Investment Attorney

Gana LLP Investigation – Former RBC Capital Markets Broker Michael Zukowski

September 18, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Michael Zukowski (Zukowski) concerning allegations that Zukowski recommended unsuitable transactions in inverse and inverse-leveraged Exchange Traded Funds (Non-Traditional ETFs) in the accounts of his customers.

Zukowski first became registered with FINRA as a securities representative in 1989. Thereafter, from July 2005 to November 2010, he was registered in that same capacity through RBC Capital Markets, LLC (RBC) where he worked in the firm’s Massachusetts office. On December 23, 2010, RBC filed a Termination Notice (Form U5) stating that Zukowski was permitted to resign for “failure to meet Firm expectations.”

On August l8, 2011, RBC filed a an amended disclosure stating that an Administrative Complaint filed by the Massachusetts Securities Division (MSD) stated that: “The Massachusetts Securities Division alleged Michael Zukowski made unsuitable recommendations to brokerage and advisory clients regarding the purchase and sale of leveraged, inverse and inverse-leveraged exchange traded funds.” Thereafter, on November 12, 2012, Zukowski entered into a Consent Order with the MSD concerning the allegations of unsuitable recommendations where Zukowski consented to sanctions including a Cease and Desist and a five year bar to act as a “broker-dealer agent, investment adviser, investment adviser representative and issuer-agent” in the State of Massachusetts. Finally, on November 16, 2012, RBC filed another amended Form U5 and disclosed a written complaint by two customers indicating that the “Clients allege material omissions and unsuitable advice regarding non-traditional ETFs, in period 2/2009 to 12/2009.”

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.

Oak Ridge Financial Services Sanctioned Over Non-Traditional ETF Sales Practices

September 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm The Oak Ridge Financial Services Group, lnc. (Oak Ridge) in connection with allegations that Oak Ridge failed to establish and maintain a supervisory system regarding the sale of leveraged, inverse and inverse leveraged exchange-traded funds (Non-Traditional ETFs) that were reasonably designed to achieve compliance with the securities laws.

Oak Ridge became a FINRA member in 1997 and is headquartered in Golden Valley, Minnesota. Oak Ridge engages in a general securities business, employs 57 registered representatives, and operates out of a single office.

Non-Traditional ETFs contain drastically different characteristics, including risks, from traditional ETFs that 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. The leverage employed by Non-Traditional ETFs is designed not simply to mirror the index but 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.

B. C. Ziegler and Company Sanctioned Over Allegations of False and Misleading Advertising

September 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm B. C. Ziegler and Company (B. C. Ziegler) and ordering the brokerage firm to pay $150,000 in connection with allegations that from January 1, 2009, through May 30, 2012 B. C. Ziegler failed to implement a supervisory system reasonably designed to ensure that material economic information regarding Church Bonds, including information concerning delinquent sinking fund payments, was disclosed to the firm’s brokers, trading desk, and customers, and was factored into the pricing of Church Bonds sold to customers in secondary market transactions. In addition, it was alleged that B. C. Ziegler used Church Bond sales material with customers that was not fair and balanced. The sales material prominently promoted the yields associated with Church Bonds without balancing the presentations by disclosing the risks. FINRA also alleged that B. C. Ziegler distributed unbalanced internal-use-only Church Bond sales material to its registered representatives, causing the firm to violate NASD Rule 2211(d)(1) and FINRA Rule 2010.

B. C. Ziegler has been a registered broker-dealer since 1948 and is a full service brokerage firm headquartered in Chicago, Illinois. A primary business of the firm is the underwriting and sale of fixed income products, including debt issued by religious institutions known as “Church Bonds” and senior living facilities (Senior Living Bonds). The firm has approximately 22 branch offices and 200 registered representatives.

According to FINRA, B. C. Ziegler specializes in underwriting and selling Church Bonds for religious institutions. Church Bonds are generally issued by nonprofit religious entities and as such are exempt from registration as a security with the SEC. While there is no established secondary market for Church Bonds, FINRA found that B. C. Ziegler frequently facilitated secondary trading among its customers for Church Bonds it underwrote. A Church Bond sinking fund is a pool of money funded with periodic payments by an issuer for the purpose of accumulating money to make annual or semi-annual coupon payments due to investors of Church Bonds. A Church Bond issuer behind on its sinking fund payments is not in strict compliance with its trust indenture and may be a sign of an issuer’s financial distress.

Former Merrill Lynch Broker George Zaki Sanctioned Over Unauthorized Trading Allegations

September 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker George Zaki (Zaki) concerning allegations that between June 2010, and August 2012, Zaki implemented and/or executed approximately 3,600 discretionary trades in the accounts of approximately 80 Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch) customers without the customers’ prior written authorization.

Zaki entered the securities industry in October 2007 joining Neuberger Berman LLC. In June 2010, Zaki became registered with Merrill Lynch. Zaki remained registered with Merrill Lynch until he was terminated on October 8, 2012 when Merrill Lynch filed a Form U-5 stating that Zaki was terminated for “conduct involving exercising discretion in non-discretionary client accounts.” In November 2012, Zaki became registered with Barclays Capital Inc. until March 2014. Thereafter, Zaki became registered with Janney Montgomery Scott LLC where he is presently employed.

Under the FINRA rules, unauthorized discretionary trading is not allowed. NASD Rule 2510(b) provides that registered representative may exercise discretionary power in a customer’s account unless such customer has given prior written authorization and the account has been accepted by the firm. FINRA has stated that subsequent ratification of the transaction by the customer does not excuse this violation. In addition, FINRA Rule 2010 requires members and associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

Broker Richard Lewis Formerly of LPL Financial Sanctioned Over Alleged Improper Use of Discretion

September 8, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Richard Lewis (Lewis) concerning allegations that Lewis exercised discretion in a customer’s account without obtaining prior written authorization from the customer. FINRA found that his conduct violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.

Lewis first became registered with FINRA firm in 1989. Since then, he has been associated with several firms and from December 2010, to March 2013, Lewis was associated with LPL Financial LLC (LPL). Currently, Lewis is associated with J.W. Cole Financial, Inc.

FINRA alleged that from April 2012, to February 2013, while Lewis was associated with LPL, he effected approximately 81 discretionary transactions in the securities account of a customer without obtaining prior written authorization and without LP accepting the account in writing as discretionary.

Broker Sanctioned Over Allegations of Unsuitable Variable Universal Life (VUL) Policies

September 6, 2014 | by Staff Attorney

shutterstock_50740552 The Financial Industry Regulatory Authority (FINRA) sanctioned broker David Herlicka (Herlicka) concerning allegations that from 2003 through 2011 Herlicka made unsuitable trade recommendations to seven customers in connection with the sales of Variable Universal Life (VULs). FINRA found that Herlicka also made misstatements and failed to adequately disclose information regarding VULs, including the fact that they have surrender fees. FINRA also alleged that Herlicka recorded false information regarding customer net worth and annual income on VUL applications for four of these customers and that he, in 2011, also effected an unauthorized trade of a VUL for a customer.

VUL are complex insurance and investment products that investors must fully understand the risks and benefits of prior to investing. One feature of a VUL policy is that the owner can allocate a portion of his premium payments to a separate sub-account that can be used to grow in value through investments. Monthly charges for the life insurance policy, including a cost of insurance charge and administrative fees, are deducted from the policy’s cash value. The cash value of the policy may increase or decrease based on the performance of the sub-account investments. In addition, the VUL policy terminates, or lapses, if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. Upon termination of the policy, the remaining cash value becomes worthless.

Given the costs involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. For example, if a policy is too expensive for the client to continue to make premium contributions to the policy could lapse over time. This is precisely what FINRA alleges that Herlicka failed to consider in some recommendations to his clients.

NEXT Financial Group Sanctioned Over Failure to Adhere to Industry Rules

September 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm NEXT Financial Group, Inc. (NEXT Financial) concerning allegations that: 1) between March 17, 2009, and August 26, 2011, NEXT Financial failed to timely and accurately amend registered representatives’ Forms U4 and U5 to disclose customer complaints, judgments and liens; 2) from January 1, 2010, through August 26, 2011, NEXT Financial permitted its former general counsel to directly supervise registered persons without a principal registration; and 3) from March 17, 2009, through August 10, 2012, NEXT Financial failed to establish and maintain a supervisory system that was reasonably designed to prevent and detect unsuitable sales of structured products to retail customers.

NEXT Financial is a general securities broker-dealer located in Houston, Texas and a member of FINRA since 1999. The firm currently has approximately 900 registered persons and 590 registered branch locations.

FINRA Rules require that every application for registration (Form U4) filed with FINRA shall be kept current at all times by supplementary amendments. Supplementary amendments must be filed within 30 days after learning of facts or circumstances that would require an amendment. FINRA also requires that a notice of termination (Form U5) be filed with FINRA within 30 days after an individual’s association with a member firm is terminated and the form must be kept current at all times by supplementary amendments.

Great American Advisors Sanctioned Concerning Supervision of Variable Annuities

September 2, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Great American Advisors, Inc. (Great American) concerning allegations that between December 2006, and December 2007, Great American failed to have an adequate supervisory system for the sale of variable annuities. FINRA alleged that two of the firm’s registered representatives recommended and effected 301 unsuitable variable annuity transactions involving 206 customers causing customers to pay $363,173 in unnecessary surrender fees and incur longer surrender periods.

Great American has been a registered firm with FINRA since 1994. From 1994 through August 2010, the Great American operated as a full service firm selling mutual funds and annuities, among other investment products. Since August 2010, the firm serves as a principal underwriter and distributor for annuity products and has 54 registered representatives.

As a background, a variable annuity is an investment and insurance product with significant risks and features the investor should be aware of before investing. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you based upon the chosen investments made in the annuity account. The investment options for a variable annuity are usually a selection of a group of mutual funds.

Blackbook Capital Sanctioned For Overcharging Clients

August 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Blackbook Capital LLC (Blackbook) concerning allegations that: 1) between April 2010 and June 2011, Blackbook charged customers $60.50 on each purchase or sale transaction in addition to or in place of a designated commission; 2) between August 2010, and August 2011, Blackbook failed to search its records in response to requests by the Financial Crimes Enforcement Network of the Department of the U.S. Treasury (FinCEN) pursuant to the USA PATRIOT Act of 2001; 3) Blackbook failed to conduct an adequate independent Anti-Money Laundering (AML) test for calendar year 2010; and 4) between July 2009, and August 2011, Blackbook failed to preserve all of its business-related emails in a non-rewriteable, non-erasable format.

Blackbook has been a member of FINRA since March 2003. The firm has three offices with its main office located in New York City. Blackbook employs approximately 35 registered persons and engages in securities transactions for retail customers and investment banking transactions.

Under NASD Conduct Rule 2430 (Charges for Services Performed) charges for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers. Under Exchange Act Rule 10b-10 (Confirmation of Transactions) broker-dealers are required to disclose specified information in writing to customers at or before the completion of a transaction. Finally, FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) requires a member in the conduct of its business to observe high standards of commercial honor and just and equitable principles of trade.