Securities Lawyers Blog

FINRA Investigating Newest Puerto Rico Issuance of Municipal Bonds

April 14, 2014 | by Staff Attorney

On March 21, 2014, The Financial Industry Regulatory Authority (FINRA) announced that it is investigating trading in Puerto Rico, examining secondary trades in Puerto Rico’s blockbuster $3.5 billion bond deal. FINRA is looking at possible violations of rules requiring minimum sales of $100,000. The greatest concern is that the bonds are being sold to individual investors in violation of securities regulations and FINRA Rules, including FINRA Rule 2111, which requires that a trade be suitable for particular investors. Given the prospectus’ apparent intent to make these institution-only bonds, sales to individual investors would be highly improper.

The self-governed United States territory sold the debt on March 11, 2013, in the largest high-yield offering for the municipal market. The issue provided Puerto Rico with enough cash to pay its bills through June 2015, as the island attempts to prop its budget, giving officials more time to jump-start the economy.

The FINRA investigation comes amid concerns that the new bonds—which now carry junk status after Puerto Rico was cut to junk last month—are being improperly sold to individual investors. The bonds’ prospectus provides that the debt will be issued in denominations of $100,000, absent an upgrade in Puerto Rico’s credit rating. Industry professionals have noted that making the trade size contingent on credit ratings is unusual, and suggests that the writer of the documents intentionally meant to prevent trades to small investors. However, recent trading activity has shown trades in denominations of as little as $5,000—smaller size trades that are more typical of individual investors.

Marylin Meyers Formerly of Allstate Financial Services Suspended Over Selling Away Activities

April 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Marylin T. Meyers (Myers) $20,000 and barred her for two years concerning allegations between September 2009, and February 2011, she participated in a series of private securities transactions totaling approximately $1,000,000 without notifying her firm, Allstate Financial Services, LLC (Allstate) or obtaining the firm’s written approval. FINRA alleged that Meyers recommended that five investors invest in On The Edge and she helped facilitate their purchases of On the Edge Notes. On The Edge is a California based company formed to be a supplier of consumer goods such as tents, folding chairs, wagons, and promotional items related to retailers. To date, On The Edge has failed to repay the principal and interest due to the investors.

Meyers first became registered with FINRA in 1986 with Merrill Lynch, Pierce, Fenncr & Smith Incorporated. In 2001, Meyers became associated with Metlife Securities Inc. Thereafter, in July 2004, Meyers joined Allstate until her termination on May 17, 2012.

The allegations against Meyers are typical of a “selling away” violation. A broker sells away from their brokerage firm when they solicit securities that were not approved by the broker’s affiliated firm or recorded on the firm’s books and records. NASD Rule 3040 requires an associated person to provide written notice to the firm prior to participating in any private securities transaction. An associated person is prohibited from participating in any manner in the private securities transaction without the Firm’s approval. Under FINRA Rule 3010, brokerage firms are required to supervise their brokers and implement supervisory procedures reasonably designed to detect and prevent violations of NASD Rule 3040.

Centaurus Financial Sanctioned Over Allegations of Supervisory Failures

April 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned Centaurus Financial, Inc., (Centaurus) concerning allegations that Centaurus failed to supervise the business activities of five representative in the dissemination of communications concerning the risks of certain private placements. FINRA fined the firm $25,000

Centaurus became a FINRA member firm in 1993 and is headquartered in Anaheim California. The firm has 367 branch offices and approximately 585 registered individuals. The firm operates as a privately held independent broker-dealer and engages in various securities businesses including corporate and municipal debt, mutual funds, direct investments, and private placements.

FINRA alleged that at various times during from February 2009, through January 2010, five Centaurus registered representatives functioned as wholesalers for an unaffiliated investment management firm. FINRA alleged that Centaurus written supervisory procedures did not address the supervision of wholesaling activities and Centaurus did not supervise the wholesaling activities of the five representatives in violation of NASD Rule 3010. FINRA found that the five representatives did not use their Centaurus e-mails for wholesaling activities and instead used the investment management firm’s email address to send communications.

Berthel Fisher fined $775,000 by FINRA for Failing to Supervise the sale of Alternative Investments

April 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined broker-dealer, Berthel Fisher & Co. Financial Services and its affiliate, Securities Management & Research, Inc., a combined $775,000. FINRA alleged supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of alternative investments. FINRA also found that Berthel Fisher’s failure to supervise extended to non-traditional exchange traded funds (ETFs).

FINRA found that from January 2008 to February 2012, Berthel Fisher had inadequate supervisory systems and lacked proper written supervisory procedures with regards to the sales of these alternative investments, namely non-traded real estate investment trusts (REITs), managed futures, oil and gas programs, equipment leasing programs, and business development companies. In its report, FINRA also alleged that some investors were sold these products at a level of concentration that exceeded their respective investment objectives, making the sales and recommendations unsuitable. FINRA also claims that Berthel Fisher failed to train its employees on individual state suitability standards.

FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for the sale of leveraged and inverse ETF’s. Before a registered firm may allow its registered representatives to recommend such products to its customers, it must conduct adequate research and review. Through its investigation, FINRA learned that Berthel Fisher representatives recommended approximately $49 million in these nontraditional ETF’s. Leveraged and inverse ETF’s expose holders to amplified movements that tend to deviate from their related benchmarks over extended periods of time. These products are often focused on short-term investment returns and subject to extreme movements during volatile markets, with the potential for significant loss of principal. According to FINRA, Berthel sold these products to conservative, buy-and-hold investors, sales that FINRA ultimately deemed unsuitable.

Barclays Capital Fined $3.75 Million Regarding Record Retention Failures

April 8, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined Barclays Capital Inc. (Barclays) $3.75 million for systemic failures relating to the failure to preserve electronic records, emails, and instant messages in the manner required for a period of at least 10 years. The retention of electronic correspondence and records is critical for the proper supervision of brokerage activities. Without a proper record retention system, brokerage firms are essentially blind to certain types of securities misconduct.

Federal securities laws and FINRA rules require that business electronic records must be kept in non-rewritable, non-erasable format — also referred to as “Write-Once, Read-Many” or “WORM” format — to prevent alteration. The Securities and Exchange Commission (SEC) has stated that a firm’s books and records are the primary means of monitoring compliance with the securities laws.

FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, and account records in WORM format. FINRA found that Barclays retention failures were widespread and included all of the firm’s business areas. Thus, FINRA alleged that Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

Gana LLP Files Churning Case Against RBC and Morgan Stanley on Behalf of Client

April 7, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against RBC Capital Markets, LLC (RBC) and Morgan Stanley Smith Barney, LLC (Morgan Stanley) accusing their registered representative Bruce Weinstein (Weinstein) of churning (excessive trading) and making unsuitable recommendations. In addition, the complaint alleged that the brokerage firms failed to properly supervise Weinstein’s activities.

The claimant alleged that he is the owner of a small business who had very little investment experience with stocks, bonds, or any other investment products. In addition, the claimant has no other financial or investment training and is generally unsophisticated in financial matters. The complaint also alleged that Weinstein knew that the claimant was providing the broker with approximately 100% of his liquid assets. The claimant alleged that even though he did not tell the broker that he desired to speculate with 100% of his liquid assets, Weinstein incorrectly marked claimant’s investment objective as speculation. Claimant alleged that the broker also incorrectly selected his investment experience in options, stocks, and bonds as being 20 years. In fact, the claimant had no options trading experience.

According to the complaint, Weinstein immediately began executing a highly leveraged and excessive trading investment strategy in claimant’s account. The claimant alleged that Weinstein’s trading was made without authorization or prior notice to the client. The claimant alleged that the broker’s trading generated exorbitant commissions for himself while providing no material benefit to his client. For example, in the May 2011, the claimant alleged that his account lost 44.8% of its value in a single month. During this month, it was alleged that the broker excessively day traded options such as Apple causing losses of $23,228 in Apple options or nearly 21% of the claimant’s entire liquid net worth.

SEC Issues Largest Monetary Sanction for Rule 105 Short Selling Violations Ever

April 6, 2014 | by Staff Attorney

On March 5, 2014, the Securities and Exchange Commission (SEC) announced the largest monetary sanction for Rule 105 short selling violations. A Long Island-based proprietary trading firm, Worldwide Capital, and its owner, Jeffrey W. Lynn, agreed to pay $7.2 million to settle the charges against them.

According to the SEC, Rule 105 prohibits short selling of an equity security during a restricted period – generally five business days before a public offering – and the subsequent purchase of that same security through the offering. The rule applies, to all equity trades, regardless of the trader’s intent. The rule is designed to promote offering prices that are set naturally by market driven supply and demand.

According to the SEC’s order instituting settled administrative proceedings, Mr. Lynn created Worldwide Capital for the purpose of investing and trading in a strategy focused primarily on new shares of public issuers coming to market through secondary offerings. Mr. Lynn had traders execute trades on his behalf, seeking allocations of additional shares soon to be publicly offered, usually at a discount to the market price. He and his traders would then sell those shares short in advance of the public offerings. Lynn and Worldwide Capital improperly profited from the difference between the price paid to acquire the offered shares, and the market price on the date of the offering.

The Supreme Court May Limit Securities Fraud Suits

April 5, 2014 | by Staff Attorney

The Supreme Court on Wednesday, MArch 5, 2014, seemed poised to impose new limits on securities fraud suits – making it harder for investors to group together to bring claims that they were misled when they bought or sold securities.

Organizations facing fraud class actions prefer to have the case certified as late in the litigation as possible because once a class is certified, the damages can be so enormous that most companies settle. “Once you get the class certified, the case is over,” Justice Antonin Scalia said on Wednesday.

Several justices, including Justice Anthony Kennedy, suggested that this phenomenon could be partly addressed through a proposal by two law professors that argued plaintiffs should be required to show at an early stage “whether the alleged fraud affected market price.”

Gana LLP Files Complaint Against H. Beck on Behalf of Client For Unsuitable Investment

April 4, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against H. Beck, Inc., on behalf of a client accusing the investment advisory firm of making unsuitable recommendations and failing to properly supervise one of its representatives.

The Claimant in this case is a retired sixty-three year old from Hawaii, who sought to safely invest what was left of his retirement funds, after being hit hard in the down market of 2008. H. Beck, through one of its advisers, offered him high, risk-free returns, which the Hawaii native readily accepted. H. Beck, through one of its advisers, took nearly two-thirds of Claimant’s retirement savings and put them into the Inland American Real Estate Investment Trust (Inland) and the Lease Equipment Finance Fund 4 (LEAF).

LEAF is a limited partnership. Limited Partnerships are investment vehicles formed to acquire, operate, and sell assets for the benefit of the partners. Investors in Limited Partnerships, also known as limited partners, are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, Limited Partnerships are not listed on an exchange. They are illiquid assets with a relatively limited secondary market. Consequently, reliable pricing information is typically very difficult to obtain.

Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers

April 3, 2014 | by Staff Attorney

Rockwell Global Capital LLC (Rockwell) brokers Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Robert Lee first became registered in 1988. From March 2005, through November 2009, Robert Lee was registered through former FINRA member firm GunnAllen. Since November 2009, Robert Lee has been registered through Rockwell.

In August 2013, Robert Lee accepted a settlement with FINRA barring the broker from associating with any broker dealer. FINRA found that between September 25, 2008, and October 31, 2008, while Robert Lee was registered with GunnAllen, Robert Lee failed to follow a customer’s instructions regarding the purchase of three securities. FINRA also found that between September 2008, and at least December 2009, while Robert Lee was registered with two member firms, Robert Lee made material misrepresentations and omissions to a customer regarding the status of their investments. Specifically, FINRA found that Robert Lee misrepresented to the client that certain investments had earned $49,591 in dividends when in fact the investments did not exist and no dividends had been earned.