Securities Lawyers Blog

EDI Financial Sanctioned Over Private Placement Supervisory Failures

April 1, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm EDI Financial, Inc. (EDI Financial) alleging that the firm’s business involved the sales of private placement offerings. From approximately January 2008 through November 2014, FINRA alleged that a substantial portion of EDI Financial’s revenue came from sales of private placements. But despite the importance of private placement sales to EDI Financial’s bottom line FINRA alleged that the firm failed to have adequate policies and procedures to supervise the sales of its private placement activities.

EDI Financial has been a registered broker-dealer since 1986. The firm conducts a general securities business which includes the sales of private placements and mutual funds. The firm has 70 brokers that operate out of its 22 branch offices, with headquarters in Irving, Texas.

FINRA found that EDI Financial failed to adopt and implement a supervisory systems reasonably designed to achieve compliance with the firm’s suitability obligations for the solicitation and sale of private placements. For example, FINRA determined that the firm lacked adequate written procedures concerning the what concentration of a customer’s assets could be allocated to private placements. Additionally, FINRA alleged that the firm did not effectively monitor customers’ exposure to private placements.

Foothill Securities Fined $210,000 Over Supervisory Failures

March 31, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Foothill Securities, Inc. (Foothill) alleging between May 17, 2010, and September 16, 2012, Foothill did not have an adequate supervisory system and written procedures to monitor its securities business, failed to follow the supervisory system, and failed to establish and enforce policies reasonably designed to supervise the firm’s securities business. Also included in FIRNA’s complaint was Stephen Shipp, Jr. (Shipp), as CCO of Foothill, FINRA alleged that he was responsible for the firm’s supervisory system, its written procedures, and the enforcement of its supervisory system causing the violations.

Foothill is a dually registered broker-dealer and investment advisor firm and has been a member of FINRA since 1962. The firm has approximately 255 registered brokers operating from approximately 138 branch offices. The firm conducts a general securities business in the following products: equities, mutual funds, corporate and municipal debt, US government securities, oil and gas interests, options, private placements, direct participation programs, and variable contracts.

FINRA alleged that Foothill’s supervisory procedures were deficient in many ways. A small sample of FINRA’s findings include that between May 17, 2010 and September 16, 2012, Foothill acting through Shipp: (1) heavily relied upon a proprietary data system for the supervision of its brokers securities transactions but that the trading information captured by the proprietary system was not consistently accurate or complete; (2) allowed nine of its ”dual Office of Supervisory Jurisdiction branch offices to have two producing managers supervise each other’s activities, even though this supervisory structure is prohibited under the FINRA Rules; (3) had an inadequate supervisory system relating to the heightened supervision of its producing managers; (4) the firm’s procedures required all producing managers’ correspondence to be forwarded to the home office for review and approval by the CCO but that procedures failed to specify the details of what the CCO’s correspondence reviews would entail and how the reviews would be evidenced; (5) at least one producing manager never sent any of his correspondence to the CCO for review or approval which was not caught by the firm; (6) failed to adequately and accurately disclose the required details of certain outside business activities of its brokers in 34 of 87 sampled disclosures; (7) failed to timely update its registered representatives disclosures in at least 13 instances; (8) failed to timely file five customer complaints, and four other customer related disclosures with FINRA; (9) failed to evidence the daily review and approval of daily reports of approved private securities transactions for one of its registered representatives

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 Bars Former Legend Equities Principal Jerry Chancy Concerning Outside Business Activities

March 26, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred broker Jerry Chancy (Chancy) concerning allegations that Chancy potentially engage in outside business activities and/or the sales of private securities. When a broker’s outside business activities also include the recommendation of investments the activity is referred to in the industry as “selling away.”

FINRA Rule 8210 authorizes FINRA to require persons associated with a FINRA member to provide information with respect to any matter involved in the investigation. In December 2014, FINRA alleged that it pursued an investigation into allegations that Chancy engaged in undisclosed outside business activities. On January 29, 2015, FINRA requested that Chancy appear and provide testimony. FINRA stated that Chancy told the regulator that he would not provide information or cooperate in the investigation. Consequently, he was barred from the industry It is unclear what organization or product Chancy was involved with or selling that FINRA was investigating.

Chancy first became registered with FINRA through his association with a member firm in 1988. From November 2006 through January 2015, Cadwallader was associated with Legend Equities Corporation.

MLP Fund MainStay Cushing Royalty Energy Hurt by Failing Oil & Gas Prices

March 25, 2015 | by Staff Attorney

The attorneys at Gana Weinstein LLP have been following the collapse of the MainStay Cushing Royalty Energy Income Fund (CURAX), (CURNX), (CURCX), and (CURZX). The fund describes its investment strategy as investing primarily in securities of energy-related U.S. royalty trusts, Canadian royalty trusts, and Canadian exploration and production (E&P), E&P master limited partnerships (MLPs), and securities of other companies in the same businesses as Energy Trusts and MLPs engage.

Investments in MLPs contain significant risks and the Cushing Fund has declined by over 50% in value from its high. These risks stem from the fact that MLPs tend to fluctuate with the price of oil and gas. For example in 2008, when oil plummeted in the wake of the great recession the AMZ MLP Index declined by 36.9% in a single year. MLPs have other risks that investors should know including the fact that these investments often grow their distributions at an accelerated rate in their first two years in order to attract positive research reports from Wall Street analysts. The funds use the increased distributions and positive reports to influence their values higher even though the true long term yield of these MLPs are unknown.

As a background MLPs are publicly traded partnerships. About 86% of MLP securities are related to energy and natural resource companies. There are about 130 MLPs trading on major exchanges that focus on energy related industries and natural resources. While MLPs have the same liquid trading characteristics as common stocks they are internally very different. For instance, MLP’s are pass through investment vehicles that pass through their income to the investor without any company level taxation. In addition, MLP’s must derive 90% of their revenues from their businesses in natural resources activities. Investors should also be aware that in practice, most MLP’s pay out most of their earnings through distributions rather than reinvest profits in the company. This causes the MLPs to issue additional debt and shares in order to grow the business.

FINRA Bars Former Ameriprise Broker Ted Cadwallader Concerning Private Securities

March 24, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred broker Ted Cadwallader (Cadwallader) concerning allegations that Cadwallader engage in outside business activities including the sales of private securities. When outside business activities also include the recommendation of investments the activity is referred to in the industry as “selling away.”

FINRA Rule 8210 authorizes FINRA to require persons associated with a FINRA member to provide information with respect to any matter involved in the investigation. In August 2014, FINRA alleged that it pursued an investigation into allegations that Cadwallader engaged in undisclosed outside business activities. On November 21, 2014, FINRA requested that Cadwallader appear and provide testimony. FINRA stated that Cadwallader told the regulator that he would not provide information or cooperate in the investigation. Consequently, he was barred from the industry

According to Cadwallader’s brokercheck he has disclosed outside business activities including ownership of The Faith Based Coach. Cadwallader is also on the board of directors of Pacer BioScience and a board member of EarthEnergy Technologies LLC. It is unclear at this time what organization or product Cadwallader was involved with or selling that FINRA was investigating.

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 Alleged to Have Sold Private Placements Without Proper Due Diligence Part III

March 20, 2015 | by Staff Attorney

This post continues our firm’s investigation concerning the recent allegations brought by The Financial Industry Regulatory Authority (FINRA) sanctioning brokerage firm World Equity Group, Inc. (World Equity) concerning at least seven different allegations of supervisory failures that occurred between 2009 through 2012. FINRA’s allegations include failures to implement an adequate supervisory system and concerned both internal processes at the firm 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 requires firms preserve for at least 6 years all communications relating to its business and to provide for ways to store electronic media. FINRA found that in May 2011, the World Equity opened a new branch office at 311 W. Monroe Street, Chicago, Illinois. FINRA alleged that errors in the process of transferring several representatives at that branch to World Equity emails of the representatives were not maintained and preserved before April 13, 2012. In addition, FINRA found that the firm failed to maintain business related emails for ten representatives who used their personal emails for business purposes.

FINRA also alleged that World Equity failed to conduct due diligence in connection with private placements offering from July 2009, through January 2012. During that time FINRA alleged that the firm conducted at least eight private placements including a product called Newport Digital Technologies, Inc. (NDT) and sold more than $6 million in these offerings. In addition, FINRA found that from August 23, 2010 to July 17, 2012 the firm conducted at least five Non-Traded REIT offerings and sold more than $3 million in these offerings.

Gana LLP Investigates WFG Investments Sale of Servergy, Inc.

March 19, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP have been investigating the sales of Servergy, Inc. (Servergy) stock through a private placement by WFG Investments, Inc (WFG) to its clients. The Securities and Exchange Commission (SEC) recently filed an action in the Northern District of Texas against Servergy concerning possible violations of the anti-fraud provisions of federal and state securities laws. Between August 2009 and February 2013, Servergy raised approximately $26 million by selling shares of its common stock to private investors

Servergy is a Nevada company headquartered in Texas formed in August 2009. The company’s main product is the developing and manufacturing the Cleantech 1000 Server (CTS-1000), technology that can be used in network function virtualization, distributed storage, and cloud computing. The SEC’s Servergy lawsuit concerns misstatements made by Servergy’s CEO, William Mapp III, to investment advisors and investors regarding Servergy’s prospects. Specifically, it was alleged that the company made statements indicating that Freescale Semiconductor had previously ordered CTS-1000 servers, that Amazon.com, Inc. had pre-ordered the server, and that the CTS-1000 consumes 80% less power, cooling, and space than its competitors.

However, according to the SEC, there was no evidence to back up that Mapp’s statements that Freescale’s ever placed such orders of the CTS-1000. The SEC also alleged that the claims concerning pre-orders from Amazon for the CTS-1000 did not exist. Finally, the SEC alleged that there were errors in a chart titled “Comparing Servergy to the Blade Server Competition” that was included in one of the Company’s private placement memoranda.