Securities Lawyers Blog

Will I Win My FINRA Securities Arbitration Claim?

February 19, 2014 | by Staff Attorney

One of the most common questions I receive as a FINRA securities attorney is whether or not a client is likely to prevail at a FINRA arbitration hearing. My first gut reaction, and the one I tell clients, is honestly I just don’t know. Most clients are puzzled by this answer because after handling hundreds of arbitration claims one would think I would have a better sense and certainty as to the strength of the case. However, the answer to whether the client would win at arbitration is not just a function of the strength of the case.

The better way to phrase the question is: What is the likely outcome of my securities case? That question is more readily answerable. I tell clients that it has been our experience that approximately 80% of all cases filed will be resolved through settlement or other means sometime prior to hearing. Recent data released by FINRA supports that approximately 80% of cases never make it to hearing. According to FINRA, of all arbitrations decided between 2009 and 2013 between 75% and 79% of those claims are resolved either through settlement, withdrawn, or means other than a hearing.

But what of the 20% of cases that do go to hearing? What are the chances of success at the FINRA arbitration hearing? The answer to that question is again usually unknowable at the time it’s first asked. There are so many considerations that go into determining the likelihood of success, many of which are unknown at the outset. Once of the biggest unknowns at the outset is who the arbitrators will be.

Gana LLP Investigates Icon Leasing Fund Eleven and Twelve

February 18, 2014 | by Staff Attorney

The attorneys at Gana Weinstein LLP are currently investigating Icon Leasing Fund Eleven and Twelve on behalf of investors who suffered losses as a result of the unsuitable recommendation of these funds. The attorneys at Gana Weinstein LLP have filed arbitrations against broker dealers that have sold these illiquid investments to their clients. Both NFP Securities, Inc. and WFG Investments Inc. have been know to sell the Icon Funds to their clients.

Allegedly, many advisors who sold the Icon investments failed to adequately explain that the funds operated as an equipment leasing program. Given the nature of the Icon Funds, in which capital is consolidated for the purchase and leasing of equipment, made the fund illiquid.

According to recent filings in securities arbitrations, during the offering period, the funds paid healthy distributions. However, not long after the funds were closed to new investors, the value of the Icon Funds began to decline and dividend payments became sporadic. By the end of 2012, Icon Leasing Fund 12 lost 53% of its value. For the same time period, Icon Leasing Fund 11 suffered an 84% decline in value. Furthermore, it has been alleged that the Icon Funds did not properly disclose that the distributions included return of original principal and that the fees were extraordinarily high.

FINRA Debates Rule Allowing Matters to Be Referred to Enforcement During Arbitration Cases

February 17, 2014 | by Staff Attorney

A recent InvestmentNews article highlighted a proposed rule change that the Financial Industry Regulatory Authority (FINRA) has proposed to the Securities and Exchange Commission (SEC) that would allow arbitrators to direct cases to FINRA enforcement during the pendency of the case. FINRA enforcement is responsible disciplining brokers and brokerage firms for securities misconduct and fraud. FINRA has the authority to suspend, sanction, fine, or bar individuals and companies from involvement in the securities industry based upon the findings of its investigation.

Under the current rules, arbitrators must wait until the case concludes before submitting a report of concerns to FINRA. But FINRA believes that making arbitrators wait until the end of the arbitration could delay the regulator’s ability to take action against a parties and to collect evidence.

I believe there are pluses and minuses to allowing mid-litigation referral of customer claims to FINRA. On the benefit side, FINRA would receive information faster and be able to protect more investors. Although arbitrations are routinely completed within one year to a year and half after filing, a delay in submitting evidence of misconduct allows wrongful actors to continue to hurt investors. In addition, sometimes counsel representing brokerage firms, on rare occasions, abuse the FINRA process in order to satisfy a demanding client. However, brokerage firms, even in litigation, must conduct themselves fairly under the FINRA rules. The power of an arbitrator to refer instances of repeated or significant abuse of the FINRA process will make firms think twice before simply ignoring panel orders.

SEC Staff Issues Risk Alert on Alternative Investments Due Diligence

February 15, 2014 | by Staff Attorney

The Office of Compliance Inspections and Examinations (OCIE), in coordination with other Securities and Exchange Commission (SEC) staff released guidance and observations concerning investment advisers due diligence process for selecting alternative investments. The OCIE has observed that investment advisers are increasingly recommending alternative investments to their clients in lieu of other investment options. Investment advisers are fiduciaries and must act in their clients’ best interests. Since an investment adviser exercises discretion to purchase alternative investments on behalf of clients the adviser must determine whether the investments: (i) meet the clients’ investment objectives; and (ii) are consistent with the investment principles and strategies that were disclosed to the client by the manager to the adviser.

Alternative investments include a variety of non-traditional investments including hedge funds, private equity, venture capital, real estate, and funds of private funds. The commonality amongst alternative investments is that they employ unique investment strategies and assets that are not necessarily correlated to traditional stock and bond indexes.

The OCIE staff examined the due diligence process processes of advisers to pension plans and funds of private funds in order to evaluate how advisers performed due diligence, identify, disclose, and mitigate conflicts of interest, and evaluate complex investment strategies and fund structures. The OCIE noted indicators that led advisers to conduct additional due diligence analysis, request the manager to make appropriate changes, or to reject the manager or the alternative investment.

FINRA fines Brown Brothers Harriman & Co. (BBH) $8 Million for Substantial Anti-Money Laundering Compliance Failures

February 13, 2014 | by Staff Attorney

FINRA fines Brown Brothers Harriman & Co. (BBH) $8 Million for substantial anti-money laundering compliance failures and suspended the firm’s global anti-money laundering compliance officer, Harold Crawford, for 30 days. The New York-based investment firm did not have an adequate program in place to look for and detect suspicious penny stock transactions, according the Financial Industrial Regulatory Authority (FINRA). The firm also failed to investigate suspicious activity involving penny stocks after becoming aware of the problem. The transaction in question generated at least $850 million in proceeds for Brown Brothers customers from January 1, 2009 to June 30, 2013.

Low-priced securities, such as penny stocks pose heightened risks because they may be manipulated by fraudsters. BBH executed transactions and delivered securities involving at least six billion shares of penny stocks, according to FINRA. BBH executed these transactions despite the fact that it was unable to obtain essential information to verify that the stocks were free trading. According to FINRA, in many instances, BBH lacked such basic information, such as the identity of the stock’s true owner. The absence of these details should trigger a review of the transactions by a firm’s anti-money laundering team.

Brad Bennett, FINRA Executive Vice President, Enforcement, said: “The sanction in this case reflects the gravity of Brown Brothers Harriman’s compliance failure. The firm opened its doors to undisclosed sellers of penny stocks from secrecy havens without regard of who was behind those transactions, or whether the stock was properly registered or exempt from registration. This case is a reminder to firms of what can happen if they choose to engage in the penny stock liquidation business when they lack the ability to manage the risks involved.”

Stifel, Nicolaus & Company and Century Securities Associates Fined by Regulator Over Leveraged ETFs

February 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered brokerage firms Stifel, Nicolaus & Company, Incorporated (Stifel Nicolaus) and Century Securities Associates, Inc. (Century Securities) to pay combined fines of $550,000 and nearly $475,000 in restitution to 65 customers concerning allegations of the improper sale of leveraged and inverse exchange-traded funds (ETFs). Stifel Nicolaus and Century Securities are affiliates and are both owned by Stifel Financial Corporation.

A leveraged ETF employs debt or leverage in order to increase and magnify the returns of the underlying securities. Leveraged ETFs are generally available for most investment indexes such as the S&P 500, the Dow Jones, commodities, or foreign exchanges. Many leveraged ETFs carry leverage as high as 300% leverage and will typically return 3% if the underlying index returns 1%. Leveraged ETFs can also be designed to return the inverse or opposite of the benchmark.

Leveraged ETFs are generally used and are only appropriate for short term trading. The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period. Thus, even if an index is relatively flat over a period of time, a leveraged ETF may still decline in value during the same period.

Thomas Oakes of Royal Securities Sanctioned Over Allegations of Unsuitable Investments

February 11, 2014 | by Staff Attorney

Broker Thomas C. Oakes (Oakes) has been suspended and fined by the Financial Industry Regulatory Authority (FINRA) concerning allegations from 2005 through May 2008, Oakes had engaged in unsuitable short term trading of low priced and/or speculative securities in the accounts of at least three customers causing substantial losses.

Oakes has been in the securities industry as a member of the FINRA since 1988. Since November 2003, Oakes has been a registered representative of Royal Securities Company (Royal). Oakes’ BrokerCheck disclosures reveal that at least 9 customer complaints have been filed against the broker. The customer complaints allege a variety of securities misconduct including securities fraud, unauthorized trading, unsuitable investments, churning, and breach of fiduciary duties.

According to FINRA, in 2005 or 2006, three customers opened new accounts at Royal with Oakes as their registered representative. Each of the customers New Account Form identified a primary investment objective of “Growth.” Royal defined a “Growth” investment objective as the goal of generating long-term capital growth through high quality equity investments consisting of large cap funds and a balanced portfolio of investment grade growth stocks with smaller positions in high grade corporate bonds. Growth investors should also be willing to assume more market risks than balance/conservative growth in return for yields that are expected to meet or slightly exceed the S&P 500 stock market index over the long run.

Former LPL Financial Broker Donald Dahn Sanctioned Over Private Loans to Customers

February 10, 2014 | by Staff Attorney

Broker Donald R. Dahn (Dahn) has been barred by the Financial Industry Regulatory Authority (FINRA) concerning allegations that he privately borrowed money from at least two customers, an act constituting securities fraud, while being a registered representative of Mutual Service Corporation (MSC) and LPL Financial LLC (LPL).

Dahn entered the securities industry in September 1991, as an Investment Company and Variable Contracts Products Representative (Series 6) license holder. A Series 6 license allows a broker to recommend only a limited number of securities including variable annuities and open-end mutual funds. From 1998 through 2009, Dahn was associated with MSC. In 2009, MSC was acquired by LPL and Dahn became registered with LPL until his termination in April 2013. On April 29, 2013, LPL submitted a Form U5 for Dahn.

Dahn has a long history of customer disputes and FINRA regulatory actions. On December 5, 2012, FINRA found that Dahn violated FINRA rules by borrowing a total of $240,000 from three customers while he was employed with MSC and failing to obtain approval from his member firm for the loans. At that time Dahn was suspended from the industry for six months. In addition, there have been six customer disputes filed against Dahn. The majority of the complaints involve allegations that clients loaned Dahn funds to keep his business operating. At least one complaint alleges that Dahn made unsuitable variable annuity switches.

Michael DeRosa Barred for Failing to Respond to Allegations of Involvement with Success Trade Promissory Notes

February 7, 2014 | by Staff Attorney

Financial Advisor Michael DeRosa (DeRosa) has been barred by the Financial Industry Regulatory Authority (FINRA) concerning allegations that he refused to provide testimony to the regulator concerning his involvement in Success Trade Securities, Inc.’s (Success Trade) sale of promissory notes (STI Notes).

As we previously reported, FINRA filed a complaint against Success Trade and its CEO and President Fuad Ahmed (Ahmed) accusing them of improperly selling $18 million worth promissory notes. The promissory notes were issued to 58 investors and were sold primarily to NFL or NBA sports athletes.

FINRA alleged that the STI Notes were part of ponzi scheme to raise capital and funds for Success Trade’s operations while purportedly offering investors 12-26% returns. FINRA alleged that investors were not made aware of the risks of investing in the STI Notes. Success Trade was financially insolvent and could only meet its ongoing expenses by selling more STI Notes and by continuing the scheme. The viability of the company was a crucial risks that need to be disclosed to investors. Success Trade and Ahmed also failed to register the STI Notes under Regulation D as required.

UBS Peurto Rico Bond Funds Vulnerable as S&P Downgrades Puerto Rico Debt to “Junk”

February 4, 2014 | by Staff Attorney

According to Bloomberg News Puerto Rico’s general obligation bonds were cut one step to speculative grade, otherwise known as “junk” status, by Standard & Poor’s citing reduced access to liquidity. The territory has $16.2 billion of debt as of June 30, according to the Government Development Bank for Puerto Rico. Investors nationwide are expected to be effected as about 70 percent of U.S. municipal mutual funds own Puerto Rico securities according to Morningstar Inc. However, investors in Puerto Rico bond funds that were heavily invested in Puerto Rico debt are expected to be hit the hardest.

As we previously reported, a credit rating agency downgrade followed by a default or restructuring of Puerto Rico’s debt seems inevitable. How did Puerto Rico end up here? Unfortunately, its the same familiar Wall Street drama that is now perfectly mirroring the mortgage securities crisis experienced only six years ago. Wall Street firms sell Puerto Rico bonds as safe, tax-free, high-yielding investments and politicians and policy makers take no interest in stopping the underwriting, issuance, and debt selling machine. Moreover, firms know that by packaging unloved and unwanted municipal bonds and other assets into mutual funds the firms can sell speculative assets to retirees and other investors seeking income as conservative and diversified bond funds.

Firms such UBS, sold proprietary bond funds to customer such as the Puerto Rico Fixed Income Fund and the Puerto Rico Investors Tax-Free Fund series that invested up to 140% of their assets in Puerto Rico debt through the employment of leverage. While UBS recommends that Puerto Rico residents should, in some cases, invest up to 100%+ of their assets in the Funds, UBS secretly recommends that UBS Puerto Rico, the firm’s island subsidiary, liquidate its own UBS bond fund holdings due to UBS the overconcentration risk. Thus, according to complaints filed against the firm, UBS’ recommendation to clients to invest in the funds was a conflict of interests with the firm’s own internal analysis that found the funds to be too risky.