breach of fiduciary duty

SEC Cracks Down on Wrap Accounts to Prevent “Reverse Churning”

October 6, 2014 | by Staff Attorney

A recent InvestmentNews article explored The Securities and Exchange Commission’s (SEC) attempts to prevent conflicts of interest at registered investment advisers, a breach of their fiduciary duties, by focusing on potential misuse of popular flat-fee wrap accounts. The use of these accounts have given rise to claims of “reverse churning.” As we previously reported, “churning” is excessive trading activity or in a brokerage account. Churning trading activity has no utility for the investor and is conducted solely to generate commissions for the broker. By contrast “reverse churning” is the practice of placing investors in advisory accounts or wrap programs that pay a fixed fee, such as 1-2% annually, but generate little or no activity to justify that fee. Such programs constitute a form of commission and fee “double-dipping” in order to collect additional fees.

The SEC is looking into the practice by which clients pay an annual or quarterly fee for wrap products that manage a portfolio of investments. Investment advisors who place clients in such programs already charge fees based on assets under management (AUM) and the money management charges for wrap products are in addition to the AUM fee. According to InvestmentNews, the assets under these arrangements totaled $3.5 trillion in 2013, a 25% increase from 2012. Included in these numbers include separately managed accounts, mutual fund advisory programs, exchange-traded-fund (ETF) advisory programs, unified managed accounts, and two types of brokerage-based managed accounts.

Reverse churning can occur under these arrangements if there’s too little trading in the accounts in order to justify the high fees. In August, the SEC’s scrutiny of these products came to the forefront with the agency’s victory in a court case that revolved in part around an adviser’s improperly placing his clients into wrap programs. A jury decided in the SEC’s favor against the advisory firm Benjamin Lee Grant that the SEC argued improperly induced clients to follow him when he left the broker-dealer Wedbush Morgan Securities to his advisory firm, Sage Advisory Group.

Advisor Raymond Clark Suspended Over Allegations of Securities Related Misconduct

September 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Raymond Clark (Clark) and imposed findings: (1) suspending the broker for three months and fined $6,000 for using his personal email account to communicate with a customer; (2) suspended for four months and fined $10,000 for making false statements to his firm; and (3) suspended for two months and fined $4,000 for failing to report a customer complaint to his firm. FINRA imposed the suspensions to run consecutively and suspended Clark for an additional three months in all supervisory capacities and ordered him to requalify by examination as a securities representative and securities principal.

According to Clark’s BrokerCheck, the broker was registered with Paulson Investment Company, Inc. from December 2008 through May 2009. From June 2007 through January 2009, Clark was registered with J.P. Turner & Company, L.L.C. From May 2009 until August 2010, Clark was registered with First Midwest Securities, Inc. Finally, from August 2010, through August 2014, Clark was registered with Dynasty Capital Partners, Inc. (Dynasty Capital). Clark’s background check also reveals two regulatory complaints and at least nine customer complaints. Only a relatively small percentage of brokers have any complaints on their records and fewer still have as many as Clark.

The complaints against Clark include claims of unauthorized trading, inappropriate use of margin, securities fraud, breach of fiduciary duty, unsuitable investments, churning, and misrepresentations.

Gana LLP Files Claim Against JHS Capital Advisors Concerning Broker Enver Alijaj’s Activities

July 7, 2014 | by Staff Attorney

On June 27, 2014, Gana Weinstein LLP filed a statement of claim against JHS Capital Advisors, LLC, formerly known as Pointe Capital Inc, on behalf of an Arkansas couple. The claims stem from the misconduct of Enver R. “Joe” Alijaj, a former Pointe Capital financial advisor who has worked at several different firms and has a record laden with customer complaints and FINRA violations. The statement of claim brought by Gana Weinstein LLP on Claimants’ behalf alleges (1) unsuitable recommendations, (2) failure to supervise, (3) breach of fiduciary duty, (4) fraudulent misrepresentation, and (5) breach of contract.

Around July 2008, Claimants, a couple from Arkansas nearing retirement, received a cold call from Mr. Alijaj—a broker with Respondent JHS. (A cold call is the solicitation of potential customers who were not anticipating such an interaction. Cold calling is a technique whereby a salesperson contacts individuals who have not previously expressed an interest in the products or services that are being offered). Mr. Alijaj aggressively pursued the Claimants’ business, promising them that he would preserve their retirement capital while providing them with increased returns.

Mr. Alijaj allegedly persuaded Claimants to give him approximately $250,000, which they believed was being safely and practically invested to accommodate their needs. Instead, Mr. Alijaj put all of Claimants’ funds into just three extremely thinly traded and highly volatile stocks. The three stocks were A-Power Energy Generation Systems Ltd. (“APWR”), Silicon Motion Technology Corp (“SIMO”), and Yingli Green Energy Holdings Co. (“YGE”). By January 2009, only five months after Mr. Alijaj made the purchases, APWR, SIMO, and YGE were each down 81%, 66%, and 59% respectively. At no point during this five-month freefall did Mr. Alijaj adjust the Claimants’ accounts or even communicate to them an explanation for the price depreciation or potential remedial action.

Gana LLP Seeks Relief for Victim of Stanford Ponzi Scheme Against Clearing Broker, Pershing, LLC

March 19, 2014 | by Staff Attorney

Over the last several years, we have seen the collapse of frauds and the capture of fraudsters, who have perpetuated a mind-numbing blow to the market and its participants. When we talk about Ponzi Schemes, the first name that springs to mind is, of course, Bernard Madoff. However, two years later authorities honed in on R. Allen Stanford (Stanford) and his fraudulent empire, which may have more far-reaching consequences than people think.

While the ponzi scheme developed and operated by Stanford fleeced investors of “only” eight billion dollars, it was perhaps far more damaging than the Madoff scheme. Why? Because the Stanford case pertains to everybody—not just to Stanford investors, not just the government, and not just the upper echelon of wealthy individuals. The Stanford scheme exploited one of the oldest, safest, and most universally understood financial instruments on the market—the Certificate of Deposit (CDs).

The ultimate reality of the Stanford Financial Group was that it was a Ponzi scheme. Essentially, Stanford and his co-conspirators used the Stanford Financial Group and the promise of high-return CD’s to lure investor money into different Stanford companies, where the funds were then pooled together and used for undisclosed and impermissible purposes. Federal authorities ultimately discovered Stanford’s multi-billion dollar scheme, putting an end to Stanford Financial Group and charging Stanford, civilly and criminally, with multiple counts of fraud. In March 2012, Stanford was convicted on 13 of 14 counts by a federal jury following a six-week trial and approximately three days of deliberation. It was ultimately revealed that the Stanford Financial Group was “selling” CD’s, marketed as low-risk, high return investments, but in reality, were paying distributions with subsequent investments–the prototypical pyramid scheme.

FINRA Arbitration Panel Awards BBVA Securities’ Investors $1.2 Million

November 8, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) Arbitration Panel has awarded damages to investors in the amount of $1.2 million in compensatory damages and cost of fees associated with the arbitration. The alleged claim was asserted against BBVA Securities of Puerto Rico, Inc. (BBVA Securities) and employees of the brokerage firm.

BBVA Securities is a brokerage firm in San Juan, Puerto Rico.

The Claimants asserted breach of fiduciary duty, unsuitable investments, churning and excessive trading, failure to supervise and gross negligence. These causes of actions related to allegedly unsuitable naked option trading strategy combined with the use of margin which caused losses in the investor’s accounts.

Fidelity In Lawsuit Over Its Employees’ 401(k) Plan

October 24, 2013 | by Staff Attorney

On March 19, 2013, a former employee of Fidelity Investments filed suit in the U.S. District Court in Boston, Massachusetts against her former employer alleging self-dealing with respect to the management of the FMR LLC Profit Sharing Plan, Fidelity’s 401(k) plan. In September, twenty-six additional current and former Fidelity employees joined a proposed class action lawsuit against Fidelity. The complaint captioned, Bilewicz v. Fidelity Investments, alleges that the FMR LLC Profit Sharing Plain offered expensive Fidelity mutual funds despite the availability of lower-fee mutual funds within Fidelity’s own investment offerings and the offerings of outside providers.

Fidelity’s 401(k) plan holds approximately $8.5 billion in assets for more than 50,000 of its employees. Fidelity generally makes annual profit sharing contributions to the plan in addition to matching up to 7% of its employees’ salary contributions.

The Employee Retirement Income Security Act (ERISA) creates a fiduciary duty for 401(k) plans, meaning Fidelity, and any other 401(k) plan provider, must act in the best interest of its employee investors. The complaint in this case alleges that Fidelity and some of its officers failed to uphold thier fiduciary duty with respect to selecting, evaluating, monitoring, and removing investment options from the Fidelity 401(k) Plan. The complaint alleges that Fidelity and certain officers selected high-fee Fidelity mutual fund products that financially benefited Fidelity instead of acting in the best interest of their employees.