securities lawyer

Cantella & Co. Accused of Overcharging Client Commissions

December 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Cantella & Co., Inc. (Cantella) over allegations that from approximately January 2006, to September 2011, the firm charged customers excessive commissions on approximately 1,270 equity transactions and 99 options transactions. FINRA also found that Cantella also failed to establish, maintain, and enforce an adequate supervisory system for the review of commissions charged.

Cantella has been a member of FINRA since 1983, the firm’s principal office is located in Boston, MA, and currently employs approximately 210 registered representatives working out of the principal office and 136 branch offices.

NASD Conduct Rule 2440 provides that all brokerage firms shall buy or sell at a security at a price which is fair, taking into consideration all relevant circumstances. The NASD established a policy that a mark-up of five percent may be deemed unreasonable and this policy applies equally to commissions on agency trades, and to mark-ups or mark-downs on principal transactions. In addition to the commission percentage other factors to be considered in determining the fairness of commission charges include: (i) the type of security involved; (ii) the availability of the security; (iii) the price of the security; (iv) the size of the transaction; (v) whether disclosure of the transaction cost was made to the customer prior to the trade’s execution; (vi) pattern of mark-ups; and (vii) the nature of the member’s business.

FINRA Sanctions Ameriprise Over Arbitration Discovery Abuse Part II

December 2, 2014 | by Staff Attorney

In the prior post we discussed the extremely difficult journey an investor may have to go through in order to obtain relevant discovery documents from the brokerage industry in FINRA arbitration. We also discussed how the system is stacked against the investor’s rights and provides incentives to firms to withhold documents. However, a recent FINRA enforcement order provides some hope that the regulatory watchdog will start taking these issues seriously.

In October 2014, FINRA sanctioned Ameriprise Financial Services, Inc. (Ameriprise) and its broker for altering documents and refusing to produce documents until the eve of hearing. FINRA’s action resulted from the discovery tactics employed by Ameriprise and its broker David Tysk (Tysk) in a FINRA arbitration.

In the Ameriprise case, the FINRA arbitrators found the firm’s conduct so egregious that it referred the matter to FINRA’s Member Regulation Department. The arbitration panel found that Ameriprise and Tysk produced documents in an arbitration proceeding without disclosing that Tysk had altered the documents after receiving a complaint letter from a customer. The altered documents were printouts of notes of Tysk’s contacts with the customer having the initials “GR.” Tysk was responsible for detailing his contact with customers in a computer system maintained by Ameriprise.

Gemini Real Estate Advisors Risk Investor Funds in Private Legal Dispute

November 15, 2014 | by Staff Attorney

As reported in InvestmentNews, three members of a real estate partnership that sells private placements in the real estate space are in the middle of a legal dispute that could potentially endanger millions of dollars in loans and investor capital as a result. The dispute is among the owners of Gemini Real Estate Advisors and began earlier this year when William Obeid, one of the partners, asked the other two partners, Christopher La Mack and Dante Massaro, to restructure the company to reflect certain areas of expertise. Those talks soon broke down and have now ended up in court.

Gemini Real Estate Advisors oversees a real estate portfolio of more than $1 billion and was founded in 2003. The complaint alleges that Mr. Obeid abused his position for personal gain through concealed unauthorized transfers of company funds and hiring of family members at inflated salaries. Thereafter, Mr. Obeid filed his own complaint in New York against Mr. La Mack and Mr. Massaro. alleging that the two other Gemini partners had proposed a business divorce and have acted in an effort to freeze him out in order to strengthen their negotiation position in discussions concerning a buyout of Mr. Obeid’s interest.

According to Mr. Obeid’s lawsuit, his partners’ strategy would harm Gemini and investors, by paralyzing Gemini’s operations, causing existing development projects to become distressed, and risk default on more than $97 million in loans and $15 million of investors’ equity.

SEC Approves Changes to Value of Non-Traded REITs on Account Statements

November 6, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) approved a rule change proposed by the Financial Industry Regulatory Authority (FINRA) that will give investors greater insight into the costs of purchasing shares of non-traded real estate investment trusts (Non-Traded REITs).

As reported by InvestmentNews, the SEC approved FINRA’s proposal on October 10. The rule change would require broker-dealers to include a per-share estimated value for an unlisted direct participation program (DPP) or a REIT on customer statements in addition to other related disclosures. The current practice is to list the value of Non-Traded REITs at a per-share price of $10, or simply the purchase price of the investment.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial real estate properties, residential mortgages of various types, or other specialty niche real estate markets such as strip malls, hotels, and other industries. REITs can be publicly traded and when they are, can be bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers and are illiquid, have no market, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

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.

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.

Former First Allied Broker Herbert Kaye Suspended for Unauthorized Trading

October 8, 2014 | by Staff Attorney

On September 15, 2015 FINRA suspended former First Allied broker, Herbert Leonard Kaye, for four months and fined him $25,000 which includes the disgorgement of $11,000 in commissions. According to FINRA, Mr. Kaye entered over 2,000 discretionary trades in the account of a customer between June 2010 and April 2013 without the customer’s prior written authorization, in violation of FINRA Rule 2010 and 2510(b). FINRA Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

In June 2010, Mr. Kaye’s customer realized a significant loss on the unsolicited sale of equities that she had inherited from her deceased husband. Following that sale the customer requested that Kaye recommend investments and investment strategies that would limit her exposure to large market fluctuations. The customer, who’s information was not disclosed, gave Mr. Kaye verbal authority to use his discretion to enter trades in her account without contacting her.

According to FINRA, Mr. Kaye did not obtain written authority to trade in her account. Moreover, First Allied’s written policies and procedures prevented discretionary trading except in limited circumstances. Nonetheless, between June 2010 and April 2013, Mr. Kaye executed over 2,000 discretionary trades generating over $173,000 in commissions.

SEC Cracks Down on Wrap Accounts to Prevent “Reverse Churning”

October 6, 2014 | by Staff Attorney

A recent InvestmentNews article explored The Securities and Exchange Commission’s (SEC) attempts to prevent conflicts of interest at registered investment advisers, a breach of their fiduciary duties, by focusing on potential misuse of popular flat-fee wrap accounts. The use of these accounts have given rise to claims of “reverse churning.” As we previously reported, “churning” is excessive trading activity or in a brokerage account. Churning trading activity has no utility for the investor and is conducted solely to generate commissions for the broker. By contrast “reverse churning” is the practice of placing investors in advisory accounts or wrap programs that pay a fixed fee, such as 1-2% annually, but generate little or no activity to justify that fee. Such programs constitute a form of commission and fee “double-dipping” in order to collect additional fees.

The SEC is looking into the practice by which clients pay an annual or quarterly fee for wrap products that manage a portfolio of investments. Investment advisors who place clients in such programs already charge fees based on assets under management (AUM) and the money management charges for wrap products are in addition to the AUM fee. According to InvestmentNews, the assets under these arrangements totaled $3.5 trillion in 2013, a 25% increase from 2012. Included in these numbers include separately managed accounts, mutual fund advisory programs, exchange-traded-fund (ETF) advisory programs, unified managed accounts, and two types of brokerage-based managed accounts.

Reverse churning can occur under these arrangements if there’s too little trading in the accounts in order to justify the high fees. In August, the SEC’s scrutiny of these products came to the forefront with the agency’s victory in a court case that revolved in part around an adviser’s improperly placing his clients into wrap programs. A jury decided in the SEC’s favor against the advisory firm Benjamin Lee Grant that the SEC argued improperly induced clients to follow him when he left the broker-dealer Wedbush Morgan Securities to his advisory firm, Sage Advisory Group.

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.