Securities Lawyers Blog

Gana LLP is Investigating Benjamin F. Edwards in connection with the Firm’s Supervision of Aon Miller

October 3, 2014 | by Staff Attorney

Gana Weinstein LLP, a nationally recognized securities arbitration boutique, is investigating Benjamin F. Edwards & Company, Inc. (“BFE”) in connection with the firm’s supervision of its former registered representative Aon D. Miller.

From November 2011 through September 2012, it is alleged that Aon D. Miller, participated in five different securities transactions with three different entities in which four of his customers invested a total of approximately $1,550,000. According to FINRA, who is also investigating Mr. Miller, he failed to inform Benjamin F. Edwards of his outside business activities as he was required to do. Aon Miller allegedly participated in three separate entities outside of his employment with Benjamin F. Edwards. The three entities at issue are: i) CDP, a real estate development company; KBI, a specialty chemical company, and iii) CTL, a company that refinanced senior secured debt.

According to FINRA, the above mentioned transactions resulted in a violation of FINRA Rule 2010 and and selling away, a violation of FINRA Rule 3040. FINRA Rule 2010 states in relevant part that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” FINRA Rule 3040 states in relevant part that “prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person’s proposed role therein…”

FINRA Suspends former Morgan Stanley Smith Barney Broker Travis Shannon for Failing to Divulge Information

October 2, 2014 | by Staff Attorney

On August 25, 2014, FINRA suspended Travis S. Shannon, of Santa Barbara, California, formerly of Morgan Stanley Smith Barney. According to FINRA, from July 2010 through June 2013, Mr. Shannon engaged in two outside business activities without first providing written notice to Morgan Stanley, in violation of FINRA Rule 2010, 3030, and 3270. 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.” All members are bound to maintain high standards and according to FINRA Mr. Shannon fell short of that standard.

FINRA Rule 3030 states that “No person associated…shall be employed by, or accept compensation from, any other person as a result of any business activity…outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member.” This activity is known as selling away. Mr. Shannon was employed as a financial advisor with Morgan Stanley from September 2008 through July 2013 when he was allowed to voluntarily resign from the firm due to FINRA’s regulatory action. According to FINRA, Mr. Shannon participated in private sales of $1,885,000 worth of securities, including securities issued by his outside business activities. Mr. Shannon also failed to timely update his U4 registration form to timely report two bankruptcy filings.

In June 2010, Mr. Shannon first began to participate in the private sales of securities issued by TC, a company that bought and sold used computer network equipment. Mr. Shannon referred eight customers to this company including four Morgan Stanley customers. Those eight purchases totaled $775,000 in investments with commissions of $77,500 to Mr. Shannon. In July 2010, Mr. Shannon co-founded AAI or Aerobat Aviation, Inc., a start-up company that was to design and produce unmanned aerial vehicles. In 2012 and 2013 Mr. Shannon participated in the private sale of $500,000 worth of Aerobat Aviation Inc. stock.

FINRA Files Complaint Against Former VSR and Berthel, Fisher Broker, Steven L. Stahler

October 1, 2014 | by Staff Attorney

On August 27, 2014, FINRA filed a complaint against Steven L. Stahler, formerly a registered representative with multiple broker dealers including Lowell & Company, Inc., Ausdal Financial Partners, Inc., Berthel, Fisher & Company Financial Services, Inc., VSR Financial Services, Inc., among others. On November 1, 2013, Lowell & Company terminated Mr. Stahler according to his form U5.

FINRA alleges that Mr. Stahler made unsuitable recommendations to customers in violation of FINRA Rule 2310 and 2110 and FINRA Rule 2010. Under FINRA Rule 2110 and 2310, all financial advisers and brokerage firms have a responsibility to deal fairly with their customers. All sales efforts are judged based upon the standards outlined in the FINRA Rules. Furthermore, all brokers must recommend the purchase, sale or exchange of securities that are reasonable given the customers investment objectives and risk tolerances.

According to the complaint, VSR Financial’s written supervisory procedures specify that no more than 40%-50% of a customer’s liquid net worth should be invested in alternative investments. VSR’s guidelines also required that new account forms used outline the customer’s percentage of the portfolio they would feel comfortable investing in high risk investments. FINRA alleges that from September 13, 2006 through October 24, 2006, Mr. Stahler recommended that a married couple, who had stated that no more than twenty percent of their portfolio be invested in aggressive/high risk investments, invested approximately $837,000 in twelve high risk investments at Mr. Stahler’s recommendation. These alternative investments included:

Gana LLP is Investigating LPL Financial broker, Kenneth W. Schulz for Improper Conduct

September 30, 2014 | by Staff Attorney

On September 11, 2014, FINRA, permanently barred Kenneth W. Schulz, a former broker of LPL Financial from associating with any FINRA member. According to the Letter of Acceptance, Waiver and Consent, in June 2013, Kenneth W. Schulz directed a registered assistant to impersonate six of Schulz’s former customers in phone calls to his prior firm requesting that the customers’ accounts be liquidated so that they could invest through Schulz at his new firm Commonwealth Financial network.

Schulz informed each of his customers that their securities holdings could be transferred “in kind” to accounts with Commonwealth. The customers agreed to transfer their securities to Commonwealth and authorized Schulz to initiate the transfers.

After the customers agreed to transfer the securities, Schulz learned that the customers’ securities could not be transferred in kind because the managed funds were proprietary to LPL Financial. Rather than inform his customers that the securities had to be liquidated before their funds could be transferred, Schulz had his assistant pretend to be the customers and had the accounts liquidated without customer consent.

FINRA Updates

September 30, 2014 | by Staff Attorney

On September 25, 2014, FINRA published its third quarter “Neutral Corner,” a newsletter designed to give practitioners, investors, and arbitrators updates on FINRA news. In the newsletter, FINRA officially announced the retirement of Linda Feinberg, President of FINRA Dispute Resolution. Ms. Feinberg has worked with FINRA since 1996. In addition, the newsletter highlights increased arbitrator disclosures. As of 2013, FINRA has increased its scrutiny of arbitrator disclosure by conducting internet searches of all arbitrators before having them appointed to panels.

Finally, FINRA highlights its new DR Portal – a web-based program designed to streamline the arbitration process for both attorneys and arbitrators. This is part of FINRA’s initiative to go paperless in the 21st century.

Choosing the Right Securities Arbitration Attorney

September 29, 2014 | by Staff Attorney

When to Call a Securities Arbitration Attorney

Securities arbitration attorneys, sometimes referred to as investment attorneys, FINRA attorneys, or securities attorneys, should be contacted whenever an investor believes he or she has been a victim of broker misconduct. An investor may have cause to retain a securities fraud attorney to file a lawsuit or arbitration claim if his or her broker failed to create a suitable investment strategy. An investor may also want to contact an attorney case if a broker made false or misleading statements about a security or omitted negative information about the risk of a security in order to persuade the investor to invest.

An investor may also want to seek legal counsel the investor’s broker bought or sold securities without prior consent (unauthorized trading) or excessively traded securities for the purpose generating commissions (churning).

FINRA Suspends and Fines Former First Allied Broker Frank N. Dettenrieder

September 28, 2014 | by Staff Attorney

On July 15, 2014, FINRA suspended Frank N. Dettenrieder, a former financial adviser with First Allied, for twelve days and fined him $5,000 for effectuating discretionary transactions in the accounts of six customers without obtaining prior written authorization from the customers and without having the accounts accepted as discretionary accounts by First Allied in violation of FINRA Rule 2510(b). FINRA Rule 2510(b) disallows registered representatives from exercising discretionary authority in customer accounts without prior written authority.

Under FINRA Rules, financial advisors can either have discretionary accounts – accounts in which the broker has discretion to make purchases without prior approval from the investor – and non-discretionary accounts – accounts in which the broker must obtain prior approval before purchasing securities. In any event, to create a discretionary account the broker must obtain the investors written consent.

FINRA also explained that Mr. Dettenrieder’s conduct violated FINRA Rule 2010. FINRA Rule 2010 requires that all registered representatives “observe high standards of commercial honor and just and equitable principles of trade.”

LPL Financial Fined For Failure to Properly Supervise Variable Annuities Transactions

September 26, 2014 | by Staff Attorney

LPL Financial was recently fined $2 million and ordered to pay $820,000 in restitution, for violations pertaining to variable annuity exchanges. This settlement, which was reached with the Illinois Securities Department, resulted from LPL’s inadequate maintenance of books and records with regards to documenting 1035 exchanges. A 1035 Exchange is a tax-free exchange of an existing annuity contract for a new one. In order for the new contract to qualify as a Section 1035 Exchange, the policyholder must have exchanged his or her existing contract for an equivalent new contract. The annuitant or policyholder must also remain the same.

According to LPL’s BrokerCheck file, LPL “failed to enforce its supervisory system and procedures in connection with the documentation of certain salespersons’ variable annuity exchange activities.” LPL has indicated that it will seek to enhance its procedures relating to surrender charges that often result from variable annuity exchange transactions. This, LPL believes, would ensure accuracy in their books and records along with client disclosures.

The product at issue was variable annuities, which have been closely watched by regulators dues to the complexity of the product and high fee structures. Elderly investors have often been sold variable annuities, when they were entirely unsuitable, just so that brokers could earn increased commissions. Regulators have paid especially close attention to those advisors who have switched their clients from one variable annuity to another, just to enhance their commissions.

FINRA Suspends Financial Advisor Over Unsuitable Variable Universal Life (VUL) Sales Practices

September 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker James Moniz (Moniz) concerning allegations that while registered with Signator Investors, Inc. (Signator) Moniz made unsuitable recommendations to a married couple that they purchase a Variable Universal Life insurance policy (VUL) on the husband’s life and use the proceeds of a reverse mortgage to purchase a variable annuity and open a managed investment account. According to FINRA, after the insurance company questioned the VUL application, Moniz caused the application to be re-submitted with changed or added information without first informing the customers of his actions. FINRA found that Moniz also inaccurately represented the source of funds for the variable annuity and managed account.

VUL are complex dual part insurance and investment products that investors must fully understand the risks and benefits of prior to investing. One feature of a VUL policy is that the owner can allocate a portion of his premium payments to a separate sub-account that can be used to grow in value through investments. The other part of the investment is the life insurance policy where the policies monthly charges including a cost of insurance charge and administrative fees are deducted from the policy’s cash value. The cash value of the policy may increase or decrease based on the performance of the selected investments. However, customers must be careful in purchasing VULs because the policy terminates, or lapses, if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. When the policy terminates the remaining cash value becomes worthless.

Given the costs involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. While an investor may be able to afford the initial purchase price of the policy it may be too expensive for the client to continue to make premium contributions over time causing the policy to lapse.

FINRA Alleges that Former Waddell & Reed Employee, Jeffrey Meyer, Engaged in 37 Private Placement Transactions without Proper Notice

September 24, 2014 | by Staff Attorney

On August 21, 2014, Richard A. March, Senior Regional Counsel of FINRA’s Department of Enforcement filed a complaint against Jeffrey Meyer, a financial advisor in Lake in the Hills Illinois who was formerly associated with Waddell & Reed, Inc. The complaint alleges that while employed at Waddell & Reed and WRP Investments, Inc. Mr. Meyer acted outside the scope of his employment with those firms by participating in 37 private securities transactions totaling more than $1.5 million, without providing prior written notice to the firms of his proposed roles in the transactions. FINRA alleges that as a result of the foregoing, Mr. Meyer 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.”

Mr. Meyer entered the securities industry in January 2000 as an investment company products and variable contracts representative with Franklin Financial Services, Corp. In February 2001 he became a general securities representative with Focused Investments, LCC. According to FINRA, United Private Capital, Inc. was a corporate entity that was established as an investment vehicle for FOREX currency trading. Between November 2008 and September 2009, United Capital sold corporate guarantees totaling $1 million to 20 investors and Mr. Meyer participated in each of the private securities transactions. Mr. Meyer, in some instances collected checks from customers and assisted them in preparing documents to effectuate the transactions. Furthermore, on at least one occasion, Mr. Meyer presented sales material to an individual who subsequently invested at United Private Capital.

In addition, according to FINRA, Mr. Meyer participated in private securities transactions related to commercial loans through Strategic Lending Solutions, LLC as well. Those promissory notes totaled approximately $300,000 with 13 investors. Mr. Meyer received a 2% payment based on the amount of the promissory note.