Securities Lawyers Blog

Broker Investigation: Meyers Associates Advisor Neal Scott

July 26, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority’s (FINRA) against broker Neal Scott (Scott). According to BrokerCheck records there are at least four customer complaint, one regulatory, and seven judgments or liens that have been filed against Scott. The most recent customer complaint against Scott alleges a number of securities law violations including breach of fiduciary duty and suitability among other claims. The claim is currently pending.

The most recent judgement or lien disclosure was filed in January 2009 and concerns a tax lien for $47,103. Tax liens and judgements are often a sign that the broker cannot manage their own personal finances and may be tempted to recommend high commission products or strategies to clients in order to satisfy debts.

In addition, the Virginia Securities Department alleged that Scott failed to complete his registration process in time and denied his registration in the state.

Investor Recovery Options for Merrill Lynch Strategic Return Notes

July 24, 2016 | by Staff Attorney

According to the Wall Street Journal, The Securities and Exchange Commission (SEC) is preparing an enforcement action against brokerage firm Merrill Lynch over an investment that collapsed losing investors as much as 95% of their initial investment. According to the financial advisors at the firm, the advertising and marketing for the product was called “borderline crooked.”

The SEC action involves a product called Strategic Return Notes that Merrill began selling in 2010 and raised about $150 million for. Market-Linked Notes to generate are structured product investments that create returns through the use of embedded derivatives designed to track the performance of a security, index, commodity or currency. Brokerage firms like Merrill Lynch have perverse incentives to market these proprietary products over safer and cheaper alternative investments. Structured Products like Market-Linked Notes often have substantial fees and/or commissions paid to affiliated companies for banking, underwriting, asset management, and ultimately broker commission.

The Strategic Return Notes in question are linked to a Merrill Lynch index tracking the volatility of the S&P 500 stock index. According to the Wall Street Journal, the five-year notes lost value rapidly as market volatility fell and the cost of buying the options that allow the note to track the index rose sharply. Because of the substantial costs of the options, volatility based investments tend to lose money over the long term no matter what the performance of the underlining index is. According to the article, roll costs for the options averaged an astounding 12% of the principal per quarter in the first half of 2011, before falling to less than 4% per quarter in the second half of the year. However, clients and brokers alike claim they were never told the costs could grow so large.

Gana LLP Files Complaint Against Newbridge Securities Concerning Broker Dennis Hayes’ USA Gold Sales

July 23, 2016 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a statement of claim with FINRA on behalf of their 60 year old client concerning inappropriate investments in private placements, non-traded real estate investment trusts (Non-Traded REITs), low priced securities, and private securities transactions. The complaint was filed against Newbridge Securities Corporation (Newbridge) and alleges that the firm’s broker Dennis Hayes (Hayes) recommended these unsuitable transactions. In total the Claimant alleges approximately $750,000 in damages.

According to the Statement of Claim, the Claimant divorced her husband in 2012 leaving her with approximately $1,500,000 in assets of which $500,000 was non-qualified money and about $1 million was qualified IRA funds. Claimant explained to Hayes that her goals were to protect her assets while providing her with returns to meet her immediate income needs. Shortly after transferring the funds, Hayes solicited the Claimant to invest in a gold fund called USA Gold. According to the complaint, Hayes recommended $300,000 in USA Gold through a self-directed IRA account.

The complaint alleges that after a diligent search there appears to be no Regulation D filing for a private placement for USA Gold and no evidence of any registration of the offering. USA Gold appears to be an unregistered securities offering and most likely an investment scam. Even more shocking is that Newbridge has failed to properly investigate and terminate Hayes for his involvement in the unregistered offering thereby continuing to place investors at risk. According to the Statement of Claim, Claimant complained to Gene Robert Abrams (Abrams), Newbridge’s General Counsel and Co-Chief Compliance Officer that Hayes was involved in private securities transactions.

FINRA Bars Broker Thomas Schober Over Variable Annuity Practices

July 23, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating the regulatory complaint filed by The Financial Industry Regulatory Authority (FINRA) against broker Thomas Schober (Schober). The FINRA regulatory action alleges that Schober recommended unsuitable variable annuity exchanges in the accounts of two senior customers ages 84 and 83. According to FINRA, one of the customers held power of attorney for the other who suffered from dementia and both customers were conservative investors with limited financial means who relied on the income from their investments. FINRA found that Schober effected the annuity exchanges to benefit himself at the customers’ expense. The exchanges caused the customers to pay total surrender charges of approximately $154,642 to sell their annuities and then to pay sales charges of approximately $69,000, of which Schober received approximately $65,000 in commissions, and incurred new surrender periods.

FINRA found that Schober never disclosed to them the amount of the surrender charges they would incur to sell their annuities and didn’t explain the sales charges associated with the purchase of the new annuities or that they would be subject to new surrender periods. FINRA found that Schober attempted to conceal the unsuitable annuity exchanges by providing false information concerning the source of funds on the annuity transaction documents.

Variable annuities are complex financial and insurance products. In fact, recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know encouraging investors to ask questions about the variable annuity before investing. Essentially, a variable annuity is a contract with an insurance company under which the insurer agrees to make periodic payments to you. The investor chooses the investments made in the annuity and value of your variable annuity will vary depending on the performance of the investment options chosen. The primary benefits of variable annuities are the death benefit and tax deferment of investment gains.

Broker Investigation: Churning Complaints Against Cory Bataan

June 15, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating customer complaints against broker Cory Bataan (Bataan). There are at least four customer complaints against Bataan and one employment termination for cause. The customer complaints against Bataan allege a number of securities law violations including that the broker engaged in churning, unauthorized trading, unsuitable trades, breach of fiduciary duty, and misrepresentations among other claims. In addition, in August 2012, Empire Asset Management terminated Bataan alleging that their were violations of the firms policies and procedures.

When brokers engage in excessive trading, sometimes referred to as churning, the broker will typical trade in and out of securities, sometimes even the same stock, many times over a short period of time. Often times the account will completely “turnover” every month with different securities. This type of investment trading activity in the client’s account serves no reasonable purpose for the investor and is engaged in only to profit the broker through the generation of commissions created by the trades. Churning is considered a species of securities fraud. The elements of the claim are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.

Bataan is currently registered with, Aegis Capital Corp. (Aegis), a brokerage firm that has been identified as employing troublesome brokers. According to a recent study conducted by the Securities Litigation and Consulting Group entitled “How Widespread and Predictable is Stock Broker Misconduct?” the incidents of investor harm at Aegis is extraordinarily high. The study ranked Aegis as the worst brokerage firm finding that brokers at the firm had over a 35% misconduct rate. The study stated that investors should stay away from Aegis “Given their coworkers’ disclosure record as of 2014, 83.7% of the brokers at these six firms would be in the highest risk quintile as defined in the FINRA study and should be avoided by investors. The BrokerCheck reports for most of the brokers at these six firms should prominently display a skull and crossbones warning.”

Customers File Complaints Against Mitchell Foote Involving REITs and Annuities

June 13, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating a customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against broker Mitchell Foote (Foote). According to BrokerCheck records Foote has been subject to at least four customer complaints. The customer complaints against Foote alleges securities law violations that including unsuitable investments and misrepresentations among other claims. Many of the complaints involve direct participation products (DPPs) and private placements including non-traded real estate investment trusts (REITs), variable annuities, and other potentially other alternative investments.

Our firm has represented many clients in these types of products. All of these investments come with high costs and historically have underperformed even safe benchmarks, like U.S. treasury bonds. For example, products like oil and gas partnerships, REITs, and other alternative investments are only appropriate for a narrow band of investors under certain conditions due to the high costs, illiquidity, and huge redemption charges of the products, if they can be redeemed. However, due to the high commissions brokers earn on these products they sell them to investors who cannot profit from them. Further, investor often fail to understand that they have lost money until many years after agreeing to the investment. In sum, for all of their costs and risks, investors in these programs are in no way additionally compensated for the loss of liquidity, risks, or cost.

Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client. In order to make a suitable recommendation the broker must meet certain requirements. First, there must be reasonable basis for the recommendation the product or security based upon the broker’s investigation and due diligence into the investment’s properties including its benefits, risks, tax consequences, and other relevant factors. Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.

FINRA Bars Brian Smit Over Private Securities Transactions

June 13, 2016 | by Staff Attorney

The investment lawyers of Gana Weinstein LLP are investigating the regulatory action brought by the Financial Industry Regulatory Authority (FINRA) against Brian Smit (Smit) formerly working out of the Sioux Falls, South Dakota office of LPL Financial LLC (LPL). LPL terminated Smit in August 2015 stating that the broker engaged in unapproved investments. Thereafter, in March 2016, FINRA barred Smit stating that Smit consented to the sanction and to the entry of findings that he refused to appear for on-the-record testimony requested by FINRA related to the alleged participation in unapproved private securities transaction.

The providing of loans or selling of promissory notes and other investments outside of a brokerage firm constitutes impermissible private securities transactions – a practice known in the industry as “selling away”. At this time it unclear the nature and scope of Smit’s outside business activities and private securities transactions. However, according to Smit’s public records his outside business activities include Pinnacle Wealth Management and Smit Holdings, LLC – a rental real estate business. Often times, brokers sell promissory notes and other investments through side businesses as accountants, lawyers, real estate agents, or insurance agents to clients of those side practices.

Smit entered the securities industry in 2010. From Aprill 2010 until August 2015, Smit was associated with LPL.

Gana LLP Wins Arbitration Award On Behalf of Client Against Centaurus Financial

June 11, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are pleased to announce an award on behalf of their client against Centaurus Financial, Inc. (Centaurus) in the amount of $150,000 plus costs. The complaint was filed The Financial Industry Regulatory Authority (FINRA) and involved multiple brokerage firms that hired advisor Ahmad Hashemian.

The Claimant alleged that Hashemian invested over $2,000,000 in exclusively high cost products and 50% of those investments were in alternative investments such as private placements, oil and gas partnerships, and non-traded real estate investment trusts (REITs). The other 50% was invested in variable and equity-indexed annuities. All of these investments come with high costs and historically have underperformed even safe benchmarks, like U.S. treasury bonds. Brokers, enticed by the high commissions, often times misled their clients into investing in these products.

In this case the panel found that “the investments Hashemian recommended while at Centaurus were not suitable and in Margaret Polito’s best interests. Margaret Polito also provided sufficient evidence to meet her burden of proof to support her allegations in her Statement of Claim that the actions by Hashemian, for which Centaurus is responsible, constitute fraudulent and negligently made material misrepresentations and omitted material information in the sale of the investments to Margaret Polito.” Award Can Be Found Here.

Invest in High Risk Contingent Convertible (CoCo) Bonds?

June 1, 2016 | by Staff Attorney

In a recent Wall Street Journal Article, it was reported that UBS Group AG sold $1.5 billion of contingent convertible (CoCo) bonds. According to the article, UBS received about $8 billion of orders for the sale. These bonds will pay an interest rate of 6.875% and last summer UBS sold $1.6 billion of CoCos at the same rate. The UBS deal was the first CoCo sale since mid-January due to price drops in February due to worries that Deutsche Bank AG might have missed an interest payment on one of its CoCo bonds.

What exactly are CoCo’s and why should investors be concerned. CoCos have been a growing type of debt issued by mostly European issuers. European lenders have sold around 100 billion in CoCos since 2012.

CoCos bear many of the same traits as hybrid preferred securities that were popular right up to the financial crisis. Like hybrid preferred stock, CoCo’s act as hybrid debt/equity investments. When times are good they behave like debt providing no growth to investors and only interest payments. When times get rough these investments behave like equity because investors are unlikely to see returns in the event of bankruptcy. As a result these investments tend to crash in lock step with a company’s equity.

FINRA Bars Christopher Tolmacs Over Borrowing Client Funds

May 31, 2016 | by Staff Attorney

The investment lawyers of Gana Weinstein LLP are investigating the regulatory action brought by the Financial Industry Regulatory Authority (FINRA) against Christopher Tolmacs (Tolmacs) working out of Portage, Michigan alleging that the broker borrowed client funds. The providing of loans or selling of promissory notes and other investments outside of a brokerage firm constitutes impermissible private securities transactions – a practice known in the industry as “selling away”. According to the FINRA regulatory action (FINRA No. 20160489663-01) Tolmacs consented sanctions in the form of a permanent bar because he failed to provide documents and information requested by FINRA during the course their investigation into allegations that he borrowed funds from multiple customers.

At this time it unclear the nature and scope of Tolmacs’ outside business activities and private securities transactions. However, according to Tolmacs’ public records his outside business activities includes Harbinger Financial Group, Inc – listed as an insurance agency, and Harbinger Asset Management, Inc which is listed as a registered investment advisory firm. Often times, brokers sell promissory notes and other investments through side businesses as accountants, lawyers, or insurance agents to clients of those side practices.

In addition, Tolmacs has been subject to significant tax liens totaling over $225,000 in late 2015. Tax liens and judgements can provide an economic incentive to brokers to violate the securities laws to garner higher commissions and income.