Investment Attorney

FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I

October 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Center Street Securities, Inc. (Center Street) concerning allegations that: 1) between approximately March 2012, and August 2013 Center Street, through multiple brokers, made unsuitable recommendations to customers to purchase GWG Renewable Secured Debentures, an illiquid and high-risk private placement investment; 2) Center Street failed to maintain an adequate supervisory system and adequate written supervisory guidelines to reasonably supervise the sales of GWG debentures; 3) between approximately February 2012, and November 2012, Center Street also distributed an inaccurate GWG sales brochure to over 100 customers; and 4) certain Center Street customer account forms contained inaccurate information about customer net worth or other information, and thus the firm failed to maintain accurate books and records.

Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.).

The notes are issued by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.

FINRA Sanctions Financial America Securities and John Rukenbrod Over Supervisory Failures

October 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Financial America Securities, Inc. (Financial America) and John Rukenbrod (Rukenbrod) concerning allegations that between August 2009, and May 2011, the firm, acting through Rukenbrod, failed to adequately supervise the business being conducted out of one of the firm’s branch offices. FINRA found that the firm: 1) failed to conduct any inspection of the branch office; 2) failed to review any incoming or outgoing e-mails of the three registered representatives operating out of the branch; 3) failed to adequately supervise private securities transactions engaged in by two of the registered representatives; 4) failed to ensure that all electronic communications were captured and retained; 5) failed to create and maintain a written report of inspections of the branch as required; and 6) failed to ensure that the firm’s securities business was supervised by a licensed securities principal.

Financial America has been a FINRA firm since 1970, employs 31 registered representatives, has two branches, and engages in a general securities business. Rukenbrod entered the securities industry in 1966 and cofounded Financial America in 1970.

FINRA alleged that two of Financial America’s representatives initialed “PC” and “CM” engaged in a securities business primarily in the sale of private placement offerings and Rukenbrod was the firm’s designated supervisor. In April 2010, FINRA found that Rukenbrod attended an investor presentation at PC and CM’s branch for a private placement offering. Rukenbrod turned down the offering and stated that the firm would not participate in the offering until certain due diligence procedures were agreed upon.

FINRA Fines Feltl & Company $1 Million Conerning the Firm’s Penny Stock Business

October 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Feltl & Company (Feltl) and fined the firm $1,000,000 concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements for broker-dealers who engage in penny stock business. FINRA alleged that Feltl did not provide some customers with Securities and Exchange Commission (SEC) risk disclosure document two days prior to effecting a penny stock transaction in the customers’ accounts. failed to sufficiently supervise penny stock transactions for compliance with applicable rules and regulations, and failed to establish, maintain, and enforce written supervisory procedures for its penny stock business.

Feltl has eight branch offices located in Minnesota and Illinois, and approximately 113 registered representatives and has been a FINRA member since 1975.

The term “penny stock” generally refers to securities that trades below $5 per share, issued by a small company. Penny stocks often trade infrequently making it difficult to sell and price. Due to the size of the issuer, the market cap, the liquidity issues, and other reasons penny stocks are generally considered speculative investments. Consequently, the SEC requires broker-dealers effecting penny stock transactions to make a documented determination that the transactions are suitable for customers and obtain the customers’ written agreement to those transactions.

Top 10 Signs of Investment Fraud

October 20, 2014 | by Staff Attorney

Every year dozens of investors contact our firm seeking to recover losses due to sham or bogus investments. Only a fraction of those defrauded people were fortunate enough to working with a licensed broker who wasn’t being properly supervised by their brokerage firm and have recourse to avenues of redress. The other investors are often left with little to no recourse other than to spend additional sums of money on the off chance for recovery.

Recently, the Securities and Exchange Commission published its “10 Red Flags That an Unregistered Offering May Be a Scam” Most investors do not realize that each and every investment out there must be registered with the SEC or offered through a registration exemption to be legally sold to investors. Yet, billions of dollars are continually pumped into fraudulent and unregistered offerings. The SEC published these top 10 red flags that every investor should be on the look out for.

Claims of High Returns with Little or No Risk – A classic red flag that high returns are around the corner with little or no risk. Every investment carries some degree of risk, and if your advisor can’t point that out to you, then you need to find another broker.

FINRA Sanctions Huntleigh Securities Concerning Non-Traditional ETF Sales Practices

October 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Huntleigh Securities Corporation (Huntleigh) concerning allegations that the firm failed to establish and maintain a supervisory system regarding the sale of leveraged as well as inverse leveraged exchange traded funds (Non-Traditional ETFs) reasonably designed to achieve compliance with applicable securities laws.

Huntleigh is a FINRA member firm since 1977 and has headquarter offices in St. Louis, Missouri. Huntleigh engages in general securities business and employs approximately 53 registered representatives across its five branch offices.

Non-Traditional ETFs contain drastically different risk qualities from traditional ETFs. While traditional ETFs simply seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.

Broker Thomas Sharp Sanctioned by FINRA Over Misleading Statements Concerning Non-Traded REITs

October 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Thomas Sharp (Sharp) concerning allegations that Sharp violated NASD Rule 2210(d) by sending emails to potential investors in a non-exchange traded real estate investment trusts (Non-Traded REITs) that were not fair and balanced and failed to provide a sound basis for evaluating the facts. Sharp was associated with Ameriprise Financial Services, Inc. (Ameriprise) from 1987 through September 2013.

The Non-Traded REIT market has been a financial boon for the brokerage industry in recent years. A Non-Traded REIT is a security that invests mostly in real estate or property assets. While publicly traded REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold in the form of private placement offerings, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, brokers have recommended these products to many investors, in part driven by the fat fees they can earn.

Brokers’ selling practices have come under scrutiny because sometimes brokers claim that Non-Traded REITs offer stable, safe returns compared to the volatile stock market. However, the stability is only a result of the fund setting its own price and illiquidity, not because the product is immune to market fluctuation.

Broker Lorene Fairbanks Alleged to Have Made Unauthorized Trades in Client Accounts

October 14, 2014 | by Staff Attorney

According to broker Lorene Fairbank’s (Fairbank) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that From August 2006, through February 2012, she effected approximately 57-69 discretionary transactions for seven firm customers without written authorization from the customers or approval from the firm. In addition, Fairbanks was alleged to have mismarked approximately 54-70 order tickets as being “unsolicited” orders when the trades were “solicited” causing the firm to maintain inaccurate books and records.

Fairbanks entered the securities industry in 1996. From August 2006, to March 2012, she was registered Merrill Lynch. Pierce, Fenner & Smith Incorporated (Merrill Lynch). In February 2012, Merrill Lynch terminated Fairbanks and disclosed in a filing that she was discharged for taking discretion in client accounts and mismarking client orders. Since June 2012, Fairbanks has been associated with Ameriprise Financial Services, Inc. In addition, at least five customer complaints have been filed against Fairbanks alleging unsuitable investments, unauthorized trading, and excessive trading (churning).

NASD Rule 2510 prohibits brokers from exercising any discretionary power in a customer’s account unless there is written authorization and the account has been accepted by the member. NASD Rule 3110 and FINRA Rule 4511 provide that members must preserve books and records. FINRA alleged that Fairbanks was not approved by her firm to exercise discretion in any customer accounts but nonetheless effected approximately 57-69 discretionary transactions for seven customers. Also, FINRA alleged that Fairbanks mismarked approximately 54-70 order tickets in the same customers’ accounts as “unsolicited” meaning that the customer asked the broker to make the trade, when the trades were solicited, meaning that the broker brought the investment to the client’s attention.

Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales

October 13, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought a complaint against broker David Escarcega (Escarcega) concerning allegations that Escarcega recommended unsuitable investments in Renewable Secured Debentures of GWG, Inc. (GWG Debentures). Escarcega is not the first Center Street Securities, Inc. (Center Street) broker that has been investigated by FINRA in connection with their GWG sales or the supervision of such sales. As we have reported FINRA recently sanctioned Michael Wurdinger (Wurdinger) concerning allegations that from approximately February 2012, to February 2013, Wurdinger failed to adequately supervise sales of GWG Debentures. In a related but separate action concerning Center Street’s supervision of the sale of the GWG debentures, Anil Vazirani (Vazirani) was found to not be appropriately registered with the firm but nonetheless solicited sales of the debentures through communications with prospective customers, discussed the details of the debentures features as an investment, recommended the purchase of the product, and assisted seven customers to complete documents in order to purchase the GWG Debentures.

As a background, GWG Holdings, Inc. purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG then pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. According to FINRA, the company has a limited operating history and has yet to be profitable. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.

In Escarcega’s case, FINRA alleged that Between March 2012, and January 2013, Escarcega violated the antifraud provisions of the federal securities laws as well as numerous FINRA and NASD rules while selling more than $1.8 million of GWG Debentures to his customers. According to FINRA, Escarcega made false and misleading oral and written statements to seven customers in connection with their purchases of the GWG Debentures. FINRA found that Escarcega falsely told the customers that the Debentures were safe, low-risk, liquid, or guaranteed. For example, on one form, FINRA found that Escarcega described the GWG Debentures as having “a guaranteed interest payment” and providing a “guaranteed rate of return.”

Dennis Karasik Barred by FINRA Over Diversified Energy Group Sales

October 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) permanently barred broker Dennis Karasik (Karasik) concerning allegations that from December 2010, to March 2012, Karasik participated in private securities transactions, otherwise known as “selling away” without providing prior written notice to the two firms with which he was associated. Specifically, FINRA alleged that Karasik participated in the sale of bonds issued by Diversified Energy Group, Inc. (DEG), an energy company, and that the company paid him finder’s fees from on the sales made.

Karasik was employed by a number of brokerage firms from 1986 through February 2013. During the times relevant to FINRA’s allegations Karasik was registered with Multi-Financial Securities Corp. (Multi-Financial) until December 2011, and with H. Beck, Inc. (H. Beck) until February 2013. Karasik maintained an office in Parkton, Maryland. Karasik was terminated by H. Beck for the conduct alleged by FINRA. According to Karasik’s BrokerCheck, he has had six customer complaints filed against him and also has two tax liens. Karasik was also a partner of Carrio, Karasik, & Associates (CKA).

DEG is a Florida energy company that develops oil and gas reserves in the United States. It has raised funds through private placement offerings of corporate bonds to accredited investors. FINRA alleged that between January 2010, and March 2012, Karasik and his partner in CKA participated in the sale of more than $3.2 million of DEG bonds to at least 25 investors. According to FINRA, Karasik was compensated for his role in these sales through the payment of a finder’s fee.

The NASAA Announces New Initiative to Focus on Senior Investor Abuse

October 9, 2014 | by Staff Attorney

As we have reported previously, financial abuse of seniors is a significant problem in the United States. In our firm’s representation of clients, seniors comprise the vast majority of clients that seek our firm’s assistance as securities attorneys.

Recently the North American Securities Administrators Association (NASAA) announced the formation of a new Board committee to address a wide range of challenges confronting senior investors. The announcement came on the heels of the agencies disclosure that at least a third of its members’ enforcement actions by state securities regulators since 2008 have involved senior victims among states that track victims by age. Of the 10,526 enforcement actions initiated between 2008 and 2013, 3,548 involved victims age 62 and older. Further, the NASAA stated that this amount is a conservative estimate since it does not include cases from states that do not report the age of victims and many senior victims simply do not come forward.

As long-time readers of this blog post know, we have frequently wrote the issue of scams and fraud targeting the elderly. See How Elderly Investors Can Protect Their Retirement Savings and The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective.