Securities Lawyers Blog

Private Placements – FINRA Warns Evaluate the Risks Before Investing

September 21, 2013 | by Staff Attorney

Every year, companies across the United States raise hundreds of billions of dollars selling securities in non-public offerings that are exempt from registration under the federal securities laws. These offerings, known as private placements, can be a tremendous source of capital for both small and large business. However, according to FINRA, investors should be aware that private placements can be illiquid and are very risky with the potential to lose most or all of your investment.

Fraud and Sales Practices Abuses

For over three years, FINRA has been investigating private placements and has uncovered fraud and sales practice abuses related to private placements that resulted in sanctions of individual brokers and financial institutions for providing investors inaccurate information relating to private placements. In addition, some materials omitted information necessary for investors to make informed investment decisions. Finally some firms failed to conduct adequate investigations into whether the private placements were suitable for customers.

Massachusetts Securities Regulator Subpoenaed 15 Brokerage Firms Over Products Sold to Senior Investors

September 21, 2013 | by Staff Attorney

In July 2013, William Galvin, the Massachusetts (MA) Secretary of the Commonwealth, began an investigation into “the marketing of complicated financial investments to older people.” In the process of the investigation, Galvin subpoenaed fifteen different brokerage firms in order to obtain information on investments that were sold to senior citizens in Massachusetts. The investigation sought to uncover the way the firms have sold “high-risk, esoteric products to seniors” as well as information on the firms’ compliance, supervision and training.

The firms that were included in the investigation were Morgan Stanley, LPL Financial, Merrill Lynch, UBS AG, Bank of America Corp., Fidelity Investments, Wells Fargo and Co., Charles Schwab Corp., and TD Ameritrade along with other firms. Galvin has stated that the investigation was not an indication of any wrongdoing on behalf of the brokerage firms. The purpose of the investigation was to get more information on brokers’ business practices in offering products to seniors and unsophisticated investors. Regulators have shown concern about “opaque products” advertised to unsophisticated investors looking for higher returns than what most interest rates have to offer. Brokers often pitch these types of products because they will usually get a higher commission rate than by selling other lower risk products such as mutual funds.

This recent investigation is a result of past inappropriate Real Estate Investment Trust (REIT) sales to seniors. Last year, the SEC probed the probe improper sale of REITs to seniors that led to five broker-dealers settling. The settlement for the improper REIT sales included $975,000 in fines and $8.6 million in restitution to the customers.

SEC Approves Advertising for Private Placements

September 20, 2013 | by Staff Attorney

In a 4-1 vote, the Securities Exchange Commission (SEC) approved a rule that would now allow broker-dealers, hedge funds, and private equity firms to advertise to the general public for private placement securities offerings. Firms are still limited to sales to accredited investors. Accredited investors are defined as those who have a net worth of $1 million, excluding the value of the investors primary residence, or earning at least $200,000 annually. According to Investment News, there are 9 million homes in the United States that meet this standard.

The SEC’s new rule will require that private-placement issuers take reasonable and appropriate steps to assess an investor’s qualifications and ability to meet the accredited investor standard. According to the SEC, the broker may have to independently verify that the client meets the appropriate standards.

The new rule will give funds the ability to publicly solicit private investments. The SEC’s rule is an implementation of the Jumpstart Our Business Startups Act enacted by Congress in April 2012. Will the law help entrepreneurs raise capital or will investors lose another level of protection? Only time will tell.

SEC Charged New York Based Hedge Fund Adviser Shadron Stastney, a Partner at Vicis Capital, LLC With Breaching Fiduciary Duty By Participating in Conflicted Principal Transaction

September 19, 2013 | by Staff Attorney

September 18, 2013 The Securities and Exchange Commission (SEC) charged Shadron Stastney, a partner at a New York based hedge fund, Vicis Capital, LLC with breaching his fiduciary duties by engaging in undisclosed principal transactions in which he had a personal financial interest.

A principal transaction occurs when a registered investment adviser (RIA) acts as a principal for its own account and knowingly and intentionally buys securities from, or sells securities to a client. sells securities to, or buys securities from, a client. A principal transaction may also occur in situations where a controlling owner or an affiliate of the RIA engages in trades with the adviser’s clients. These transactions may lead to abuses, such as price manipulation, and the placement of unwanted securities in clients’ accounts—a practice known as “dumping.”

In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal transactions are potentially very harmful to investors and advisory clients. Principal transactions create the opportunity for RIAs to engage in self-dealing. Principal trading with clients is a clear conflict of interest that must be adequately disclosed to customers.

How to Investigate your Investment Adviser or Broker Before You Invest

September 19, 2013 | by Staff Attorney

Most investors chose there financial advisers based on the broker’s personality. However, that is a mistake. Liking your financial adviser is important, but before you invest your life savings with someone, there are seven steps you should take:

1. Know your investment objectives and try to properly articulate those objectives to your adviser. Are you looking for growth or income producing securities? Is a tax advantage strategy most appropriate for you? What are your retirement goals? These are all questions you must ask yourself before seeking an adviser.

2. Get references. Ask friends and family for the names of brokers that have served them well over the years. After choosing the adviser, ask the adviser to provide additional client references that you can call to get a better sense of the broker and his or her general trading strategy.

FINRA Arbitration Panel Awards Investors $3.1 Million Against Citigroup Due to Failure to Supervise Selling Away Activities

September 18, 2013 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel ruled that Citigroup Inc. (Citigroup) must pay $3.1 million to a Florida couple who alleged that their financial advisor, Scott King (King), solicited them to invest in real estate developments. The case was filed by Dr. Nasirdin Madhany and his wife, Zeenat Madhany, alleging negligent supervision, breach of fiduciary duty, fraud, and breach of contract. The panel’s decision represents an important win for consumers and refutation of common arguments employed by the industry to avoid responsibility for their employee’s wrongful conduct.

The case involved a typical, and all too common, “selling away” scenario. Selling away occurs where a broker sells securities to customers that are not approved by the brokerage firm. Selling away investments represent a substantial risk to the investing public because brokerage firms do not record the transactions on their books and records and do not supervise the activity to ensure that the investment is appropriate for the customer.

Brokerage firms usually defend selling away cases by arguing that they were not aware of the securities transactions and therefore cannot be found liable. Firms also argue that they do not know the broker’s customer because in many cases the investor does not have a brokerage account with the firm. Therefore, the firm argues that it cannot be responsible for investment losses occurring to investors they do not know and away from the firm.

Adam Gana is Quoted in the Wall Street Journal Reuters After having Received $2.8 Million Award

September 16, 2013 | by Staff Attorney

The Wall Street Journal and Reuters quoted managing partner, Adam J. Gana after he received a $2.8 Million award in Jacobs v. Van Zandt, FINRA Case No. 12-00156. Seven claimants alleged that Robert Van Zandt orchestrated a $35 million ponzi scheme leading to Mr. Van Zandt’s criminal indictment by the New York Attorney General. Mr. Gana was pleased with the victory and the outcome for the claimants. “These are hard working people from the Bronx who did not deserve to be defrauded by Mr. Van Zandt. This type of fraud is rampant in the securities industry and it is up to the regulators and the attorneys to weed it out and bring these people to justice.”

Centaurus Financial, Inc Broker Ralph Saviano Barred From Securities Industry

September 15, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred Ralph Saviano (Saviano) from the securities industry after the broker failed to respond to FINRA’s requests for information and an interview concerning unreported tax liens, a civil judgment, and a customer complaint involving the misuse of funds.

During a routine investigation of Centaurus, FINRA discovered information regarding certain undisclosed liens, judgments, and possible customer loans. Thereafter, in June 2012, Centaurus filed a regulatory tip disclosing that a customer had provided Saviano with a cashier’s check for approximately $66,000 that was made payable to Saviano. Saviano’s transactions with the customer concerned a possible misuse or conversion of funds.

Saviano has been associated with several brokerage firms in the past decade. Until 2004 Saviano was a registered representative of Royal Alliance Associates, Inc. From April 2004 until December 2006, Saviano was associated with USAllianz Securities, Inc. Thereafter, from December 2006 until July 2007, Saviano was a registered representative of Questar Capital Corporation. Finally, Saviano was registered with Centaurus Financial, Inc. (Centaurus) until his termination in June 2012. According to Saviano’s FINRA disclosure records he is also the president of Saviano Financial Group.

UBS Preliminarlily Settles Lehman Principal Prtoected Note Cases – Should You Hold Out?

September 14, 2013 | by Staff Attorney

On August 8, 2013, UBS agreed to pay $120,000,000 to settle claims related to the Lehman Principal Protected Note cases. According to Reuters, this is UBS’ second settlement in less than three weeks.

According to counsel, the $120,00,000 settlement represents a recovery of 13.4% of the total face value of the structured notes. The parties have stipulated to certify the case for the purpose of settlement. If the class action is approved it will resolve over $898 million in claims against UBS for the Lehman Securities sold by UBS from March 2007 through September 15, 2008 when Lehman filed for bankruptcy in the Southern District of New York.

The question for investors is whether they should take the settlement after approval by the court or reject the settlement and bring a claim individually against UBS. In an individual arbitration, the chances of getting more than a 13.4% recovery is fairly substantial. Many of the UBS Lehman Principal Protected Note cases that went to arbitration since 2009 have resulted in large awards for investors and many have settled before hearing.

David Mura Accused of Selling Unregistered Securities and Churning

September 9, 2013 | by Staff Attorney

David Mura was recently barred by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) over allegations concerning the sale of unregistered securities away from his associated brokerage firm.

From September 2002 through April 2011, Mura was a registered representative and branch office manager with J.P. Turner & Co., LLC (J.P. Turner), a broker-dealer headquartered in Atlanta, Georgia. Thereafter, Mura was associated with Aegis Capital Corp. from April 2011 until October 2012. According to the SEC, from mid-2007 through 2012, Mura led a team of individuals that managed several limited liability companies (LLCs) including Charge-On Demand LLC (COD), Innovations Group Enterprises LLC (IGE), and Stucco LLC and directed and participated an effort to solicit investors in the sale of unregistered promissory notes issued by the LLCs (LLC Promissory Notes).

According to the SEC’s order, Rising Storm Technologies LLC (“Rising Storm”) was created 2006 to pursue various business ideas. Mura invested in Rising Storm in 2008 and caused the LLCs to take over Rising Storm’s business. Edward Tackaberry (Tackaberry), a resident of Fairport, New York was allegedly employed by Mura as a product salesman. Tackaberry had been previously barred from associating with any broker or dealer based on a September 2007 case brought by the SEC accusing Tackaberry of securities fraud.