Securities Lawyers Blog

Merriman Capital Sanctioned Over Private Placement and Supervisory Failures

March 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Merriman Capital, Inc. (Merriman) concerning allegations that for more than three years Merriman’s written supervisory procedures were not reasonably designed to achieve compliance the FINRA rules. FINRA alleged that Merriman’s written supervisory procedures failed to describe the specific procedures to be followed and the persons responsible for carrying them out. In addition, according to FINRA, between May 2009, and September 2013, Merriman Capital raised more than $16 million for its parent company through several private offerings of securities even though Merriman did not have written procedures related to the sale of private placements.

Merriman has been a FINRA member since November 1986 and its business is focused on offerings of growth companies and institutional investors. Merriman is headquartered in San Francisco, California and employs fifty-five registered persons.

FINRA alleged that Merriman Capital’s written supervisory procedures, at fifteen pages long, listed legal rules and regulations that had to be complied with but failed to describe the specific procedures to be followed by the firm or how compliance with the procedures would be documented. Further, FINRA found that until June 2011, Merriman written supervisory procedures failed to address private placements even though the selling private placements was a substantial portion of the firm’s business. FINRA found that Merriman failed to address private placements in the firm’s supervisory manual even though Merriman Capital raised more than $16 million for its parent company through several private offerings.

FINRA Alleges Royal Securities Company Had Numerous Supervisory Deficiencies – Part I

March 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas. FINRA alleged that Royal Securities failed to properly supervise two of its registered representatives, one of which utilized a unitary investment strategy for virtually all of his customers. FIRNA also found that other representative made unsuitable recommendations in three customer accounts.

FINRA alleged that between January 2010 and May 2012, representatives of Royal Securities recommended nontraditional exchange-traded funds (Non-Traditional ETFs) to customers without having a reasonable basis to do so. Further, FINRA found that Royal Securities failed to establish and maintain a supervisory system and training regarding the sale of Non-Traditional ETFs that was reasonably designed to comply with FINRA rules.

Royal Securities has been a FINRA member since September 1982 and the firm’s business lines include hedge funds, an investment advisory business, and a traditional brokerage business. Royal Securities has approximately 41 registered persons operating out of nine offices.

Gana LLP Moves and Welcomes a New Associate

March 3, 2014 | by Staff Attorney

There are many exciting changes that our firm would like to report. First, Gana Weinstein LLP would like to welcome Daniel Gwertzman to our team. Danny joins our firm as a senior associate. Dany has a wealth of securities industry experience and has had exposure to a wide range of financial products. Prior to graduating magna cum laude from the University of Miami, Danny worked at Deutsche Bank and GlobeOp Financial Services. After graduating law school, Danny worked as a senior compliance examiner for the National Futures Association and is a certified fraud examiner. Danny was a member of his law school’s Business law review and the moot court board. Danny is admitted to practice in New York and New Jersey and just sat for the Florida bar as well.

In other news, Gana Weinstein LLP has moved to 345 Seventh Avenue, 21st Floor, New York, NY 10001. Our new office offers a wide range of additional services to help meet our clients needs including additional conference space, more support staff, and a centralized location. As always, our goal is to position our selves to meet the needs of our ever growing client base and facilitate strong working relationships with our clients. We strongly believe that our growth (both in space and staff) will help our clients tremendously.

Center Street Securities Fined by FINRA Over Email Supervisory Failures

February 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Center Street Securities, Inc. (Center Street) concerning allegations that the firm failed to establish, maintain, and enforce adequate supervisory systems and written supervisory procedures to monitor the use of external email accounts to conduct firm-related business by the firm’s registered representatives. The firm was fined $30,000.

Center Street has been a FlNRA member since February 7, 1991 and employs approximately 84 registered persons out of 74 branch offices. Center Street’s principal office is in Nashville, Tennessee. Center Street sells variable life insurance and annuities, mutual funds, private placements, options, corporate equities, debt securities, U.S. government securities and municipal securities.

The duty to supervise is a critical component of the securities regulatory scheme. The duty to supervise is an affirmative responsibility of all brokerage firms. The SEC has found that effective supervision by a broker-dealer must provide effective staffing, efficient resources and a system of follow-up and review to determine that any responsibility to supervise is being diligently exercised. Evidence that there is a variance between the conduct called for by a firm’s procedures and the actions actually undertaken by a firm supports a finding of liability and failure to supervise.

Matrix Capital and Christopher Anci Sanctioned by FINRA Over Variable Annuity Practices

February 27, 2014 | by Staff Attorney

In or about May 2010, a registered representative who concentrated in variable annuities became registered with Matrix Capital Group, Inc. (Matrix) and remained with Matrix until April 2011. According to FINRA, during a one year period the representative recommended 17 customers surrender their existing variable annuities and replace them with another annuity product. FINRA alleged that each customer purchased a new annuity and paid a surrender charge of at least $1,000. In sum, FINRA found that in total the customers paid a total of $70,000 in surrender charges. In addition, FINRA alleged that in 16 of the 17 transactions, the customer forfeited significant death and/or living benefits through the switch.

Matrix’s primary business involved equity agency transactions, mostly for institutional customers and high net worth individuals. Christopher Anci (Anci) joined Matrix in 1996. He has been dually registered with three other firms at various times while registered with Matrix. Anci has been President and a director of Matrix Capital Group since 2004.

As President of the Matrix, Anci had overall supervisory responsibility for the firm’s operations. Also, during the time Anci served as Chief Compliance Officer, until November 2010, Anci was designated in the firm’s written supervisory procedures as the person responsible for reviewing and approving variable annuity sales and exchanges. Even after Matrix hired a new Chief Compliance Officer, according to FINRA Anci remained responsible for the supervision and review of variable annuity transactions.

FINRA Proposes Rule Addressing Valuation Issues of REITs and DPPs

February 26, 2014 | by Staff Attorney

FINRA has recently proposed a rule change that would amend the procedures for valuing Direct Participation Programs (DPPs) and Real Estate Investment Trusts (REITs). The rule change is intended to provide greater clarity to investors concerning the value of these investments, an extremely contentious issue.

A REIT is a security that invests in different types of real estate such as commercial properties, home mortgages, or other specialty niche real estate markets (e.g., golf courses, malls, hotels). REITs can be publicly traded or privately held. Publicly traded REITs can be sold on an exchange and have the liquidity traditional associated with other liquid stocks and bonds. Non-traded REITs are sold only through broker-dealers and are illiquid.

Increased volatility in the stock market in recent years led some investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, claims of stable REITs have been shown to be false. The stability of non-traded REITs only exists because brokerage firms and issuers have control over the value of the security listed on an investor’s account statements and not because the security will actually sell at that value or is stable over time.

PNC Investments Fined by FINRA Over Sale of Non-Traditional ETFs

February 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm PNC Investments LLC, (PNC) concerning allegations from January 2008, through June 2009, PNC failed to establish a supervisory system, including written procedures, reasonably designed to achieve compliance with the FINRA rules in connection with the sale of leveraged, inverse, and inverse leveraged Exchange-Traded Funds (Non-Traditional ETFs).

Non-Traditional ETFs have grown in popularity since 2006. By April 2009, over 100 Non-Traditional ETFs had been issued with total assets of approximately $22 billion. Leveraged ETFs seek to deliver multiples an index or benchmark the ETF tracks. Some Non-Traditional ETFs are “inverse” or “short” funds that return the opposite of the performance the index or benchmark. ETFs can also be both inverse and leveraged and return a multiple of the inverse performance of a index or benchmark. Non-Traditional ETFs contain significant risks that are not found in traditional ETFs. Non-Traditional ETFs have risks associated with a daily reset, use of leverage, and compounding.

In addition, the performance of Non-Traditional ETFs over long periods of time can differ significantly from the performance of the underlying index or benchmark it tracks. For example, between December 2008, and April 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while a leveraged ETF seeking to deliver twice the index’s daily return fell six percent. In addition, a related ETF seeking to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period. These risks prompted FINRA to issue a Notice to Members clarifying brokerage firm obligations when selling Non-Traditional ETFs to customers.

Gana LLP Investigates Alleged Fraudulent Activity Related to Credit Suisse’s TVIX Notes

February 21, 2014 | by Staff Attorney

Gana Weinstein LLP, a full-service nationally recognized securities litigation firm, is investigating Credit Suisse Securities (USA) LLC for underwriting and VLS Securities, LLC (VLS) for marketing the VelocityShares Daily 2x VIX Short Term Exchange Traded Notes (TVIX). According to TVIX’s offering documents and marketing materials, TVIX was linked to twice the daily performance of the S&P 500 VIX Short-Term Futures Index. The offering documents stated that TVIX was designed for investors who seek exposure to the applicable underlying index.

TVIX do not represent ownership in any basket of securities, instead TVIX acts as a debt instrument that is supposed to track an index and on which the issuer pays the note based on the terms of the offering documents. As a result, investors may receive a cash payment at maturity. TVIX began trading on November 30, 2013 at a $100 per share price. On February 21, 2012, Credit Suisse temporarily suspended the issuance of new shares of TVIX, due to internal limits reached on the size of TVIX, according to Credit Suisse.

On March 22, 2012, the TVIX shares decline in price by over 29% as rumors were circulating that Credit Suisse was considering whether to begin reissuing shares of TVIX. On March 23, 2012 after Credit Suisse announced that it would reopen issuance of TVIX, the shares dropped another 30% in value.

Investment Losses In Oppenheimer Global Resource Private Equity Fund

February 21, 2014 | by Staff Attorney

The law firm of Gana Weinstein LLP is investigating the Oppenheimer Global Resource Private Equity Fund. In August 2013, the SEC began investigating the Oppenheimer Global Resource Private Equity Fund for misleading investors about the valuation and performance of the fund. According to the SEC, the fund manager, Brian Williamson was barred from the industry and fined $100,000 for overstating the value of the fund’s holdings by over 18%. Williamson is a resident of Newtown, Pennsylvania. Williamson was an Oppenheimer employee from 2005 through 2011. In March 2013, the SEC also charged two investment advisers with misleading investors about the valuation and performance of the fund. The SEC order found that the Oppenheimer employees made the following misrepresentations to its clients:

1. That the increase in the funds value was due to performance when in fact it was due to a new valuation method;

2. That a third-party valuation firm wrote up the valuation; and

FINRA Alleges that Cambridge Investment Research Failed to Supervise Broker Emails

February 20, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Cambridge Investment Research, Inc. concerning allegations that from January 2009, to July 2010, Cambridge failed to ensure that the firm preserved, maintained, and reviewed the business emails of two of its registered representatives. FINRA found that during this time Cambridge was relying upon its representatives to forward copies of their emails but did not have effective procedures reasonably designed to ensure that the representatives actually forwarded emails in violation of FINRA supervision rules.

Cambridge has been a FINRA member since December 1995 and has 3,044 registered individuals in 1,530 branch offices.

The duty to supervise has been held to be a critical component of the securities regulatory scheme. Supervisors have an obligation to employ systems and processes designed to ferret out wrongful behavior. In addition, firms must respond vigorously to indications of irregularity, commonly referred to as “red flags” of misconduct.