. Honingstock has several other debts listed on his disclosures including a hospital bill from 2013, and a New York State Tax lien for over $17,000. A broker’s inability to manage his own finances or having trouble making ends meet may suffer from potential conflicts of interests in making recommendations to his clients.

Honingstock entered the securities industry in 1986. From January 2003, until May 2007, Honingstock was registered with UBS Financial Services, Inc. (UBS). Upon leaving from UBS, from May 2007, through June 2009, Honingstock was associated with Citigroup Global Markets Inc. (Citigroup). From there, Honingstock was associated with Morgan Stanley Smith Barney form June 2009, until December 2009. Finally, Honingstock has been registered with Citigroup since 2013.

Numerous Customer Complaints Against Former Berthel Fisher Broker Jerry McCutchen

August 13, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Jerry McCutchen (McCutchen) has been the subject of at least 15 customer complaints and one judgment or lien. The customer complaints against McCutchen allege a number of securities law violations including that the broker made unsuitable investments, negligence, and misrepresentations among other claims.

The claims against McCutchen involve various investments including equipment leasing, non-traded real estate investment trusts (Non-Traded REITs), and variable annuities. We have written many times about the investing dangers of these products. One quality all of these investments have in common is the fact that they come with high commissions for the broker and low probability of success for the client. Our firm has written numerous times about investor losses in these programs such as equipment leasing programs like LEAF Equipment Leasing Income Funds I-IV and ICON Leasing Funds Eleven and Twelve. The costs and fees associated with all of these investments cause the security to be so costly that significant returns are virtual impossibility. Yet, investors are in no way compensated for the additional risks of these products.

In a typical equipment leasing program upfront fees are around 20-25% of investor’s capital. As for Non-Traded REITs, it was reported in the Wall Street Journal, that a study on “Nontraded REITs are costing investors, especially elderly, retired, unsophisticated investors, billions. They’re suffering illiquidity and ignorance, and earning much less than what they ought to be earning.” In conclusion, “No brokerage should be allowed to sell these things.”

FINRA Bars Former Morgan Stanley Advisor Justin Amaral

August 13, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Justin Amaral (Amaral) has been barred for failing to respond to requests for information by the agency. The requests may have related to the reasons Morgan Stanley gave for terminating Amaral’s employment. Upon termination from Morgan Stanley the firm filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Amaral was due to allegations by the firm that Amaral became an executor and beneficiary in a client’s estate and that he used discretionary authority in several client accounts.

In addition, to the most recent FINRA action and bar, Amaral has been the subject of at least two customer complaints involving unsuitable closed-end funds and misrepresentations of investments involving mutual funds. According to FINRA, the agency made attempts to have Amaral appear for testimony concerning an unstated matter. Amaral failed to appear and was consequently barred from the securities industry.

It is important for investors to know that all advisers have an obligation and responsibility to deal fairly with investors including making suitable investment recommendations. In order to make suitable recommendations the broker must have a reasonable basis for recommending the product or security based upon the broker’s investigation of the investments properties including its benefits, risks, tax consequences, and other relevant factors. In addition, the broker must also understand the customer’s specific investment objectives to determine whether or not the specific product or security being recommended is appropriate for the customer based upon their needs.

SEC Charged 36 Brokerage Firms Over Municipal Bond Offerings

August 12, 2015 | by Staff Attorney

The Securities and Exchange Commission (SEC) announced enforcement actions against 36 municipal bond underwriting brokerage firms for material misstatements and omissions in municipal bond offering documents. The SEC offered favorable settlement terms to municipal bond underwriters and issuers who self-reported securities law violations leading to the settlements.

The SEC alleged that between 2010 and 2014, 36 brokerage and financial firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with their obligation to disclosure. The firms were also alleged by the SEC to have failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.

The municipal bond market is a $3.7 trillion market. Continuing disclosure provides municipal bond investors with information about the solvency and financial fitness of issuers on an ongoing basis. The SEC had previously identified issuers’ failure to comply with their continuing disclosure obligations as being a major challenge for investors seeking up to date information about their municipal bond holdings.

FINRA Suspends Broker David Ledoux Over Failure to Disclose Certain Liens

August 12, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker David Ledoux (Ledoux) was recently fined and suspended by the regulator for failing to disclose certain liens on his registration. FINRA alleged that between May 1, 2006 and June 20, 2014, LeDoux failed to timely update his Form U4 to reflect the following six liens totaling $184,795.

In addition, to the recent regulatory action and judgement and liens, Ledoux has been the subject of one criminal event and six customer complaints. The customer complaint against Ledoux allege a number of securities law violations including that the broker made unsuitable investments, fraud, misrepresentation, and engaged in churning (excessive trading) among other claims.

LeDoux entered the securities industry in June 1994. From June 2001, to July 2014, LeDoux was associated with National Securities Corporation. At that time National Securities permitted LeDoux to resign due to his late reporting of liens. Since August 2014, LeDoux has been associated with Westpark Capital, Inc.

Julius Kenney Formerly of LPL Financial Barred Over Outside Business Activities Investigation

August 11, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned and barred broker Julius Kenney (Kenney) concerning allegations Kenney refused cooperate with requests made by FINRA in connection with an investigation into possible outside business activities. Such activities may, under certain circumstances also involve investment transactions referred to as “selling away” in the industry. According to FINRA BrokerCheck records Kenney has disclosed that he operates as a LPL Financial LLC (LPL Financial) broker under the DBA Frank Kenney Wealth Management in Calhoun, Georgia. There is one customer complaint against Kenney alleging that the broker solicited an investment in a business referred to as Mellow Mushroom in or around October 2013.

Kenney entered the securities industry in 2008, when he became associated with Edward Jones. Thereafter, Kenney became associated with LPL Financial in 2011 before leaving for Dempsey Lord Smith, LLC in July 2012 through September 2013. Finally, in September 2013, Kenney came back to LPL Financial until his termination in June 2015. On May 22, 2015, LPL Financial filed a termination notice (known as a Form U5) with FINRA disclosing that Kenney was discharged from the firm for participating in an undisclosed outside business activity.

The conduct alleged against Kenney may lead to “selling away” securities violations. 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 the brokerage firm claim ignorance of their advisor’s activities, under the FINRA rules, a brokerage firm owes a duty 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 often occurs in brokerage firm that 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.

Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part II

August 11, 2015 | by Staff Attorney

This post continues our investigation into whether or not brokerage firms have a basis to continue to sell non-traded real estate investment trusts (Non-Traded REITs). Non-Traded REIT sales have exploded becoming the latest it product of Wall Street. However, experts and regulators have begun to question the basis for selling these products. And if Non-Traded REITs are to be sold, should there be a limit on the amount a broker can recommend.

As reported in the Wall Street Journal, Craig McCann, president of Securities Litigation & Consulting Group, a research and consulting company, “Nontraded REITs are costing investors, especially elderly, retired, unsophisticated investors, billions. They’re suffering illiquidity and ignorance, and earning much less than what they ought to be earning.” In conclusion, “No brokerage should be allowed to sell these things.”

According to his analysis, shareholders have lost about $50 billion for having put money into Non-Traded REITs rather than publicly exchange-traded funds. The data comes from a study of the difference between the performance of more than 80 Non-Traded REITs and the performance of a diversified portfolio of traded REITs over two decades. The study found that the average annual rate of return of Non-Traded REITs was 5.2%, compared with 11.9% for the Vanguard REIT Index Fund.

FINRA Bars Former Securities America Broker Judith Woodhouse

August 10, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Judith Woodhouse (Woodhouse) has been barred for failing to respond to requests for information by the agency. The requests may have related to the reasons Securities America, Inc. (Securities America) gave for terminating Woodhouse’s employment. Upon termination from Securities America the firm filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Woodhouse was due to allegations by the firm that Woodhouse violated the firm’s policies relating to the borrowing of funds and responding to supervisory requests.

In addition, to the most recent FINRA action and bar, Woodhouse has been the subject of at least one customer complaint involving a private placement. In addition, Woodhouse has several financial disclosures and two regulatory actions. Another FINRA action in 2013, concerned Woodhouse’s involvement in private securities transactions totally over $500,000 that were made without Securities America’s consent. This action resulted in a $10,000 fine and three month suspension.

It is important for investors to know that all advisers have an obligation and responsibility to deal fairly with investors including making suitable investment recommendations. In order to make suitable recommendations the broker must have a reasonable basis for recommending the product or security based upon the broker’s investigation of the investments properties including its benefits, risks, tax consequences, and other relevant factors. In addition, the broker must also understand the customer’s specific investment objectives to determine whether or not the specific product or security being recommended is appropriate for the customer based upon their needs.