Securities Lawyers Blog

Broker Eric Johnson Terminated for Allegedly Stealing Over $1,000,000 From Investors

November 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) barred broker Eric Johnson (Johnson) concerning allegations that Johnson misappropriated more than $1,000,000 from at least six firm customers’ brokerage accounts. FINRA also alleged that Johnson falsified the signatures of two firm employees and notarized seals on firm documents. Finally, Johnson failed to provide documents, information, and on-the-record testimony during FINRA’s investigation of this matter.

Johnson first became registered with FINRA in 1991. In March 1999, Johnson became registered with RedRidge Securities, Inc. (RedRidge). Johnson operates out of his DBA business called HD Brent & Company (HD Brent). RedRidge terminated Johnson’s registration on September 24, 2014, in connection with the firm’s investigation concerning the alleged theft of customer funds. RedRidge may have only become aware of the misappropriation of funds when the Federal Bureau of Investigation (FBI) contacted the firm concerning their investigation of Johnson.

FINRA alleged that from approximately December 2006, through September 2014, Johnson misappropriated more than $1,000,000 in customer funds. FINRA determined that Johnson made at least 60 wire transfers from at least six firm customers’ brokerage accounts to his own personal bank accounts. The wire transfers required the signature of a firm principal and the signature and seal of the firm’s notary public that FINRA alleged Johnson falsified in order to effectuate the transfers. Given that Johnson’s activities took place over the course of eight years it is astonishing that RedRidge did not supervise and detect Johnson’s activities sooner.

Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors

November 23, 2014 | by Staff Attorney

According to InvestmentNews, LPL Financial, LLC (LPL Financial) was recently fined by Massachusetts securities regulators fined for sales practices concerning variable annuities and agreed to reimburse senior citizens $541,000 for surrender charges they paid when they switched variable annuities. LPL Financial and its brokers have been on the defensive from securities regulators many times in recent years concerning a variety of alleged sales practice and supervisory short comings as shown below.

Do Increased Investor Risks Lurk Behind the SEC’s Revisiting of the Accredited Investor Definition Part II

November 21, 2014 | by Staff Attorney

This article continues to opine on an InvestmentNews article, describing the Securities and Exchange Commission’s (SEC) revisiting the accredited investor standard that determines who is eligible to invest in private placements. It is the opinion of this securities attorney who has represented hundreds of cases involving investors in private placement offerings that some of the IAC’s proposals are severely flawed and will only enrich the industry at investor’s expense. While proposals to increase standards through sophistication tests and limiting the amount of private placement investments to a certain percentage of net worth are constructive, it is clear that some will attempt to use the review to water down the current requirements. Below are some of the reasons why proposals to abandon the income and net worth approach and instead use a definition that takes into account an individual’s education, professional credentials, and investment experience will be a disaster for investors.

First, many private placements such as equipment leasing and non-traded real estate investment trusts (Non-Traded REITs) already skirt these rules and offer non-traded investments to those with income of $70,000 and net worth of $250,000. If you want to see what the world would be like without the $1,000,000 constraint on private placements, it’s already here and it’s not pretty.

Non-Traded REITs are a $20 billion a year industry that basically ballooned overnight. These non-traded investments act like private placements and charge anywhere from 7-15% of investor capital in the form of commissions and selling fees. In addition, there is little evidence to support that these investments will largely be profitable for investors. In fact, because non-traded REITs offer products with very limited income and net worth thresholds brokers have loaded up clients accounts to such an extent that the NASAA has proposed universal concentration limits to curb these abusive practices. But as bad as many of these products are, many other private placements that would be allowed to be sold to investors under some of the IAC proposals are far worse.

Accredited Investor Definition Revisited By SEC Part I

November 20, 2014 | by Staff Attorney

According to an InvestmentNews article, the Securities and Exchange Commission (SEC), for the first time in 32 years, is revisiting the idea of who should qualify as an accredited investor to be eligible to invest in private placements. The current accredited-investor standard limits private placement purchases to individuals who earn at least $200,000 annually or have a net worth of $1 million after excluding the primary residence. Recently, the SEC recommended considerable revisions on who should make to the definition of an accredited investor in order to broaden the potential pool and strengthen verification that they qualify.

Under the Dodd-Frank reform law, the SEC must review the accredited investor definition every four years. Under the current rules, about 8.5 million investors currently qualify. The Investor Advisory Committee (IAC) was also established by Dodd-Frank to represent retail investors to the SEC to propose rule recommendations.

The committee stated that relying on income and net worth oversimplifies the analysis of who has the wealth and liquidity to withstand the risks of private offerings. For instance, the thresholds fail to provide adequate protection for investors whose net worth is based on an accumulated retirement savings, illiquid holdings, or maybe a lump sum settlement from a lawsuit that is supposed to replace income.

SEC Rejects Bids by Funds to List Nontransparent ETFs

November 19, 2014 | by Staff Attorney

In a rare move of true consumer protection, the Securities and Exchange Commission (SEC) denied applications by fund managers BlackRock Inc. and Precidian Investments to offer nontransparent exchange-traded funds (ETFs) to investors by stating that such products were not in the public’s interest. The SEC stated that the proposals could inflict substantial costs on investors, disrupt orderly trading, and damage market confidence in trading of ETFs.

The fund managers have argued that opening up actively managed ETFs to full transparency would lead to front running, a strategy where other investors trade ahead to gain a benefit. As a result, the funds argue that their trading strategies are rendered obsolete by the market’s knowledge of them. Thus, the solution the industry devised was to deprive the investing public of disclosure of fund holdings.

However, the SEC said that daily transparency is necessary to keep the market prices of ETF shares at or close to the net asset value per share of the ETF. But as usual, the industry losses a battle but will eventually win the war. Others funds such as American Funds, T. Rowe Price Group Inc. and Eaton Vance Corp. all have applications pending for similar nontransparent ETFs where the SEC could rule on various alternative proposals. In addition, Precidian’s chief executive, Daniel J. McCabe, told InvestmentNews he believed the SEC’s objections can be worked though and that it will merely take longer to get approval because the funds are not standard.

Illinois Files Churning Complaint Against James Markoski

November 18, 2014 | by Staff Attorney

James Markoski (Markoski) recently had a complaint filed against him from the State of Illinois, Securities Department. According to the complaint Markoski has a history of churning accounts, or engaging in excessive trading that is designed to generate huge commissions at the expense of the customer.

Markoski’ entered the financial industry in the early 1970’s and until 1991, Markoski worked for Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill). Thereafter, from September 1991, through June 2010, Markoski was a registered representative of David A Noyes & Company. From June 2010, through April 2012, Markoski worked for Birkelbach Investment Securities, Inc. Finally, Markoski currently is associated with Forest Securities, Inc. Markoski has been subject to 9 customer arbitrations throughout his career. Virtually all of the customer complaints involve claims of churning and excessive trading activity in the customer’s account. It is rare for a broker to have a complaint filed against them. It is even more rare for a broker to have more than 2 complaints filed against them.

The Illinois Secretary of State alleged that Markoski alleged that Markoski has a penchant for targeting widows and senior women to engage in his fraudulent churning conduct. In one of the alleged churning instances, Markoski inherited a client’s account from one of his colleagues. The complaint alleges that upon inheriting the client’s account, Markoski began selling off the client’s bond holdings that the client was relying upon the income from. The selling of the bonds before maturity allegedly resulted in $175,000 in losses.

LPL Financial Fires Texas Broker James “Jeb” Bashaw

November 16, 2014 | by Staff Attorney

Gana Weinstein LLP is investigating LPL Financial after its stunning termination of James “Jeb” Bashaw, a former broker with LPL Financial. According to FINRA’s BrokerCheck Report, LPL Financial terminated Mr. Bashaw for “participating in private securities transactions without providing written disclosure to and obtaining written approval from the firm.”

In addition, LPL explained that it terminated Mr. Bashaw for borrowing money from a client and engaging in a business transaction that created a “potential conflict of interest without providing written disclosure to and obtaining written approval from the firm.” Finally, LPL Financial stated that Mr. Bashaw failed to follow firm policies and industry regulations. Mr. Bashaw was discharged on September 24, 2014. In response, Mr. Bashaw stated that he was home supervised and had 13 perfect audits. Furthermore, he stated that he was still unclear as to the specifics of the discharge.

Mr. Bashaw started his career with Merrill Lynch, Pierce Fenner & Smith, Inc. and worked there for about two years and four months. Over his thirty year career, he also worked at Kidder, Peabody & Co., Thomas F. White & Co., First America Equities Corp., Augusta Securities Corp., Suntrust Equitable Securities, J.C. Bradford & Co., UBS Painewebber, Inc. and was most recently working at Wunderlich Securities, Inc.

Gemini Real Estate Advisors Risk Investor Funds in Private Legal Dispute

November 15, 2014 | by Staff Attorney

As reported in InvestmentNews, three members of a real estate partnership that sells private placements in the real estate space are in the middle of a legal dispute that could potentially endanger millions of dollars in loans and investor capital as a result. The dispute is among the owners of Gemini Real Estate Advisors and began earlier this year when William Obeid, one of the partners, asked the other two partners, Christopher La Mack and Dante Massaro, to restructure the company to reflect certain areas of expertise. Those talks soon broke down and have now ended up in court.

Gemini Real Estate Advisors oversees a real estate portfolio of more than $1 billion and was founded in 2003. The complaint alleges that Mr. Obeid abused his position for personal gain through concealed unauthorized transfers of company funds and hiring of family members at inflated salaries. Thereafter, Mr. Obeid filed his own complaint in New York against Mr. La Mack and Mr. Massaro. alleging that the two other Gemini partners had proposed a business divorce and have acted in an effort to freeze him out in order to strengthen their negotiation position in discussions concerning a buyout of Mr. Obeid’s interest.

According to Mr. Obeid’s lawsuit, his partners’ strategy would harm Gemini and investors, by paralyzing Gemini’s operations, causing existing development projects to become distressed, and risk default on more than $97 million in loans and $15 million of investors’ equity.

Stifel Nicolaus Broker Robert Head Terminated and Barred for Unauthorized Trading

November 14, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) and barring former Stifel, Nicolaus & Company, Inc. (Stifel Nicolaus) broker Robert Head (Head) concerning allegations that between August 2013, and October 2013, Head exercised discretion, aka unauthorized trading, in the account of a customer without obtaining the customer’s prior written consent in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010. In addition, FINRA alleged that Head recommended transactions to the same customer between January 2010, and October 2013, that were qualitatively and quantitatively unsuitable for the customer.

From August 2008, until January 2014, Head was registered with Stifel Nicolaus. Since that time, Head has not been registered with any brokerage firm. In December 2013, Head was discharged from Stifel Nicolaus for alleged violation of the firm’s policy regarding exercising discretion in a client’s account without written authorization.

According to FINRA, Head managed a Stifel Nicolaus trust account for a customer from August 2008, until October 2013. The customer was retired with an original account application listing investment objectives of “Growth and Income” and “Speculation / Active Trading / Complex Strategies.” FINRA found that in November 2009, the account’s investment objective was changed to identify only ”Speculation / Active Trading / Complex Strategies.” FINRA found that the customer never gave Head written authorization to exercise his own discretion for her account.

Broker Spotlight – Mark Johanson’s Sale of Tenants-in-Common (TIC)

November 13, 2014 | by Staff Attorney

According to the Financial Industry Regulatory Authority’s BrokerCheck system, there have been four customer complaints filed against former Sigma Financial Corporation (Sigma) and current Charles Schwab broker, Mark Johanson (Johanson) stemming from unsuitable Tenants-in-Common (TIC) investments.

Sales of TICs exploded during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. TICs are private placements that have no secondary trading market and are therefore illiquid investments. These products were promoted as appropriate section 1031 exchanges in which an investor obtains an undivided fractional interest in real property. In a typical TIC, the profits are generated mostly through the efforts of the sponsor and the management company that manages and leases the property. The sponsor typically structures the TIC investment with up-front fees and expenses charged to the TIC and negotiates the sale price and loan for the acquired property.

TIC investments entail significant risks. A TIC investor runs the risk of holding the property for a significant amount of time and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the fees and expenses associated with TICs, including sponsor costs, can outweigh the any potential tax benefits associated with a Section 1031 Exchange. That is, the TIC product itself may be a defective product because its costs outweigh any potential investment value for a customer. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.