Securities Lawyers Blog

What is Churning?

September 1, 2013 | by Staff Attorney

“Churning” is essentially investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.

Recently, the National Adjudicatory Council (“NAC”) provided a detailed description of the elements and factors evaluated in determining a claim of churning. The NAC affirmed a Financial Industry Regulatory Authority (FINRA) finding that Alan Jay Davidofsky (Davidofsky) engaged in unauthorized trading, excessive trading, and churning in a customer’s account. The panel barred Davidofsky from the financial industry for the unauthorized trading, imposed a separate bar for the excessive trading and churning, and ordered Davidofsky to pay a fine of $11,741 as disgorgement of the financial benefit earned through the misconduct.

As the NAC ruling explained, NASD Rule 2110 requires brokers to “observe high standards of commercial honor and just and equitable principles of trade.” NASD Rule 2310(a) provides that in recommending securities, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer based upon the customer’s financial situation and needs. Included in this rule is the obligation of “quantitative suitability,” which focuses on whether the number of transactions within a given timeframe is suitable in light of the customer’s financial circumstances and investment objectives.

FINRA Finds George Kardaras and Brian Borakowski Sell Echo Canyon, LLC Away From Their Brokerage Firms

August 30, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently entered a default decision against George Alexander Kardaras (Kardaras) and Brian Matt Borakowski (Borakowski) after having alleged that the two brokers perpetrated a Ponzi scheme. FINRA found that the two solicited at least 12 customers over four years to invest more than $665,000 in total in Echo Canyon promissory notes. The notes bore interest rates between 14 to 56 percent and had quarterly, semiannual, and annual maturity dates.

Kardas’ and Borakowski’s scheme involved soliciting customers to purchase promissory notes in Echo Canyon LLC, a limited liability company in Arizona. Kardas and Borakowski told investors that their investment would be used to purchase used vehicles in U.S. auto auctions and shipped to Russia for re-sale. FINRA determined that Kardaras and Borakowski never intended to use the customer funds as represented. Instead, only two automobiles for EchoCanyon in or around late 2007 or early 2008 were actually purchased.

FINRA found that 95 percent of the funds raised, approximately $634,000 were used by the two brokers in order to pay personal expenses, to cover expenses at their employer firms’ branch office businesses, and to make payments to earlier investors in furtherance of the Ponzi scheme.

John S. Turo Settles With Regulatory Agency Concerning Allegations of Selling Unregistered Securities

August 30, 2013 | by Staff Attorney

John S. Turo (a/k/a James S. Turo) recently reached a settlement with the Financial Industry Regulatory Authority (FINRA) concerning allegations that he sold unregistered, nonexempt securities through general solicitation of the public in violation of Section 5 of the Securities Act of 1933 and in violation of NASD Rule 2110 and FINRA Rule 2010. The FINRA settlement result in a fine of $20,000. Turo became a registered securities representative and principal in 2003. From May 2005 until April 2007, Turo was associated with Innovation Capital, LLC. Starting in 2001, Turo was also associated with GT Securities, Inc. (GT Securities a/k/a Growthink Securities, Inc., Growthink, Inc., GTK Partners). Turo is the Managing Director and Chief Compliance Officer of GT Securities.

From 2008 and through 2010, Growthink issued securities to raise capital for GT Securities. In order to raise the capital, Turo sold private placements investments in Growthink to approximately 46 investors totaling $2,611,124. FINRA alleged that the private placement sales were nonexempt securities offerings that violated Rule 506 of Regulation D requiring registration and prohibits general solicitation of the investment to the public.

In order to sell the Growthink securities, FINRA alleges that Turo held webinars online on topics such as strategic business planning, entrepreneurship, and private equity investing that included general solicitations for investments in Growthink. The webinars were open to the general public. In addition, investors did not need a pre-existing relationship with Growthink or Turo in order to register and participate in the webinars. Thus, the webinars lacked a pre-screening process in order to limit the participants to only those who would qualify as accredited investors under the securities laws governing the sale of private placements. FINRA’s complaint alleged that the foregoing sales practices and the private placement offering itself violated various securities laws.

Gana LLP Investigating Claims Against Success Trade Securities for Sale of Promissory Notes

August 29, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Success Trade Securities, Inc (STS) and its CEO and President Fuad Ahmed (Ahmed) accusing them of improperly selling $18 million worth promissory notes. The promissory notes were issued by STS’ parent company Success Trade, Inc. (STI) to 58 investors. The notes were sold primarily to sports athletes in the NFL or NBA.

The FINRA complaint alleges that the STI notes were part of ponzi scheme to simply raise capital and fund STS’ operations while purportedly offering investors 12-26% returns. The investors were not aware of the risks of investing in the STI notes. For example, STS was at all times financially insolvent and could only meet its ongoing expenses by selling more STI notes and by continuing the scheme. Crucial risks such as the viability of the company are material risks that need to be disclosed to investors. The complaint also alleges that STS and Ahmed failed to register the STI notes as a private placement offering as required under Regulation D.

Problems with the notes began to emerge once the STI notes became due in 2012 through 2013. At that time, STS and Ahmed solicited noteholders to roll over or extend the terms of the STI notes at higher interest rates or offered customers an equity interest in STS. The complaint also alleges that in connection with the rollover and extended note sales the firm failed to disclose to some investors that the firm is financially unable to repay the notes that have become due.

Karl Hahn Ordered by FINRA to Pay An Investor $11 Million

August 28, 2013 | by Staff Attorney

Former Merrill, Lynch Pierce, Fenner & Smith, Inc. (Merrill Lynch), Deutsche Bank Securities (Deutsche Bank), Inc., and Oppenheimer & Co., Inc. (Oppenheimer), broker Karl Edward Hahn (Hahn) was ordered by the Financial Industry Regulatory Authority (FINRA) to pay former clients over $11 million for misconduct in April 2013. Hahn was accused of common law fraud, negligent misrepresentations, and breach of fiduciary duties.

Hahn worked at Merrill Lynch from 2004 until 2008, at Deutsche Bank from 2008 to mid-2009, and at Oppenheimer from 2009 to early 2011. Hahn allegedly recommended various unsuitable investments to customers including covered calls, a premium financed life insurance policy, and $2.3 million fraudulent real estate financing project “involving East Coast” properties. Hahn allegedly recommended the life insurance policy for the the large commissions he stood to earn. Hahn also allegedly pocketed the money that was supposedly going to finance the East Coast properties.

Other claims made against Hahn include churning of investment accounts. Churning is a type of financial fraud where the broker engages in excessive trading in a client’s account for the purpose of generating commission but does not provide the investor with suitable investment strategy.

FINRA Charged Commonwealth Capital Securities Corp. and Kimberly Springsteen-Abbott With Misusing Investor Funds

August 27, 2013 | by Staff Attorney

On May 3, 2013 the Financial Industry Regulatory Authority (FINRA) filed a complaint against Commonwealth Capital Securities Corp. (CCSC) and Kimberly Springsteen-Abbott, owner, chief executive, and head of compliance for CCSC, for misusing investor funds. CCSC employs about 22 registered representatives and sells private placements and direct investments. Since 1993, CCSC marketed and sold 13 different equipment leasing funds raising $240 million for various technology equipment leases. The technology leases were supposed to have durations of 12 to 36 months.

Instead, according to FINRA, from December 2008 until February 2012, Kimberley Springsteen-Abbot misused investor funds to pay for various personal credit card charges and other expenses totaling at least $334,798. Some of those personal expenses include a $1,971 family vacation in 2010, and a $12,414 board of directors meeting in Hawaii in 2010. In total, FINRA alleges that 2,272 credit card charges related to misuse of funds.

In addition, FINRA alleges that during the agency’s examination in 2011, Kimberley Springsteen-Abbot and CCSC falsified and backdated a memo accounting for tickets to Disney World. Kimberley Springsteen-Abbot’s and CCSC’s manipulations of the records caused the brokerage firm’s books and records to be inaccurate.

vFinance Investments Inc. Settles Dispute Concerning Private Placements

August 26, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has settled a dispute with vFinance investments, Inc. (vFinance) concerning several violations of the securities laws including selling private placements in violation of the securities laws, failure to supervise, failure to disclose that the firm had worked with a statutorily disqualified person, and failure to retain and review email communications.

vFinance has been a FINRA member since 1998 has approximately 8 branch offices and employs about 40 registered representatives. The recent settlement is not the first time vFinance has been investigated by regulators. According to CRD records, there have been a total of 16 SEC, state, and FINRA regulatory actions initiated against vFinance in the past ten years.

The recent FINRA allegations concern several alleged violations. First, FINRA alleged that vFinance violated Regulation M. Regulation M is intended to prevent manipulative practices in the course of a securities offering by persons with an interest in the outcome by preventing conduct that could artificially influence a security’s market. In this case, FINRA alleged that vFinance representatives solicited nearly $6 million from investors for the PERF Go-Green Holdings, Inc. (PGOG) private placement. During the offering period, vFinance placed the PGOG’s common stock on the firm’s restricted list in order to avoid any potential conflict. However, despite the PGOG being placed on the firm’s restricted list, 22 customers of two representatives have been accused of selling 255,300 shares of the common stock of PGOG when the issuer was on the firm’s restricted list.

Broker-Dealers Settle with Massachusetts Securities Division Over the Alleged Improper Sales of Non-traded REITs

August 25, 2013 | by Staff Attorney

The Massachusetts Securities Division reached a settlement of $9.6 million with five independent broker dealers concerning allegations that the firms improperly sold non-traded real estate investments trusts (REITs) to hundreds of investors within the state. The firm’s fined include Ameriprise Financial Services Inc., Commonwealth Financial Network, Royal Alliance Associates, Inc. Securities America, Inc., and Lincoln Financial Advisors Corp. The Secretary of the Commonwealth of Massachusetts William Galvin announced that a part of the settlement would be used to distribute $6.1 million to investors as restitution.

A REIT is a security that invests in real estate directly either through properties or mortgages. REITs can be publicly traded on a national exchange or privately held. Private REITs are often referred to as non-traded REITs. Non-traded REITs have become increasingly popular as increased volatility in the stock market has led many investors to look for investment products that offer more stable returns. However, non-traded REITs may not be as safe and stable as advertised. Because non-traded REITs do not trade publicly the REIT itself determines its own asset values and only publishes updated valuations sporadically. Thus, a REITs volatility includes not only real estate market volatility but also management decisions and potentially leverage positions that investors may simply not be informed about.

Massachusetts alleged that the firms engaged in a “pattern of impropriety” selling these “popular but risky investments.” Massachusetts alleged significant and widespread problems with the firms’ compliance policies, practices, and procedures in the sale of non-traded REITs. In addition, Massachusetts alleged that the firms failed to only sell non-traded REITs to qualifying investors. Massachusetts allegations concerning each firm are as follows:

FINRA Files Complaint Against David Mickelson Over Private Placement Sales

August 24, 2013 | by Staff Attorney

David Mickelson has been accused by the Financial Industry Regulatory Authority (FINRA) of improperly selling approximately $8.3 million worth of various private placements to at least 71 customers without informing his brokerage firm (a practice known as “selling away“).

From 2004 through May 2011, Mickelson was associated with NFP Securities, Inc. (NFP). Mickelson’s private placement sales during this time included investments in Micro Pipe Fund I, LLC (Micro Pipe Fund), The Nutmeg Fund/Michael Fund LLLP, The Nutmeg/Fortuna Fund, LP, the Nutmeg/Patriot Fund, LLLP, and Lone Wolf, Inc. FINRA alleged that Mickelson created Micro Pipe Capital Management, LLC, Mickelson Investment Management, LLC, Hannahlu Ventures, LP, and DFM Agency, LLC in order to manage the various private placement offerings.

In order to promote his private placements, Mickelson allegedly marketed Micro Pipe Fund and other investments using misleading websites and advertisements communicated to customers using email accounts not monitored by NFP. Mickelson’s websites included: mickelsoninvestmentmanagement.com/mickinvest.com; astuteasset.com; and mickelsonlife.com. These websites contained securities-related communications including detailed discussions of private investment in public equity (PIPE) funds.

First Allied Securities Has Been Accused of Selling Advanced Equities Securities By Misleading Investors

August 23, 2013 | by Staff Attorney

The brokerage firm Advanced Equities, Inc. (Advanced Equities) specialized in so called late-stage private equity private placements. Advanced Equities had been particularly active in the clean-tech space. Through First Allied Securities, Inc. (First Allied), Advanced Equities private placements including Advanced Equities GreenTech Investments, LLC, AEI 2007 Venture Investments, LLC, AEI 2010 Cleantech Venture, LLC, and AEI Fisker Investments, LLC, were sold to hundreds of investors. Customers have alleged that First Allied misrepresented the Advanced Equities private placements to investors and failed to conduct adequate due diligence concerning the offerings.

In 2007, First Allied was acquired by Advanced Equities Financial Corp. (AEF) and became a sister corporation to Advanced Equities. At the time of the merger, Advanced Equities employed about 80 registered representatives while First Allied employed over 1,000 brokers. Utilizing First Allied’s customer and broker resources, AEI vastly expanded marketing of private placements to First Allied customers.

Sales materials developed for Advanced Equities and presented to investors touted the private placements as “late stage equities” or companies that were 12-36 months from going public through an initial public offering (IPO). The private placements were also represented as providing “higher near-term investment returns than the public equity markets” while possessing “greater short-term liquidity and lower risk profiles.”