Securities Lawyers Blog

Gilford Securities Fined by FINRA Over Deficient Supervisory Procedures

July 1, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Gilford Securities, Inc. (Gilford Securities) concerning allegations that from April 2010 through March 2012, Gilford Securities failed to: (i) make certain disclosures in research reports; (ii) have approval of certain research reports; (iii) implement written supervision policies reasonably designed to comply with NASD Rule 2711; (iv) establish and enforce written supervisory control policies concerning the supervision of producing managers; and (v) implement a reasonably designed Anti-Money Laundering Compliance Program (AMLCP).

Gilford Securities has been a FINRA member since January 1980, has eight branch offices, and 78 registered representatives. Gilford Securities’ principal place of business is New York, New York.

FINRA rules require disclosure of any material conflict of interests of the research analyst of which the research analyst knows or has a reason to know in the publication of the research report. FINRA found that from April 2010, through March 2012, Gilford Securities published 503 research reports. FINRA found that each of those reports failed to disclose that the research analyst received compensation of commissions on transactions the analyst’s customers made in the securities covered in violation of the FINRA Rules.

Dawson James Securities Sanctioned Over Alleged Supervisory Failures

June 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Dawson James Securities, Inc., (Dawson James) concerning allegations that the firm did not provide for supervision reasonably designed to comply with certain applicable securities laws and regulations.

FINRA has stated that at a minimum, written supervisory procedures should describe: (a) identification of the individual responsible for supervision; (b) supervisory steps and review procedurals to be taken by the supervisor; (c) the frequency of reviews; and (d) the documentation of reviews. FINRA found that the Dawson James’ written supervisory procedures failed to provide for one or more of the four above-cited minimum requirements for adequate written supervisory procedures for conduct concerning: (1) disclosure of potential conflicts of interests to clients; (2) trading in the opposite direction of solicited customer transactions; (3) certain broker sales practice concerns such as unauthorized trading, suitability, excessive trading, and free-riding; (4) concentration of securities in clients’ accounts; (5) the sharing of profits and losses in clients’ accounts; (6) wash transactions; (7) coordinated trading; and, (8) the review of representatives’ electronic communications, among other violations.

FINRA alleged that the firm failed to investigate numerous ”red flags” relating to the activities of one registered representative referred to by the initials “DM”, including: (1) numerous exceptions generated on the firm’ s supervisory reports which included commissions charged to DM’s clients; (2) high concentrations of one security in DM’s clients’ accounts; and, (3) numerous cancel rebill requests for DM’s clients’ accounts. FINRA also found that James Dawson failed to enforce its written supervisory procedures that required electronic correspondence be reviewed on a daily basis. FINRA also found that from January 2007 through February 2008, the firm failed to ensure that the firm’s Head Trader, referred to as the initials “AE” carried out his delegated supervisory responsibilities relating to proprietary trading; trade reporting; clock synchronization; short sale compliance; compliance with the manning rule; mark ups and mark downs; and, compliance with inventory guidelines.

JP Turner Sanctioned Again By Financial Regulator

June 27, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker-dealer J.P. Turner & Company, L.L.C. (JP Turner) concerning allegations JP Turner failed to establish and enforce reasonable supervisory procedures to monitor the outside brokerage accounts of its registered representatives. In addition, FINRA alleged that JP Turner failed to establish an escrow account on one contingency offering and broke the escrow without raising the required minimum in bona fide investments.

This isn’t the first time that FINRA has come down on JP Turner’s practices and that our firm has written about the conduct of JP Turner brokers. Those articles can be accessed here (JP Turner Sanctioned By FINRA Over Non-Traditional ETF Sales and Mutual Fund Switches), here (JP Turner Supervisor Sanctioned Over Failure to Supervise Mutual Fund Switches), and here (SEC Finds that Former JP Turner Broker Ralph Calabro Churned A Client’s Account).

JP Turner has been FINRA firm since 1997. JP Turner engages in a wide range of securities transactions including the sale of municipal and corporate debt securities, equities, mutual funds, options, oil and gas interests, private placements, variable annuities, and other direct participation programs. JP Turner employs approximately 422 financial advisors and operates out of 185 branch offices with principal offices in Atlanta, Georgia.

Carolina Financial Fined by FINRA Over Private Placement Due Diligence

June 26, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Carolina Financial Securities, LLC (Carolina Financial) concerning allegations that the firm failed to conduct proper due diligence on private placements sold by the firm.

Carolina Financial has been FINRA member since 1997 and operates out of Brevard, North Carolina. The firm has 12 registered representatives and derives generates revenues through the sale of private placements. The firm has two other prior disciplinary actions including a FINRA action in July 2010, concerning allegations that Carolina Financial failed to ensure that an escrow account was established for a contingent offering.

NASD Rule 3010 requires brokerage firms to establish, maintain, and enforce a supervisory system reasonably designed to comply with the securities laws and the FINRA rules. As part of a brokerage firm’s responsibility includes conducting due diligence on its securities products in order for the firm to understand the risks of these products and to have a reasonable basis to believe these products are suitable for at least some customers. FINRA stated in its complaint that due diligence is especially important for alternative investments such as private placement offerings under Regulation D where there is no registration of the securities with the SEC.

Unsuitable IRA Investments On the Rise – Part III

June 25, 2014 | by Staff Attorney

This article continues our prior posts concerning a recent report by Bloomberg that noted the rise in rollovers from 401(k) plans into IRA accounts. The article pointed to concerns by regulatory agencies and investors concerning the suitability of the investment choices being recommended by brokers soliciting rollovers.

In another example, a mechanical engineer for Hewlett-Packard in Puerto Rico, rolled over $150,000 from a 401(k) to an IRA with UBS. His broker Luis Roberto Fernandez Diaz, recommended Puerto Rico municipal bond funds that contained a 3 percent upfront sales fee and 1 percent annual expenses. Fernandez’s brokercheck lists 17 customer disputes from 2009 through 2014. As we have reported on multiple occasions, our firm represents investors in claims against UBS concerning the firm’s practices in overconcentrating many of their client’s assets in these speculative highly leveraged bond funds. Those articles can be found here, here, and here.

In the case of an IRA, it makes little sense for a financial adviser to recommend investing in municipal bonds because the bonds main advantage is tax avoidance which already is a benefit of investing in an IRA. The investor interviewed by Bloomberg, says that the bonds plunged in value because of the deteriorating finances of Puerto Rico and are only worth $90,000.

Beware of Brokerage Firms Soliciting 401(k) Rollovers – Part II

June 24, 2014 | by Staff Attorney

This article picks up on our prior post concerning a recent report by Bloomberg concerning allegations that brokerage firms have used unscrupulous tactics in rolling over employee 401(k) plans into IRA accounts.

The article highlighted how Kathleen Tarr (Tarr) and Richard McCollam (McCollam) with Royal Alliance Associates gained access to AT&T Inc. employees. Tarr was also associated with SII Investment, Inc., from July 2010 until November 2012. McCollam began marketing to AT&T employees with 401(k) rollovers and lump-sum pension payments. The telecommunications company has 246,000 workers and ranks among the best 15 percent of U.S. plans in terms of fees, charging expenses as low as .01 percent. At AT&T employees can take a pension monthly payment or a lump sum payment.

According to the article the employees looked to Tarr as 401(k) expert and visited their homes and offices in order to advise them on their retirement plans. Bloomberg found that Tarr encouraged hundreds of departing AT&T employees to roll over their retirement savings into risky high-commission investments that the SEC and FINRA have warned customers against investing substantial unsuitable sums into.

Brokerage Firms Profit Off of 401(k) Rollovers at Investors’ Expense

June 23, 2014 | by Staff Attorney

A recent article by Bloomberg highlighted a disturbing trend whereby brokers of independent brokerage firms have been able to make substantial profits while providing allegedly unsuitable investment advice and potentially tanking the retirement savings of potentially hundreds and maybe thousands of blue collar workers. These brokerage firms have been able to tap into large corporations with thousands of employees with 401(k) plans and convince them to rollover their accounts to their firm into IRAs. Once there, the brokers recommend unsuitable investments in an already tax-deffered account such as municipal bond funds and variable annuities. Some of the investments are extremely speculative and carry huge commissions and fees. In the end the brokers make hundreds of thousands in commissions while the investor is left with a depleted retirement account.

How the practice works is that brokers form connections with large employers in order to pitch their investment services to employees. Because the employer allows the broker to use their offices and facilities to pitch their investment services, employees often mistakenly believe that the company endorses or has otherwise evaluated the broker. In fact, these companies often have little to no relationship with the broker or a defined screening process.

According to Bloomberg, employees shifted $321 billion from 401(k)-style plans to individual retirement accounts in 2012. As a result, IRAs account assets are up to $6.5 trillion, more than the $5.9 trillion contained in 401(k)-style accounts. However, the shifts have been used by some Wall Street firms to profit at their client’s expense. IRAs often charge higher fees than 401(k) plans which provides brokers an incentive to promote rollovers.

Adam Gana Publishes Article on the Problems with Securities Laws in New York

June 23, 2014 | by Staff Attorney

The Fordham Journal of Corporate and Financial Law will be publishing an article written by Adam Gana and Michael Villacres. The article is entitled Blue Skies for America in the Securities Industry… Except for New York: New York’s Martin Act and the Private Right of Action. The article addresses the origins and legislative history of New York’s securities regulations and compares the regulations to that of other states. The article then explores the disadvantages to New York’s retail investing public. Finally and most importantly, the article recommends changes to the law that will truly help protect investors in the state of New York.

The article will appear in the summer 2014 edition of the Fordham Journal.

The Failure to Protect the Public From Securities Fraud – Part II

June 20, 2014 | by Staff Attorney

As discussed in Part I, the primary defense to preventing securities fraud is has been to “bar” the person from the industry and to instruct the criminal to stop committing fraud. Despite the evidence that the slap on wrist approach has been ineffective, some lawmakers continue to think barring individuals and educating the public is the best way to stop securities fraud.

Yet, according to Futures Magazine, during the hearing Sens. Susan Collins (R-ME) and Bill Nelson (D-FL) stressed the importance of “consumer education” to prevent future scams. If only we could convince senior citizens to spend their golden years reading CFTC and SEC news releases and memorize the names of hundreds of barred fraudsters each year maybe we can turn the tide in this fight – right. Great game plan. At least Sen. Claire McCaskill (D-MO) understood the disservice the education alone approach would provide the investing public by stating that “The first line of defense is not consumer education,” but rather “putting the crooks in prison.”

The hearing also featured testimony of a former fraudster, Karl Spicer. Spicer was convicted for ripping off investors in a metals scam. Spicer’s testimony also clearly stated that it is government agencies failure to instill fear into fraudsters that has resulted in no progress in investor protection. Without real world consequences, criminals merely go from scam to scam and will unapologetically continue to swindle. Spicer stated that “With all due respect to the civil authorities, the people that I have encountered…don’t really respect the civil authority bans.” In fact, “The gentleman I was with had a CFTC ban, he cooperated; he had a ban and he still went about doing business the very next day.”

The Failure to Protect the Public From Securities Fraud – Part I

June 19, 2014 | by Staff Attorney

If someone broke into your home and stole hundreds of thousands of dollars of your possessions you expect that person to go to jail. But what if the consequence was merely to pay a fine and a court ordered bar from breaking into homes. Would you be alright with that outcome? Could such an approach really stop or even deter criminals? Could you imagine lawmakers arguing with you that the key to preventing more burglaries is to inform homeowners about locking their doors and windows and installing alarms – but not jail. If such an approach sounds silly then why have we accepted this approach to securities fraud.

The primary defense to preventing securities fraud is simply to “bar” the person from the securities industry and to instruct him or her to stop committing fraud. For many recidivist fraudsters, being barred from the industry is merely part of the career plan. Often times being barred from the industry merely frees the fraudster from the shackles of having to conceal their fraud within the confines of industry supervision. After being barred fraudsters are often in a perfect position to continue stealing from investors. Think about it – they have been industry trained, have spent years learning their craft, and have established many contacts and industry connections that they can now utilize for their post-industry frauds.

Yet regulators and lawmakers seemingly fail to grasp the very simple principal that those who commit securities fraud need to go to jail – period. Recently, the Senate presented findings of the Senate Special Committee on Aging concerning investigations gold investment scams targeting Florida seniors. The hearing clearly exposed how securities regulators, in this case the Commodity Futures Trading Commission (CFTC), has no ability to prevent securities fraud and protect the investing public.