securities fraud

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.

Broker Edward Wendol Barred by FINRA Over Failure to Respond to Outside Business Activity Inquiries

October 16, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred broker Edward Wendol (Wendol) concerning allegations that during the course of FINRA’s investigation into whether Wendol was involved in undisclosed outside business and private securities transactions, also known as “selling away”, Wendol failed to respond to FINRA’s requests. On May 29, 2014, FINRA requested that Wendol provide documents and information. On June 16, 2014, Wendol informed FINRA that he would not provide the requested documents and information or appear and provide testimony. As a result, Wendol was barred from the securities industry.

Wendol first became registered with FINRA in 1993 with South Richmond Securities, Inc. From October 1993, through October 2009, Wendol was registered with seven different FINRA member firms. On December 5, 2011, Wendol registered with Sterling Enterprises Group, Inc. (Sterling). Thereafter, from September 2013, through July 2014, Wendol was associated with WTS Proprietary Trading Group LLC.

The allegations against Wendol are consistent with a “selling away” securities violation. In such a case, the broker sells private securities away from the firm because the investment is not 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 fact, each brokerage firm is required to establish and maintain a system to supervise the activities of each registered representative that is reasonably designed to achieve compliance with the securities laws. Selling away often occurs when supervisory lapse conditions exist. Supervisory lapses include either the failure to put in place a reasonable supervisory system or a failure to implement their supervisory requirements. Many times there obvious “red flags” of misconduct that are overlooked or not properly followed up on.

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.

An Examination of LPL Financial’s Recent Regulatory Woes

October 7, 2014 | by Staff Attorney

LPL Financial, LLC (LPL) is one of the largest independent brokerage firms in the United States employing approximately 13,840 registered reps and advisers. However, the firm’s growth has come with a host of regulatory actions focusing on the firm’s alleged supervisory failures.

Recently, InvestmentNews reported that the firm was hit with a $2 million fine, and ordered to pay $820,000 in restitution, for failing to maintain adequate books and records documenting variable annuity exchanges. The mounting firm fines have led to flat second quarter earnings at LPL. The firm has stated that the company is instituting enhanced procedures with a view to ensuring that surrender charges incurred in connection with variable annuity exchange transactions are accurately reflected in the firm’s books and records as well as in any disclosures given to clients. The firm is also purportedly taking steps to make sure that its advisers are adequately documenting the basis for their variable annuity recommendations.

LPL has been on the radar of FINRA and several state regulators that have focused on the firm’s supervisory and other record systems as well as examining sales of investment products, including non-traded real estate investment trusts (REITs). In February 2013, LPL settled with the Commonwealth of Massachusetts to pay at least $2 million in restitution and $500,000 in fines concerning the firm’s non-traded REIT practices. In addition, in the last year, FINRA has fined LPL Financial $7.5 million for significant e-mail system failures. Moreover, we have reported on numerous LPL registered representatives who have been fined over the past year for a variety of misconduct ranging from misappropriation of funds, sales of alternative investments, selling away activities, and private placements.

Gana LLP is Investigating LPL Financial broker, Kenneth W. Schulz for Improper Conduct

September 30, 2014 | by Staff Attorney

On September 11, 2014, FINRA, permanently barred Kenneth W. Schulz, a former broker of LPL Financial from associating with any FINRA member. According to the Letter of Acceptance, Waiver and Consent, in June 2013, Kenneth W. Schulz directed a registered assistant to impersonate six of Schulz’s former customers in phone calls to his prior firm requesting that the customers’ accounts be liquidated so that they could invest through Schulz at his new firm Commonwealth Financial network.

Schulz informed each of his customers that their securities holdings could be transferred “in kind” to accounts with Commonwealth. The customers agreed to transfer their securities to Commonwealth and authorized Schulz to initiate the transfers.

After the customers agreed to transfer the securities, Schulz learned that the customers’ securities could not be transferred in kind because the managed funds were proprietary to LPL Financial. Rather than inform his customers that the securities had to be liquidated before their funds could be transferred, Schulz had his assistant pretend to be the customers and had the accounts liquidated without customer consent.

Broker Ismail Elmas Terminated Over Outside Business Activities

September 22, 2014 | by Staff Attorney

According to broker Ismail Elmas’ (Elmas) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently discharged from CUSO Financial Services, LP (CUSO Financial) concerning allegations that the broker “converted client funds for personal use as well as participated in an unauthorized outside business activity involving investments without the firm approval…” Previously Elmas was associated with CUNA Brokerage Services, Inc.

Shortly thereafter, a customer filed a complaint against Elmas alleging that the broker took the client’s variable annuity contract, surrendered it, and sent the proceeds to a third-party – which the client says was unauthorized activity. In addition, since Elmas was terminated from CUSO Financial authorities have been unable to locate the broker. In articles, officials say that Elmas, 49, has been missing since July 29^th and have warned that Elmas may be armed and should not be approached. According to reports Elmas was last seen leaving his home in his gray 2008 Toyota Prius.

The allegations against Elmas 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. Under the FINRA rules, a brokerage firm owes a duty to properly monitor and supervise its employees. In order to properly supervise their brokers each firm is required to establish and maintain a system to supervise the activities of each registered representative to achieve compliance with the securities laws. 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.

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.

FINRA Sanctions B. C. Ziegler and Company For Failure to Supervise Church Bond Sales (Part II)

September 12, 2014 | by Staff Attorney

This post picks up on our first article on The Financial Industry Regulatory Authority (FINRA) sanctioning brokerage firm B. C. Ziegler and Company (B. C. Ziegler) and ordering the brokerage firm to pay $150,000 on allegations that the firm failed to implement a supervisory system reasonably designed to ensure that material economic information regarding Church Bonds was disclosed to the firm’s brokers, trading desk, and customers.

FINRA found that while the firm maintained a Credit Watch List to check for delinquent and missed Church Bond payments, this list was only produced periodically and not every time a Church Bond issuer fell five weeks behind on its sinking fund payments. Accordingly, FINRA found that B. C. Ziegler violated NASD Rule 3010 by failing to establish and maintain a supervisory system reasonably designed to ensure that material economic information, such as delinquent sinking fund payments, was disclosed to the firm’s brokers and customers who were sold Church Bonds in secondary market transactions.

FINRA found that prior to September 2010, B. C. Ziegler did not inform its brokers, trading desk, or customers when an issuer was more than 30 days behind on its sinking fund payments, an indicator of financial distress. Further, it was alleged that from September 2010, through at least May 2012, B. C. Ziegler’s registered representatives and trading desk were informed only periodically when a Church Bond issuer fell five weeks behind on its sinking fund payments through the Credit Watch List causing B.C. Ziegler’s supervisory system to not be reasonably designed to consider material economic information in the pricing of Church Bonds in secondary market transactions. The result, FINRA found, was that the firm had similar pricing for secondary market trades in Church Bonds that were current and delinquent with sinking fund payments.

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.