securities fraud attorney

FINRA Bars Former Pruco Securities and MetLife Securities Broker Derek Weaver

January 14, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Derek Weaver (Weaver) alleging that Weaver failed to provide documents and information to FINRA in response to demands made to investigate the broker’s activities. On December 1, 2014, FINRA sent Weaver a request for documents concerning allegations that he participated in a Ponzi scheme. The details concerning the exact nature of the alleged Ponzi scheme and Weaver’s role are not yet fully known.

The allegations against Weaver are consistent with a potential “selling away” securities violation. In the industry the term selling away refers to when a financial advisor solicits investments in companies, promissory notes, or other securities that are not pre-approved by the broker’s affiliated firm. Under the FINRA rules, a brokerage firm owes a duty to properly monitor and supervise its employees in order to detect and prevent brokers from offering such products. In order to properly supervise their brokers each firm is required to establish and maintain written supervisory procedures and implement such policies in order to monitor the activities of each registered representative. Selling away often occurs in environments where the brokerage firms either fails to put in place a reasonable supervisory system or fails to actually implement that system and meet supervisory requirements.

In selling away cases, investors are unaware that the advisor’s investments are either not registered or not real. Typically investors will not learn that the broker’s activities were wrongful until after the investment scheme is publicized or the broker simply shuts down shop and stops returning client calls.

Aegis Capital Corp. Broker Malcom Segal Barred From Industry Over Allegations of Outside Business Activities

January 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred former Aegis Capital Corp. (Aegis) broker Malcom Segal (Segal) alleging that Segal may have engaged in unauthorized transfers of funds from customer accounts to an outside business activities (a/k/a “selling away”).

According to Segal’s BrokerCheck, Segal was registered with Cumberland Brokerage Corporation from 1989 until April 2011. Thereafter, Segal was a broker for Aegis until July 2014 where he was terminated on allegations of by the firm violations of the firm that Segal failed to cooperate with an internal investigation into a customer complaint he made unauthorized wire transfers from a customer’s account. Segal’s disclosures also reveal that he is listed as a partner of J & M Financial and President of National C.D. Sales.

Upon information and belief, it is in connection with National C.D. Sales that customer have filed complaints against Segal concerning. While details concerning Segal’s activities are still pending, the allegations against Cox are consistent with a “selling away” securities violation. Selling away occurs when a financial advisor solicits investments in companies or promissory notes that were not approved by the broker’s affiliated firm. In many cases the broker transfers funds or liquidates investments at his registered firm in order to make the investment in the outside business.

Ameritas Broker Jason Muskey Accused of Stealing Customer Funds

December 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Jason Muskey for failing to respond to the regulator’s requests for information. FINRA’s investigation appears to have been prompted by Muskey’s termination from Ameritas Investment Corp. (Ameritas) after the firm alleged that he failed to respond to the firm’s request for information concerning an internal investigation concerning theft and forgery. Muskey was registered with Ameritas from June 2006, through June 2014. Muskey operated his business through Ameritas, upon information and belief, through a DBA called Muskey Financial Services.

Since the termination eight customers have filed customer complaints against Ameritas accusing the firm of failing to supervise Muskey’s activities and alleging that Muskey engaged in a Ponzi scheme that led to the theft of their funds.

As recently reported in the times-tribune Muskey was sued recently by his own mother, his wife’s uncle, an aunt, and two others alleging that he stole almost $400,000 in the scheme. Muskey allegedly used the money for his personal benefit and covered up the thefts for years by sending out fake quarterly financial statements that listed a set of phony investments. Many of Muskey’s victims are hard-working blue collar workers who had placed their money with Muskey for retirement.

Oil and Gas Investments – Issuers Profit While Investors Take All the Risk

December 29, 2014 | by Staff Attorney

As recently reported in Reuters, oil and gas companies such as Reef Oil & Gas Partners, Black Diamond, and Discovery Resources & Development LLC have marketed themselves to investors as a way to get into the U.S. energy boom. These companies issue private placement partnership that will drill for oil and gas and pay investors the profits that will result. However, oil and gas private placements contain substantial risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk. Due to these risks investors often lose money while issuers make handsome profits.

According to Reuters, of 34 deals Reef has issued since 1996, only 12 have paid out more cash to investors than they initially contributed. In addition, Reuters found that Reef sold an additional 31 smaller deals between 1996 and 2010 collecting $146 million for itself while paying out investors a paltry $55 million.

Under the terms of one Reef deal, investors raised $50 million and Reef immediately took $7.5 million for fees and broker commissions. After that, Reef received a monthly management fee of $41,667 from the fund. Reef also charged for drilling, operating, legal, and other expenses to the fund. Reef completely controlled these expenses and determined which other Reef entities would be hired to do work for the venture. In fact, no more than half of the money would be used to buy oil and gas land where there were reserves.

FINRA Sanctions Sammons Securities Company Over Host of Supervisory Failures Part I

December 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Sammons Securities Company, LLC (Sammons) over allegations that Sammons failed to establish and maintain a system of supervision that is reasonably designed to achieve compliance with securities laws. From March 8, 2010, through October 8, 2012, FINRA alleged that certain supervisory deficiencies existed at Sammons including the firm’s supervision of registered representatives, the firm’s due diligence processes and procedures, and some of its implemented customer safe-guards.

Sammons has been a FINRA member since January 2002, employs a total of 516 registered representatives, and operates from 357 branch office locations. Sammons’ compliance functions are conducted in Ann Arbor, Michigan, where its main registered Office of Supervisory Jurisdiction (OSJ) is located.

FINRA found that Sammons’ supervisory and compliance functions were conducted by a company called BD OPS, LLC, (BD OPS), an entity under common ownership with Sammons. BD OPS performed all of the firm’s supervision and compliance and also provided supervisory and compliance services for another broker-dealer and its related investment advisor. As a result, FINRA found that the 35 supervisory personnel working for BD OPS were responsible for supervising a total of 1,274 registered representatives and 854 branch offices between the two broker-dealers.

Securities America Broker James McLaughlin Sanctioned Over Churning Allegations

December 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Securities America, Inc. (Securities America) broker James McLaughlin (McLaughlin) alleging that between October 2010, through October 2012, McLaughlin: (i) engaged in excessive trading (churning) in four customers’ accounts; (ii) recommended unsuitable short-term trading of mutual funds in four customers’ accounts; (iii) engaged in unauthorized trading in three customers’ accounts and; (iv) exercised discretion in one customer’s account without having written authorization.

McLaughlin was registered as a broker from 1989 until October 2012. McLaughlin was registered with Securities America from October 2000, until October 2012. On October 29, 20l2, Securities America terminated McLaughlin’s registrations for violating firm policies and procedures relating to excessive trading.

FINRA alleged that McLaughlin excessively traded at least four customers’ accounts. By analyzing the number of trades, turnover rate, and cost-to-equity ratio for these accounts FINRA determined that across a two-year relevant period from October 2010, through October 2012 that the accounts were excessively traded. In one account 286 purchase and sale transactions occurred resulting in a turnover rate of 47.63 and a cost-to-equity ratio of 228.03%. In a second account 459 purchase and sale transactions occurred resulting in a turnover rate of 15.86 and a cost-to-equity ratio of 69.54%. In a third account FINRA alleged that McLaughlin executed 140 purchase and sale transactions resulting in a turnover rate of 6.79 and a cost-to-equity ratio of 32.74%. Finally, in fourth customer’s account FINRA found McLaughlin executed 111 purchase and sale transactions resulting in a turnover rate of 8.75 and a cost-to-equity ratio of 44.50%.

Global Brokerage Services Fined Over Misleading Account Statements

December 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Global Brokerage Services, Inc. (Global) over allegations that from approximately February 2011, to August 2013, Global failed to establish and enforce a reasonable supervisory system regarding the use of consolidated reports by registered brokers with the firm. FINRA found that Global’s brokers provided consolidated reports to their customers that lacked required disclosures and/or contained misleading information. ln addition, FINRA alleged that one the brokers disseminated consolidated reports that included his own inaccurate and potentially misleading valuations for non-traded REITs and other illiquid investments.

Global has been a FINRA member since 1995, employs fourteen registered representatives, and its main office is in Hunt Valley, Maryland.

FINRA found that certain of Global’s brokers created consolidated reports using Morningstar or Excel for distribution to their customers. FINRA alleged that Global failed to have written supervisory procedures specific to consolidated reports. Instead, FINRA determined that consolidated reports at Global were treated as correspondence requiring only a sample (10%) be reviewed on a quarterly basis.

Why Your Broker Asking You to Sign A Comfort Letter is A Big Misconduct Red Flag

December 8, 2014 | by Staff Attorney

Your brokerage firm reviews customer accounts for misconduct and what does it find; bizarre and unreasonable trading activity. Maybe dozens of trades are being made every month or an account previously invested in plain vanilla mutual funds is now loaded up with speculative penny stocks and private placements. Whatever the cause, the firm has a system to monitor for unusual trading activity and sends the customer a letter. These letters go by many names including “happiness”, “comfort”, and more appropriately “Cover You’re A@!” (CYA).

A recent article by the Wall Street Journal explored how the purpose of these letters is to elicit an acknowledgment from the customer that they are satisfied with how the account is being handled in order to minimize future liability from a suit concerning the wrongful activity. To clarify, when a brokerage firm finds indications of possible misconduct their first action isn’t to stop the misconduct and help their client but to get the client to release the firm from liability.

Having reviewed dozens of these letters myself they are designed to be unreadable to the average investor and use industry jargon and legal lingo that is indecipherable to anyone but a securities attorney. These letters begin warmly enough by thanking you for your business and hoping that everything is well with you. Then the conversation becomes impersonal and maybe mentions that your investment choices have become more risky or aggressive recently. These sentences are code words for your investment objectives have completely changed from generating retirement income to you are now interested in potentially losing all your money with casino level risk. Maybe some information related to a “cost-to-equity ratio” or “turnover” is given. There is no explanation as to what these terms mean or why you should be concerned because they are just being provided for legal reasons that the customer should be unconcerned with.

FINRA Sanctions Genworth Financial for Failing to Supervise Churning of Customer Accounts

December 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned brokerage firm Genworth Financial Securities Corporation (Genworth) n/k/a Cetera Financial Specialists, LLC (Cetera) concerning allegations that from July 2009, through June 2012, the firm failed to establish a supervisory system and enforce written supervisory procedures designed to identify and prevent unsuitable excessive trading and the churning of customer funds.

FINRA alleged that although Genworth’s written supervisory procedures explicitly provided for the monthly review of an Active Account Report, no such report actually existed. Further, FINRA found that Genworth had no other systems in place that would monitor active accounts for excessive trading. According to FINRA, the firm’s failure to have systems in place and the failure to enforce written supervisory procedures allowed at least one registered representative to churn a customer’s account in violation of anti-fraud rules.

Churning is considered a type of securities fraud because the broker places his own interests ahead of his customer and induces transactions in the customer’s account that are excessive in size and frequency in order to generate commissions for himself. In order to show that churning took place an investor must demonstrate that the broker exercised control over the account, that the broker engaged in excessive trading considering the objectives and nature of the account, and that the broker acted with intent.

FINRA and SEC Release Guidance on Avoiding Penny Stock Schemes

November 30, 2014 | by Staff Attorney

Recently, FINRA and the SEC’s Office of Investor Education and Advocacy issued an alert to warn investors that some low-priced “penny” stocks are being aggressively promoted to engage in investment fraud schemes. In many cases the stocks of dormant shell companies, businesses with nominal business operations, are susceptible to market manipulation. To help prevent these types of fraud, the SEC suspended trading in 255 dormant shell companies in February 2014.

The typical investment scheme concerns pump-and-dump frauds in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to promote and inflate the stock’s price. The fraudster then dumps his shares causing a massive sell off and leaving his victims with worthless shares of stock. Among the more common schemes is a fraudsters who uses a dormant shell company to buy its shares and then claim that the company has developed a “new” product that has caused the price to jump higher or the company will announce new management.

The SEC provided 5 tips to avoid becoming a victim of a penny stock scheme.