Securities Lawyers Blog

Wells Fargo Advisors Awarded Limited Recovery On Broker Promissory Note

June 18, 2014 | by Staff Attorney

Recently, a Financial Industry Regulatory Authority (FINRA) arbitration panel rendered a decision concerning Wells Fargo Advisors, LLC’s (Wells Fargo) claims against its former broker Steven Grundstedt (Grundstedt) for breach of three promissory notes. FINRA Arbitration Case No. 11-02245. The FINRA arbitration panel held that Grundstedt was entitled to an offset against the outstanding balance of the first promissory note dated July 30, 2008 because Wells Fargo, then Wachovia at the time, breached an implied contract and/or the covenant of good faith and fair dealing in the contracts Grundstedt signed, causing him substantial economic damage.

Wells Fargo claimed that Grundstedt failed to repay three separate forgivable promissory notes. Note 1 was in the principal amount of $320,000 and constituted a “transitional bonus” Grundstedt was rewarded with for moving his book of business from his former employer, Citigroup. Like the other notes in the litigation, the principal portion of Note 1 could be received in a lump sum or could be taken in monthly installments. In either case, the monthly re-payment of principal and interest was to be offset by the forgiveness of an equivalent amount conditioned upon Grundstedt’s continued employment with Wachovia’s.

According to the order, at the time Grundstedt accepted employment with Wachovia, he signed multiple agreements. One of these agreements promised Grundstedt that he would receive “support” from Wachovia including “re-assignment of accounts, walk-ins, prospective customer leads…” among other forms of company support. The panel found that Wachovia initially lived up to its promises but that the situation changed after Wachovia was acquired by Wells Fargo. In the fall of 2009, Wells Fargo consolidated operations, closed branches, and changed payouts and various other things designed with the intent to make the overall business more efficient and profitable.

Ameriprise Slammed With $1.17 Million Decision Concerning Tenants-in-Common (TIC) Investments

June 17, 2014 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel recently ordered Ameriprise Financial Services Inc. (Ameriprise) to pay two elderly California investors $1.17 for recommending the investments in Tenants-in-Common (TIC), real estate related investments that eventually failed.

Brokerage firms, such as Ameriprise, having increasingly turned to alternative investment products such as TICs in recent years. The sales of TIC interests grew from approximately $150 million in 2001 to approximately $2 billion by 2004. FINRA has warned brokerage firms to put investors on notice of the risks of these illiquid investment for which no secondary market exists. In addition, subsequent sales of TIC property may occur at a discount to the value of the real property interest causing the investor substantial losses. FINRA has also warned that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with the IRS Section 1031 Exchange. FINRA requires that all member brokerage firms have an obligation to comply with all applicable conduct rules when selling TICs. These rules include the obligation to conduct proper due diligence and to ensure that promotional materials used are fair, accurate, and balanced.

In a recent InvestmentNews article, it was reported that in May, a FINRA arbitration panel in San Francisco ruled that Ameriprise had inappropriately advised two retired schoolteachers to invest a total of $1.03 million into three TICs in office complexes and hotels in early 2008. One of the TICs has subsequently failed and the two others have suffered declines in value. According to the investors, the couple lost most of their life savings. The couple invested in TICs known as ARI-Onyx Office Plaza Tenant In Common; Moody Springhill Suites Pittsburgh Tenant in Common; and Moody Marriott TownePlace Suites Portland Scarborough Tenant in Common.

Morgan Stanley Fined $5,000,000 For Failure To Supervise Sales of IPO’s

June 16, 2014 | by Staff Attorney

On May 6, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Morgan Stanley Smith Barney LLC $5,000,000 for failure to properly supervise the solicitation of retail clients to invest in initial public offerings (IPOs). According to FINRA, Morgan Stanley sold shares to its retail customers in eighty-three different IPO’s between February 16, 2012 and May 1, 2013, with insufficient procedures and employee education. Some of the more commonly sold IPOs included Facebook and Yelp among other Internet favorites.

When broker dealers sell IPOs, there is a process in place for soliciting customer interest. Prior to the effective date of the registration statement, firms may only obtain an “indication of interest” from customers. An “indication of interest” is not a purchase. In order for an “indication of interest” to result in a purchase the investor must reconfirm their interest after the IPO registration statement becomes effective. Broker dealers may also solicit what is known as “conditional offers to buy.” This differs from an “indication of interest” in that the investor does not have to reconfirm. It may bind the customer after the registration statement becomes effective if the investor simply takes no action to revoke the conditional offer before the brokerage firm accepts it. According to FINRA, Morgan Stanley Smith Barney failed to institute adequate procedures and properly train its employees to ensure that its staff clearly differentiated an “indication of interest” from a “conditional offer” in their solicitation of potential investors.

Morgan Stanley Smith Barney actually adopted a policy related to the solicitation of IPO’s. In adopting this policy back on February 16, 2012, however, the firm used the terms “indication of interest” and “conditional offer” interchangeably, which implicitly disregarded the need for customer reconfirmation prior to trade execution. According to FINRA, Morgan Stanley never provided its sales teams and financial advisers any education or materials explaining the differences in terminology. As a consequence there was a strong possibility that neither the Morgan Stanley staff nor its customers properly understood the type of order that was being solicited. In addition, FINRA found that Morgan Stanley’s inadequate policies failed to comply with the federal securities laws and other FINRA rules.

Investment Fraud Update: Patricia Miller Charged in Ponzi Scheme

June 14, 2014 | by Staff Attorney

Our law firm is currently investigating an alleged Ponzi scheme run by financial advisor Patricia S. Miller (Miller) of McMurray, Pennsylvania. According to the United States Attorney Office, on June 6, 2014, Miller was arrested on charges that she orchestrated a massive Ponzi scheme and committed wire fraud.

Our attorneys encourage investors to contact our office if they have been an unfortunate victim of Miller’s. Our attorneys have significant experience recovering investor funds by holding brokerage firms and Ponzi schemer’s responsible. In a similar fraudulent investment scheme our attorneys obtained a $2.8 million award on behalf of a group of defrauded investors including $1.9 million in punitive damages. See Reuters, Arbitrator orders alleged Ponzi-schemer to pay $2.8 million (Aug. 8, 2013) and the Award here.

In Miller’s case, the United States has alleged that Miller used and abused her position of trust and her association with a Massachusetts broker dealer in order to obtain money from clients. While Miller represented to clients that their funds would be invested prudently, it is becoming clear that Miller never made such investments. According to the United States Attorney’s Office, Miller promised high returns in “investment clubs” called KS Investments and Buckharbor, among others. Miller represented, that the investment clubs would be placed in fixed-income notes and other investments. Instead, Miller has been accused of misappropriating the client’s funds for her own personal use. If convicted, Miller could face a maximum sentence of 20 years in prison and a $250,000 fine.

FINRA Fines Investors Capital Corp. Over Failing to Supervise ETF Sales

June 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined brokerage firm Investors Capital Corp. (Investors Capital) $100,000 on allegations that from at least about June 2009 through April 2011, Investors Capital failed to provide prospectuses to customers who purchased exchange traded funds (ETFs). FINRA also alleged that Investors Capital also failed to establish, maintain and enforce an adequate supervisory system concerning the sale of ETFs and the obligation to provide ETF prospectuses to customers.

Investors Capital is an independent broker-dealer offering brokerage services and financial planning to customers and has been a FINRA member since 1992. Investors Capital is headquartered in Lynnfield, Massachusetts, and employs approximately 539 registered persons, across 325 branch offices.

ETFs typically attempt to track an index such as a market index, a commodity, or an entire market segment. ETFs can be either attempt to track the index or apply leverage in order to amplify the returns of an underlying stock position. ETFs that employ leverage are called either non-traditional ETFs or leveraged ETFs. In an ideal world, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse or the opposite of the return of the benchmark.

FINRA Fines Commonwealth Financial Network Concerning Email Supervisory Failures

June 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined brokerage firm Commonwealth Financial Network (CFN) $250,000 on allegations that from December 7, 2009 to January 28, 2012, CFN’s supervisory system: (a) failed to subject about 12.6 million outgoing e-mails to daily e-mail surveillance protocol, constituting 90% of the e-mails that the firm’s registered representatives sent through doing business as (DBA) e-mail accounts; and (b) failed to survey approximately 474,380 registered representatives e-mails. FINRA also found that the firm failed to establish and maintain procedures to test its e-mail supervisory system to timely identify systemic failures.

CFN has been a member of FINRA since 1979 and the firm has approximately 4,550 associated persons operating from 1,154 branch offices. CFN’s primary office is located in Waltham, Massachusetts. CFN’s registered representatives are independent contractors and many of them operate from branch offices under one or more DBA names. Most of CFN’s brokers use non-CFN e-mail domains names.

During the period from December 2009, to January 2012, CFN used a system to archive, preserve, and supervise business related e-mails of its associated persons. FINRA found that e-mails sent through DBA email domains were automatically transmitted to CFN’s system for retention and review. CFN’s supervisory procedures required the firm’s emails to be transmitted through CFN’s server so that the firm could capture and review its brokers’ emails. CFN’s supervisory system required a daily review of its registered representatives’ e-mails including lexicon searches and a random sampling of emails.

Ralph Lord Disciplined Over Outside Business Activities in SigFX and Cranebrake

June 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Ralph Lord (Lord) concerning allegations that the broker, from 2007 through 2013, engaged in three unapproved outside business activities in violation of NASD Rule 3030 and FINRA Rule 3270, participated in undisclosed private securities transactions, provided inaccurate information on compliance questionnaires, and failed to disclose an unsatisfied judgment.

Lord resides in Jackson, Mississippi and has been in the securities industry since 1988. From 2000 until June 2011, Lord worked at Sanders Morris Harris Inc. (f/k/a Harris Webb & Garrison, Inc.). Thereafter, Lord was associated with Abshier Webb Donnelly & Baker. Inc. from June 2011 until January 2012. Finally, from January 2012 until July 2013, Lord was associated with Saxony Securities. Inc (Saxony Securities). Lord was then terminated by Saxony Securities for violating the firm’s internal policies concerning disclosure of unpaid judgments. Previously Lord was the subject of an another FINRA disciplinary action in 1991 for exercising discretion without prior written authorization. According to Lord’s BrokerCheck, he has also been the subject of at least 15 customer complaints over his career.

FINRA alleged that Lord and two acquaintances created a called Canebrake Capital Management LLC (Cranebrake) in or about 2007 to make an investment in a spring water business. FINRA found that Lord and his acquaintances owned Canebrake and therefore a large position in the water company, were responsible for operating the water business, and that Lord personally invested at least $200,000 in Cranebrake. According to FINRA, in 2007, Lord created a private placement memorandum and a presentation to market partnership interests in Cranebrake to raise funds for the company. FINRA also alleged that Lord solicited several customers to invest in the water company but with the exception of one customer was largely unsuccessful.

SEC Charges Brokers Jerry Cicolani and Jeffrey Gainer in KGTA Petroleum Securities Scam

June 7, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP are investigating client claims regarding the Securities and Exchange Commission (SEC) complaint against Thomas Abdallah (a/k/a Tom Abraham), Kenneth Grant and their company KGTA Petroleum, Ltd. (“KGTA”) concerning a fraudulent investment scheme. Also named in the complaint are two registered representatives, Jerry Cicolani and Jeffrey Gainer who were associated with Primesolutions Securities, Inc., (Primesolutions) a brokerage firm.

According to the SEC, Grant and Abdallah marketed KGTA to investors as a petroleum company that earns profits by buying and reselling crude oil and other fuel products. Investors were purportedly told that they had relationships with bona fide third party purchasers and that they would use investor funds to buy fuel at a discount that would then be sold at a substantial profit. The KGTA investment was pitched to investors as an opportunity that offered astronomical returns – typically between 2% to 4% per month or 24-48% annualized – with no market risk.

According to the SEC, Grant and Abdallah convinced investors to buy KGTA promissory notes (KGTA Notes) by promising that the investment funds and the returns would flow through an escrow account monitored by attorney Mark George who would act as the escrow agent. Grant, Abdallah, and George promised that investor funds would be held in George’s IOLTA account until KGTA received a firm purchase order from a bona fide third party purchaser.

Gana LLP Investigates Broker Patricia Miller’s Ponzi Scheme

June 6, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP are currently investigating an alleged Ponzi scheme run by financial advisor Patricia S. Miller (Miller) of McMurray, Pennsylvania. According to allegations made against Miller by investors, she convinced customers to invest in purportedly safe mix of securities including corporate and municipal bonds. However, it is becoming increasingly clear that these investments may not exist at all.

Miller was a registered broker with several brokerage firms including Janney Montgomery Scott LLC and Investors Capital Corp. (Investors Capital). According to Miller’s BrokerCheck, on May 19, 2014, Investors Capital received a complaint alleging that an investor provided Miller with $80,000 that had been misappropriated by Miller. Two days later Investors Capital discharged Miller alleging that the broker has been accused of misappropriating funds, borrowing money from customers, fraudulent investment activity, and creating false documents.

According to investor complaints, Miller may have used various entities, including KS Investments, KS Investment Partnership, K Squared Development, K Squared Investments, Buck Harbor Investments, Buck Harbor Investment Club, and Buck Harbor Investment Partnership in order to carry out her scheme. Investors in these vehicles may have received false statements listing securities holdings and values of securities that may not truly exist. For instance some investors may have been misled into believing that they owned bonds issued by companies like General Electric, McDonald’s Corporation, Ford Motor Company, and other municipal bonds.

Ameriprise Broker Jeffrey Davis Barred Accused of Converting Client Funds

June 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred Ameriprise Financial Services (Ameriprise) broker Jeffrey Davis (Davis) concerning allegations that the broker committed securities fraud by converting client funds. FINRA alleged that from May 2012, through June 2013, Davis converted $116,976 from five Ameriprise customers for his personal use and benefit. According to FINRA, Davis initiated 71 unauthorized electronic Automated Clearing House (ACH) payments from the customers’ brokerage accounts to personal credit card accounts held in Davis’ name. FINRA found that these transfers converted customer funds and violated FINRA Rules 2150 and 2010.

Davis entered the securities industry in June 1998. Davis became associated with Ameriprise in September 2000 and remained with the firm until he was terminated on July 19, 2013. In a Form U5 Uniform Termination Notice dated July 24, 2013, Ameriprise reported that Davis was terminated for misappropriating customer funds to ‘pay personal credit cards.

FINRA Rule 2150(a) prohibits members or person associated with a member from making improper use of a customer’s funds. Improper use of customer funds constitutes conversion of the client’s funds when there is an intentional and unauthorized taking of or exercise of ownership by one who neither owns the property nor is entitled to possess it.