Suitability

Broker Investigation: Laidlaw & Company Advisor Robert Yasnis

November 20, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Robert Yasnis (Yasnis) has been the subject of 3 customer complaints, and 3 regulatory actions. The customer complaints against Yasnis allege securities law violations that claim unauthorized trading among other claims. The most recent complaint was filed in June 2015, and alleged $34,350 in losses due to unauthorized trading in May 2011.

The most recent regulatory action was taken by the state of Florida in 2013, when the state alleged that a material false statement was made on an application for registration resulting in a denial of registration. In 1997, the state of Virginia alleged that Yasnis offered unregistered securities in the state and received a fine. Finally in 1994, the state of Texas revoked Yasnis’ securities license in the state due to allegations that he misled the state concerning the status of registration within the state.

Yasnis entered the securities industry in 1993. From February 2007, until July 2009, Yasnis was associated with Hallmark Investments, Inc. From November 2009, until April 2010, Yasnis was associated with Stephen A. Kohn & Associates, Ltd. Thereafter, from April 2010, until October 2012, Yasnis was associated with Buckman, Buckman & Reid, Inc. From October 2012, until January 2014, Yasnis was associated with Meyers Associates, L.P. Presently, Yasnis is associated with Laidlaw & Company (UK) Ltd. out of the firm’s New York, New York branch office location.

FINRA Sanctions Broker Garrett Ahrens Over False Account Statements

November 8, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2013036001201) broker Garrett Ahrens (Ahrens) concerning allegations that the broker used false and misleading consolidated reports with clients.

According to FINRA’s BrokerCheck records Ahrens has been in securities industry since 1989. From June 1998 until August 2015, Ahrens was associated with LPL Financial LLC (LPL Financial). In August 2015, LPL Financial allowed Ahrens to voluntarily resign alleging that the broker potentially violated certain FINRA rules relating to the use of consolidated statements. In addition to the termination and FINRA complaint Ahrens has been subject to nine customer complaints over the course of his career. Many of the more recent complaints involve allegations of investments in limited partnerships, private placements, and non-traded real estate investment trusts (Non-Traded REITs) among other investments.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are also publicly traded REITs that are 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, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

FINRA Files Churning Complaint Against Leonard Goldberg

September 30, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought and enforcement action against broker Leonard Goldberg (Goldberg) (FINRA No. 2011026098504) alleging during the seven year period from August 2007 through August 2014, while he was registered with FINRA through J.P. Turner & Company, LLP (JP Turner) and Newport Coast Securities Inc. (Newport Coast) Goldberg caused over $123,600 in losses to five customers while making over $77,900 for himself by using discretion without authorization in connection with 300 mutual fund and Exchange Trading Fund (ETF) transactions to his benefit and the customers’ loss. FINRA also alleged that from August 2007 through February 2012, Goldberg used discretion to facilitate a scheme of effecting fraudulent and unsuitable short term switching of Class A mutual funds – a/k/a excessive trading activity or churning – in the accounts of the five customers. Finally, FINRA alleges that Goldberg also falsified firm documents in furtherance of his scheme.

Goldberg first became associated with a FINRA member in 1972. From July 2007, until October 2010, Goldberg was associated with JP Turner. Thereafter, from October 2010, until December 2014, Goldberg was associated with Newport Coast. According to BrokerCheck records Goldberg has had at least six customer complaints filed against him during his career.

According to FINRA, Goldberg’s fraudulent and unsuitable short term mutual fund switching scheme involved replacing one Class A mutual fund position with another one more than 90 times in a five year period. FINRA determined that the accounts held those mutual funds for an average of only five to six months before Goldberg switched the funds. FINRA also found that the customers generally trusted Goldberg to trade on their behalf in their accounts and he did not inform them in advance of the trades. In sum, FINRA determined that Goldberg’s mutual fund switching had no business purpose other than to generate commissions for himself through repeated fees and charges.

FINRA Bars Richard Adams Over Churning Customer Accounts

September 28, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought and enforcement action against broker Rasheed a/k/a Richard Adams (Adams) (FINRA No. 2015045911001) resulting in a bar from the securities industry alleging that between July 2013, and June 2014, Adams engaged in unsuitable excessive trading and churning in two of his customers’ accounts. In addition, FINRA alleged that Adams willfully failed to amend his Uniform Application for Securities Industry Registration and Transfer (Form U4) to disclose 12 unsatisfied judgments and liens.

Adams first became associated with a FINRA member in 1997. From May 2002, until August 2010, Adams was associated with E1 Asset Management, Inc. Thereafter, from August 2010, until June 2011, Adams was associated with PHD Capital, Finally, from June 2011, until May 2015, Adams was associated with Caldwell International Securities out of their New York, New York office location. In 2010, Adams created and was the 100% owner of Adams Wealth Management, Inc. (AWM).

According to FINRA, from July 2013, to June 2014, Adams exercised de facto control over two customers’ accounts referred to by the initials “AD” and “PV”. FINRA found that Adams excessively and unsuitably traded and churned AD’s account and PV’s account in a manner that was inconsistent with those customers’ investment objectives, financial situations, and needs. Specifically, FINRA found Adams’ trading activity was inappropriate because it resulted in a turnover rate in AD’s account of 16.14, and a cost-to-equity ratio of 70.99% while in PV’s account the turnover ratio was 19.16 and the cost-to-equity ratio was 91.96%. FINRA found that the improper trading activity in these two accounts resulted in losses of approximately $37,000 and generated commissions of approximately $57,000.

Cape Securities, Inc. Fined $125,000 for Failure to Supervise

September 18, 2015 | by Staff Attorney

On May 5, 2015, the brokerage firm Cape Securities, Inc. (“Cape”) was fined $125,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its personnel, in effect allowing its brokers to recommend unsuitable investments and churn customer accounts.

According to the Letter of Acceptance, Waiver and Consent (AWC), for a sixteen-month period, spanning October 2011 through February 2013, Cape’s supervisory system and written supervisory procedures, pertaining to the review of actively traded accounts, failed to adequately address and identify numerous items. According to FINRA, Cape’s supervisory policies and procedures failed to address (1) the process by which transactions are reviewed, (2) risks in customer accounts, and (3) methods by which Cape conducted its suitability analysis. According to the AWC, Cape never made use of clearing firm exception reports in their review of actively traded accounts and had no written supervisory procedures relating to the monitoring of complex trading strategies.

In addition, during the period of October 2011 through September 2012, registered representatives in Cape’s Manhattan branch conducted trades in several leveraged exchange traded funds (“ETFs”) and sold covered calls to customers. This trading activity caused customer accounts to have excessive turnover ratios, which indicates churning of customer accounts. According to FINRA, Cape did not inquire into the suitability of this trading activity despite all the indications of excessive trading and its awareness of the strategies being recommended.

BestVest Investments Sanctioned Over Non-Traditional ETF Sales

September 15, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned (Case No. 2014038906201) brokerage firm BestVest Investments, Ltd. (BestVest) concerning allegations that from January 2012, through August 2014, BestVest 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).

As a background, Non-Traditional ETFs behave drastically different and have different risk qualities from traditional ETFs. While traditional ETFs 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 are also used to earn the inverse result of the return of the benchmark.

However, the risks of holding Non-Traditional ETFs go beyond merely multiplying the return on the index. Instead, Non-Traditional ETFs are generally designed to be used only for short term trading as opposed to traditional ETFs. The use of leverage employed by these funds causes their long-term values to be dramatically different than the underlying benchmark over long periods of time. For example, between December 1, 2008, and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index’s daily return fell six percent. In another example, the ProShares UltraShort Oil and Gas, seeks to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.

FINRA Bars Merrill Lynch Broker Kai Cheng Over Unauthorized Trading Investigation

September 2, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred (Case No. 201303930510) broker Kai Cheng (Cheng) concerning the broker’s failure to respond to requests for information concerning the regulators investigation into claims that Cheng engaged in conduct including entering into personal financial transactions with a customer, using a personal email address to communicate with a customer, and unauthorized trading in a customer account. In addition, to the FINRA bar Cheng has one employment separation and one customer dispute disclosed on his BrokerCheck record. The customer complaint contains allegations of unsuitable investments, failure to follow instructions, unauthorized trading, and omissions of material facts.

Cheng first entered the securities industry in 2005 as a broker with Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) with the title of “First Vice President” and worked there until he was discharged in 2015. On March 2, 2015, Merrill Lynch filed a Uniform Termination Notice (Form U5) that reflected that Cheng was discharged on February 4, 2015. According to FINRA the Form U5 stated that Cheng was terminated for conduct including entering into personal financial transactions with a customer, using a personal email address to communicate with a customer and unauthorized trading in a customer account.

FINRA then sought to investigate these allegations and during the course of FINRA’s examination, the agency sent a letter to Cheng’s counsel pursuant to FINRA Rule 8210 requesting Respondent to provide on the record testimony. According to FINRA Cheng failed to provide testimony. Cheng’s failure to appear resulted in a bar from the industry.

FINRA Sanctions Tyler Powell Over Unauthorized Trades

September 1, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned (Case No. 2014040633301) broker Tyler Powell (Powell) concerning allegations that Powell exercised discretion in a customer’s account without obtaining prior written authorization from the customer.

Powell first became registered with FINRA in 2007 through his association with a A.G. Edwards & Sons, Inc. From January 2008, to August 2014, he was associated with Wells Fargo Advisors, LLC (Wells Fargo) and registered with FINRA. Since August 2014, Powell has been associated with Stifel, Nicolaus & Company, Incorporated (Stifel Nicolaus).

NASD Conduct Rule 2510(b) prohibits registered representatives from exercising discretion in a customer account unless the customer has provided written authorization to the broker and the brokerage firm to exercise discretion. Advisors are not allowed to engage in unauthorized trading. Such trading occurs when a broker sells securities without the prior authority from the investor. A broker must first discuss all trades with the investor before executing them. The SEC has also found that unauthorized trading to be fraudulent nature.

Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part II

August 11, 2015 | by Staff Attorney

This post continues our investigation into whether or not brokerage firms have a basis to continue to sell non-traded real estate investment trusts (Non-Traded REITs). Non-Traded REIT sales have exploded becoming the latest it product of Wall Street. However, experts and regulators have begun to question the basis for selling these products. And if Non-Traded REITs are to be sold, should there be a limit on the amount a broker can recommend.

As reported in the Wall Street Journal, Craig McCann, president of Securities Litigation & Consulting Group, a research and consulting company, “Nontraded REITs are costing investors, especially elderly, retired, unsophisticated investors, billions. They’re suffering illiquidity and ignorance, and earning much less than what they ought to be earning.” In conclusion, “No brokerage should be allowed to sell these things.”

According to his analysis, shareholders have lost about $50 billion for having put money into Non-Traded REITs rather than publicly exchange-traded funds. The data comes from a study of the difference between the performance of more than 80 Non-Traded REITs and the performance of a diversified portfolio of traded REITs over two decades. The study found that the average annual rate of return of Non-Traded REITs was 5.2%, compared with 11.9% for the Vanguard REIT Index Fund.

Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I

August 10, 2015 | by Staff Attorney

As longtime readers of our blog know we have reported numerous instances of sales and other practice violations regarding how brokers and brokerage firms sell non-traded real estate investment trusts (Non-Traded REITs). See list of articles below. As Non-Traded REITs have become the latest darling product of the financial industry experts and regulators have begun to question the basis for selling these products. And if Non-Traded REITs are to be sold, should there be a limit on the amount a broker can recommend.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are publicly traded REITs that are 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, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

Investors are also often ignorant to several other facts that would warn against investing in Non-Traded REITs. First, only 85% to 90% of investor funds actually go towards investment purposes. In other words, investors have lost up to 15% of their investment to fees and costs on day one in a Non-Traded REIT. Second, often times part or almost all of the distributions that investors receive from Non-Traded REITs include a return of capital and not actual revenue generated from the properties owned by the REIT. The return of capital distributions reduces the ability of the REIT to generate income and/or increases the investment’s debt or leverage.