securities attorney

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.

Broker Spotlight – Mark Lisser Accused of Churning by at Least Three Customers

August 27, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP is investigating a string of securities arbitration cases involving broker Mark Lisser (Lisser) which generally allege securities violations including churning, excessive use of margin, churning, unsuitable investments, and breach of fiduciary duty. All the cases have been filed before The Financial Industry Regulatory Authority (FINRA).

Lisser was registered with Prestige Financial Center, Inc. from February 2008, until November 2010. Thereafter, he was an associated person with Global Arena Capital Corp.

As a background “churning” occurs in a securities account when a dealer or broker, acting in his own interests and against those of his customer, induces transactions in the customer’s account that are excessive in size and frequency in light of the character of the account. In order to show that churning took place a claimant must demonstrate that the broker-dealer exercised control over the account and that the broker engaged in excessive trading considering the objectives and nature of the account.

Brokerage Firm Safeguard Securities and Peter Mooney Sanctioned Over Numerous Supervisory Failures

August 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Safeguard Securities, Inc. (Safeguard Securities) and broker Peter Mooney (Mooney) concerning allegations that during a FINRA examination of the firm Safeguard Securities provided certain outside business activity (OBA) forms to FINRA that had been backdated. FINRA found that Mooney, who signed the backdated forms, knew or should have known that the forms had been backdated. In addition, FINRA identified many supervisory and recordkeeping failures relating to: the review and retention of electronic communications; outside business activities; private securities transactions; the supervision of producing managers; and branch registration and fingerprinting of personnel.

FINRA found that Mooney was the firm’s principal and supervisor responsible for establishing and implementing supervisory procedures. FINRA alleged that Safeguard Securities, through Mooney, failed to establish and/or implement adequate supervisory procedures in numerous respects. First, it was alleged that the firm failed to establish and implement an adequate supervisory system for the review and retention of electronic communications relating to the business of the firm. For example, between July 14, 2008, and November 4, 2012, it was alleged that Safeguard Securities failed to maintain any record to evidence its review of electronic communications. Further, FINRA alleged that the firm failed to take any steps to monitor registered representatives who used e-mail addresses at domains other than the firm’s e-mail system.

In another instance of supervisory failure, FINRA alleged that during 2012, Mooney knew that a broker by the initials “WM” was engaging in private securities transactions for compensation. Notwithstanding the fact that the firm prohibited such activity, FINRA found that Mooney failed to take any steps to stop the broker’s participation in those transactions. Under NASD Rule 3040, a duty is imposed on member firms to supervise the transaction as if the transaction were executed on behalf of the member.

SEC Releases Alert Warning Investors About Affinity Fraud

August 21, 2014 | by Staff Attorney

The SEC’s Office of Investor Education and Advocacy issued a Investor Alert to help educate and warn investors about the dangers of affinity fraud. Affinity fraud is a common type of securities fraud that preys upon members of a group or community such as members of certain religions or ethnic communities. Affinity frauds involve either fake investments or extremely risky investments that are conducted outside regular securities channels. The fraudster will typically lie about important details such as the risk of loss, the track record of the investment, or the background of the investment.

Many affinity frauds turn out to be Ponzi schemes. In a Ponzi scheme new investors money goes to pay earlier investors to create the illusion that the investment is succeeding all the while the fraudster skims large amounts of the funds for his or her personal use. When the fraudster’s supply of new investor money runs out and current investors seek payment the scheme collapses. Fraudsters use many legitimate investment sounding vehicles and names to mask their schemes. For example, the fraudster may tell investors that they are investing in real estate, options, precious metals, or employing leverage or other sophisticated investment tools to increase returns.

In order to carry out affinity frauds, the fraudster will be a member of the group they are trying to defraud such as a particular denomination or church. However, any close knit community or group such as an ethnic group, immigrant community, or racial minority will work. Fraudsters may also prey upon members with other commonalities such as teachers, union members, or military servicemen. The key to affinity fraud is that the fraudster can target the group and built up a high level of trust and confidence through the affinity connection to convince them to trust the fraudster with their life savings.

Business Development Companies (BDC) – The Next Risky Wall Street Cash Cow?

August 19, 2014 | by Staff Attorney

Since the financial crisis, the product development squad on Wall Street has been hard at work putting new spins on old ideas. The usual plan is merely to rebrand an old idea with a new label and convince investors looking for the latest and greatest product that the investment will provide outsized yield with less risk. It’s no coincidence that these new ideas make lots of money for the brokers selling them.

Enter the non-traded business development companies (BDCs). Now that many regulators and investors have begun to wise up and sour on the high commission and uncertain return approach offered by non-traded REITs, BDCs have entered into the fray as the non-stock market, non-real estate, high yield alternative. However, BDCs appear to be just as speculative – likely even more so – and inappropriate for most investors as non-traded REITs with many of the same failings such as obscenely high up-front fees, limited liquidity, and reliance on leverage to juice returns.

BDCs make loans to and invest in small to mid-size, developing, or financially troubled companies. BDCs have stepped into a role that many commercial banks left during the financial crisis due to capital raising requirements. In sum, BDCs lend to companies that may not otherwise get financing from traditional sources. While BDCs are not new, until very recently the market has been served by publicly traded closed-end funds that act like private equity firms. Just like the market was served just fine by publicly traded REITs before the non-traded variety showed up on the scene. One would think that the publicly traded BDCs provided high enough returns and were risky enough for even the most speculative investor considering that during the last downturn some of the funds fell by 60%, 70% or more. But greed is good.

FINRA Sanctions Salomon Whitney Over Non-Traditional ETF Sales Practices

August 13, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Salomon Whitney, LLC (Salomon Whitney) concerning allegations from July 2008 through November 2009 the firm failed to establish and maintain a supervisory system reasonably designed to monitor transactions in leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs). Non-Traditional ETFs contained risks that increase over time and in volatile markets including risks of a daily reset, leverage, and compounding. FINRA found that Salomon Whitney failed to establish a reasonable supervisory system to monitor transactions in Non-Traditional ETFs, provide adequate formal training, and observe reasonable basis suitability guidelines by failing to perform reasonable due diligence to understand the risks and features associated with the products.

Salomon Whitney has been a FINRA broker-dealer since 2008 and the firm is headquartered in Farmingdale, New York where it conducts a general securities business. Salomon Whitney has approximately 19 brokers registered with the firm.

Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on an underlining asset, class of securities, or sector index. The leverage employed by Non-Traditional ETFs is designed 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 Robert Livingstone Barred Over Alleged Sales of Newland Strategies to Customers

August 8, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Robert Livingstone (Livingstone) concerning allegations that Livingstone failed to respond FINRA’s request for documents concerning claims that Livingstone deposited a customer’s money into a private company called Newland Strategies.

Livingstone first became registered with FINRA in 1992 as a General Securities Representative with Morgan Stanley DW, Inc. Thereafter, in 2001, Livingstone registered with BB&T Investment Services, Inc. (BB&T). Livingstone remained registered with BB&T until the firm filed a Form U5 that terminated his registration with on October 3, 2013. BB&T stated on Livingstone’s BrokerCheck that a “client alleged she thought she invested 200,000 with BBTIS through her BBTIS rep in February 2013. However, it was deposited into a private company called Newland Strategies by her rep and was told she lost $68,000.”

FINRA alleged that in October 2013, BB&T terminated Livingstone’s registration after the firm investigated a customer complaint against Livingstone alleging participation in a private securities transaction. On March 21, 2014, FINRA investigated the customer complaint against Livingstone and requested documents and information from Livingstone. FINRA stated that Livingstone did not produce the requested documents and information after several requests. It was alleged that on April 24, 2014, Livingstone informed FINRA that he would not comply with requests. As a result of Livingstone’s failure to provide documents and information as required by FINRA Rule 8210, FINRA found that Livingstone violated FINRA Rules 8210 and 2010 and imposed a bar from the financial industry.

James Applewhite Fined Over Allegations of Unauthorized Discretionary Trading

July 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned financial advisor James Applewhite (Applewhite) concerning allegations that from about January 2010, through October 2012, Applewhite exercised discretion by effecting approximately 171 transactions in eight customer accounts without obtaining prior written authorization from the customers and without having the accounts accepted as discretionary accounts as required by NASD Rule 2510(b). FINRA found that the discretion was generally exercised pursuant to a strategy previously agreed upon with the customers. Nonetheless, FINRA alleged the firm did not permit discretionary trading, except for managed accounts, with pre-approved written discretion. As a result FINRA found that Applewhite violated NASD Rule 2510(b) and FINRA Rule 2010.

Applewhite entered the securities industry in November 1983. During all periods mentioned in the FINRA finding he was associated with Wells Fargo Advisors, LLC. Applewhite’s employment with Wells Fargo ended on October 22, 2012. Thereafter, Applewhite became registered with BB&T Securities, L.L.C f/k/a Scott & Stringfellow, LLC.

The allegations made against Applewhite constitute unauthorized trading. Unauthorized trading occurs when a broker sells, buys, or exchanges, securities without the prior consent or authority from the investor. Unless an investor gives discretion to make trades, the broker must first discuss all trades with the investor before executing them. Even if the a customer verbally grants a broker discretion such an agreement is not valid under industry rules The SEC has found that unauthorized trading also constitutes securities fraud due to its fraudulent nature. No omission of information could be more material than the failure to inform the investor of his or her own purchases and sales.

Former Sterne Agee Broker Dean Mustaphalli Alleged to Have Wrongfully Run $6 Million Hedge Fund

July 15, 2014 | by Staff Attorney

The attorneys at Gana Weinstein LLP are investigating claims that former Sterne Agee Financial Services Inc. (Sterne Agee) broker Dean Mustaphalli (Mustaphalli) solicited millions of dollars from investors running to run a $6 million hedge fund on the side without formerly disclosing the activity to his brokerage firm. As reported by InvestmentNews, the Financial Industry Regulatory Authority (FINRA) charged Mustaphalli for founding and receiving commissions from a hedge fund he created called Mustaphalli Capital Partners in or about 2011 without informing his. Mustaphalli sold the investment through his registered investment advisory firm, Mustaphalli Advisory Group.

According to allegations made, Mustaphalli solicited money for the fund from at least 25 investors over six months during 2011. The fund invested in publicly traded equity and debt securities has since declined by approximately 90% according to investors. At least some of Mustaphalli’s clients were direct customers of Sterne Agee as well. According to FINRA, Mustaphalli was not cooperating with the agencies requests to provide account statements for the hedge fund. Typically in these cases if a broker does not cooperate with FINRA’s department of enforcement and the agency proves he withheld information the broker would be barred from the securities industry among other remedies that could be imposed.

Mustaphalli disclosed the existence of the Mustaphalli Advisory to Sterne Agee but did not disclose that he was managing the hedge fund through the firm according to FINRA. However, under the FINRA rules, brokers must fully disclose hedge funds for approval to their member firm and be supervised by the firm under Rule 3040.

Bank Loan ETFs – Buyer Beware

July 11, 2014 | by Staff Attorney

A recent statement by BlackRock Inc (BlackRock) Chief Executive Larry Fink concerning leveraged exchange traded funds (Leveraged ETFs) has provoked a chain reaction from the ETF industry. Fink runs BlackRock, the world’s largest ETF provider. Fink’s statement that structural problems with Leveraged ETFs have the potential to “blow up the whole industry one day” have rattled other ETF providers – none more so than those selling bank loan ETFs. Naturally, sponsors of Leveraged ETFs, a $60 billion market, called the remarks an exaggeration.

As a background, leveraged ETFs use a combination of derivatives instruments and debt to multiply returns on an underlining asset, class of securities, or sector index. The leverage employed is designed to generate 2 to 3 times the return of the underlining assets. Leveraged ETFs can also be used to return the inverse or the opposite result of the return of the benchmark. While regular ETFs can be held for long term trading, Leveraged ETFs are generally designed to be used only for short term trading – sometimes as short as a single day’s holding. The Securities Exchange Commission (SEC) has warned that most Leveraged ETFs reset daily and FINRA has stated that Leveraged ETFs are complex products that are typically not suitable for retail investors. In fact, some brokerage firms simply prohibit the solicitation of these investments to its customers, an explicit recognition that a Leveraged ETF recommendation is unsuitable for virtually everyone.

Despite these dangers, bank loan Leveraged ETFs may be an easy sell to investors. Investors in fixed income instruments are compensated based upon the level of two sources of bond risk – duration risk and credit risk. Duration risk takes into account the length of time and is subject to interest rate changes. Credit risk evaluates the credit quality of the issuer. For example, U.S. Treasury’s have virtually no credit risk and investors are compensated based on the length of the bond. At the other end of the safety spectrum are low rated floating-rate debt – what bank loan Leveraged ETFs invest in. These funds are supposed to reset every 90 days in order to get exposure to the credit side but not take on much duration risk.