Suitability

EDI Financial Sanctioned Over Private Placement Supervisory Failures

April 1, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm EDI Financial, Inc. (EDI Financial) alleging that the firm’s business involved the sales of private placement offerings. From approximately January 2008 through November 2014, FINRA alleged that a substantial portion of EDI Financial’s revenue came from sales of private placements. But despite the importance of private placement sales to EDI Financial’s bottom line FINRA alleged that the firm failed to have adequate policies and procedures to supervise the sales of its private placement activities.

EDI Financial has been a registered broker-dealer since 1986. The firm conducts a general securities business which includes the sales of private placements and mutual funds. The firm has 70 brokers that operate out of its 22 branch offices, with headquarters in Irving, Texas.

FINRA found that EDI Financial failed to adopt and implement a supervisory systems reasonably designed to achieve compliance with the firm’s suitability obligations for the solicitation and sale of private placements. For example, FINRA determined that the firm lacked adequate written procedures concerning the what concentration of a customer’s assets could be allocated to private placements. Additionally, FINRA alleged that the firm did not effectively monitor customers’ exposure to private placements.

MLP Fund MainStay Cushing Royalty Energy Hurt by Failing Oil & Gas Prices

March 25, 2015 | by Staff Attorney

The attorneys at Gana Weinstein LLP have been following the collapse of the MainStay Cushing Royalty Energy Income Fund (CURAX), (CURNX), (CURCX), and (CURZX). The fund describes its investment strategy as investing primarily in securities of energy-related U.S. royalty trusts, Canadian royalty trusts, and Canadian exploration and production (E&P), E&P master limited partnerships (MLPs), and securities of other companies in the same businesses as Energy Trusts and MLPs engage.

Investments in MLPs contain significant risks and the Cushing Fund has declined by over 50% in value from its high. These risks stem from the fact that MLPs tend to fluctuate with the price of oil and gas. For example in 2008, when oil plummeted in the wake of the great recession the AMZ MLP Index declined by 36.9% in a single year. MLPs have other risks that investors should know including the fact that these investments often grow their distributions at an accelerated rate in their first two years in order to attract positive research reports from Wall Street analysts. The funds use the increased distributions and positive reports to influence their values higher even though the true long term yield of these MLPs are unknown.

As a background MLPs are publicly traded partnerships. About 86% of MLP securities are related to energy and natural resource companies. There are about 130 MLPs trading on major exchanges that focus on energy related industries and natural resources. While MLPs have the same liquid trading characteristics as common stocks they are internally very different. For instance, MLP’s are pass through investment vehicles that pass through their income to the investor without any company level taxation. In addition, MLP’s must derive 90% of their revenues from their businesses in natural resources activities. Investors should also be aware that in practice, most MLP’s pay out most of their earnings through distributions rather than reinvest profits in the company. This causes the MLPs to issue additional debt and shares in order to grow the business.

World Equity Group Alleged to Have Sold Private Placements Without Proper Due Diligence Part III

March 20, 2015 | by Staff Attorney

This post continues our firm’s investigation concerning the recent allegations brought by The Financial Industry Regulatory Authority (FINRA) sanctioning brokerage firm World Equity Group, Inc. (World Equity) concerning at least seven different allegations of supervisory failures that occurred between 2009 through 2012. FINRA’s allegations include failures to implement an adequate supervisory system and concerned both internal processes at the firm and procedures and in the handling of customer accounts in the areas of suitability of transactions in non-traditional ETFs, private placements, and non-traded REITs.

FINRA requires firms preserve for at least 6 years all communications relating to its business and to provide for ways to store electronic media. FINRA found that in May 2011, the World Equity opened a new branch office at 311 W. Monroe Street, Chicago, Illinois. FINRA alleged that errors in the process of transferring several representatives at that branch to World Equity emails of the representatives were not maintained and preserved before April 13, 2012. In addition, FINRA found that the firm failed to maintain business related emails for ten representatives who used their personal emails for business purposes.

FINRA also alleged that World Equity failed to conduct due diligence in connection with private placements offering from July 2009, through January 2012. During that time FINRA alleged that the firm conducted at least eight private placements including a product called Newport Digital Technologies, Inc. (NDT) and sold more than $6 million in these offerings. In addition, FINRA found that from August 23, 2010 to July 17, 2012 the firm conducted at least five Non-Traded REIT offerings and sold more than $3 million in these offerings.

World Equity Group Fined $225,000 Over Supervisory Failures Part I

March 17, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm World Equity Group, Inc. (World Equity) alleging that between 2009 through 2012, the firm failed to implement an adequate supervisory system reasonably designed to detect and prevent potential rule violations including: (1) failure to preserve emails; (2) failure to establish and maintain account records and obtain suitability information; (3) failure to implement a supervisory system to ensure suitability of transactions in non-traditional ETFs; (4) failure to properly document adequate due diligence in connection with private placements and non-traded REITs; (5) failure to establish an adequate supervisory system for the review of activity for options activity in unapproved accounts; (6) failure to have a reasonable supervisory system to ensure compliance with Section 5 of the Securities Act of 1933; and (7) failure to adequately enforce information barrier procedures.

World Equity is a full service broker dealer and has been a FINRA member since 1992. The firm is based in Illinois and has approximately 160 brokers operating out of 68 registered branch offices.

One of the offerings FINRA investigated at World Equity was Newport Digital Technologies, Inc. (NDT). In 2008, according to FINRA, World Equity hired a new syndicate manager by the initials MN to lead the business line out of the firm’s Spokane office. During MN’s tenure as syndicate manager, World Equity was involved in several private offerings including the NDT offering for which the firm acted as the placement agent. NDT had been registered with the SEC since 2000 and originally was known as Golden Choice Foods Corporation and then as International Food Products Group, Inc. (IFPG). These companies were in the consumer food business until December 2008.

Tapes Show That UBS Executives Forced UBS Brokers to Sell High Risk Bond Funds

March 13, 2015 | by Staff Attorney

As our firm has written about on numerous occasions, our firm is currently representing investors who purchased the UBS Puerto Rico closed-end-bond funds and other Puerto Rico municipal debt. The allegations our firm has brought on behalf of clients focuses on UBS’ sales tactics and recommendations to its customers to invest in 23 proprietary closed-end funds. The UBS Puerto Rico bond funds contained substantial risks that allegedly were downplayed by the firm’s advisors in order to generate sales. The funds’ risks included excessive amount of leverage, conflicts of interests, and omission of material information concerning the risky nature of certain of the funds’ holdings.

Many of our clients tell very similar tales about how they were recommended to invest as much as 100% of their portfolios in the UBS Puerto Rico closed-end funds, some through additional margin or bank loans. Now, thanks to an article published by Reuters, Puerto Rico bond fund investors are starting to learn why.

According to the article, a group of brokers came up with a list of 22 reasons why they wanted to stop selling the funds including the facts that the funds suffered from low liquidity, excessive leverage, oversupply and instability, and contained debt underwritten by UBS, a conflict of interests.

Cary Olson Sanctioned by FINRA Over Non-Traditional ETF Sales

March 3, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Cary Olson (Olson) concerning allegations that Olson made recommendations in non-traditional exchange-traded funds (ETFs) to several customers without having reasonable grounds to believe his recommendations were suitable in relation to the holding periods for the ETFs. FINRA also alleged that Olson permitted the execution of options transactions in the account of a customer who was not approved for options activity.

Olson entered the securities industry in 1993. In June 2006, Olson became registered at FlNRA firm Great Circle Financial until July 2013. From June 2013 until November 2013, Olson was registered with GBS Financial Corp. Finally, Olson is currently associated with Calton & Associates. This disciplinary matter is not the first time FINRA has sanctioned Olson. In January 2006, Olson consented to the entry of findings by NASD that he exercised discretion in customer accounts without obtaining written authorization. Olson was suspended for one month and fined $5,000.

FINRA alleged that from October 2010 through October 2012, Olson recommended transactions of various leveraged and inverse-leveraged ETFs in the accounts of five customers. As a background, these types of ETFs are designed to achieve their objectives over the course of a single day only and are generally not appropriate for long term holdings. By holding these ETFs over longer periods of time the value of the investment differs dramatically from the index it tracks because the investment is reset daily.

FINRA Sanctions Financial Advisor Tory Duggins Over Unauthorized Discretionary Trading

February 19, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Tory Duggins (Duggins) concerning allegations that between November 2011 through May 2012, Duggins exercised discretionary power in two customer accounts by making 17 transactions without obtaining prior written authorization from the customers. Under NASD Conduct Rule 2510(b) Duggins was required to provide written authorization to his firm in order to engage in discretionary trading activity. In addition, FINRA alleged that Duggins made false statements on a member firm semi-annual compliance questionnaire concerning his exercise of time and price discretion in customer accounts.

Duggins entered the securities industry in July 2002. Since that time Duggins has been associated with a total of nine different brokerage firms. Most recently from October 2008 through December 2012 Duggins was associated with vFinance Investments, Inc. (vFinane). Thereafter, Duggins was associated with National Securities Corporation (National Securities) until January 2014. Currently, Duggins is associated with Avenir Financial Group.

In addition to FINRA’s claims, Duggins public disclosures reveal that Duggins has been subject to multiple tax liens totaling over $300,000. Often times such extensive debts influence brokers to engage in excessive trading and churning in order to generate commissions to pay down personal debts. Often times, authorized trading goes hand and hand with churning. In Duggins’ case, three customers have brought complaints against the broker alleging excessive trading designed to generate commissions for the broker.

FINRA Sanctions Felt & Company Broker Timothy O’Brien Over Discretionary Trades

February 17, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Timothy O’Brien (O’Brien) alleging that O’Brien exercised discretion in two customers’ accounts without obtaining prior written authorization from the customers. O’Brien is associated with brokerage firm Felt & Company.

The FINRA rules provide that registered representatives shall not exercise discretionary power in a customer’s account unless the customer has given prior written authorization to a stated broker and the account has been accepted by the member on that basis. FINRA found that O’Brien was the registered representative for two Felt customers. FINRA determined that in handling the customers’ accounts O’Brien periodically discussed trading strategies with these two customers. However, FINRA alleged that these customers did not give O’Brien written authorization to exercise discretion in their accounts nor did Felt approve these accounts as discretionary accounts. From July 2012, through February 2013, FINRA found that O’Brien used discretion to execute approximately 171 transactions in these customers’ accounts.

Often times unauthorized discretionary trading goes hand and hand with churning, trading that broker engages in solely to generate commissions at the client’s expense. In order to establish a churning claim the investor must show that the trading was first excessive and second that the broker had control over the investment strategy. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over and whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably be expected to profit from the activity.

Gana LLP Investigation Spotlight: Source Capital Group and Donald Saccomano

February 10, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently brought a complaint against Source Capital Group, Inc. (Source Capital) broker Donald Saccomano (Saccomano) alleging misconduct in connection with suitability, false representation, and failure to supervise claims relating to Direct Participation Products, limited partnerships, and municipal debt securities. FINRA has not released detailed information concerning the pending complaint but this is only one of several recent actions FINRA has taken against Source Capital and its financial advisors in recent years.

As we recently reported, FINRA filed a complaint against former Source Capital broker Joseph Hooper (Hooper) alleging that Hooper was working for a company called the iPractice Group, Inc. (iPractice) in a capacity that included solicited and participating in the sale of iPractice stock to customers. In that complaint FINRA alleged that Hooper was compensated for his activities. FINRA alleged that Hooper participated in 53 private securities transactions involving 41 investors or investor groups and a total of $3,400,648 worth of iPractice stock. In return, FINRA alleged that Hooper received $425,081 and more than 21,000 shares of iPractice stock as compensation for his activities.

Previously, our firm wrote about supervisory and disclosure issues at Source Capital, including FINRA’s action against Source Capital and certain principals concerning the failure of the firm’s brokers to adequately disclose material facts and the transaction of sales through misstatements. The allegations in FINRA’s action concerned certain oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle) offered by Source Capital.

WFG Investments Sanctioned Over Failure to Review Transactions for Suitability Part II

February 9, 2015 | by Staff Attorney

This article continues our prior post concerning The Financial Industry Regulatory Authority (FINRA) recent sanctions of brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014.

In one supervisory failure example involving suitability, FINRA found that between 2009, and 2013, a broker by the initials “MC” (1) traded with discretion in several of his customers’ accounts without their written authorization; and (2) also excessively traded in at least one of his customer’s accounts in light the customer’s investment objectives and risk tolerance. FINRA also alleged that many of the securities traded were also qualitatively unsuitable in light of the customers’ age, objectives, risk tolerance, and financial situation. In addition, several of the customer’s accounts were charged both commissions and management fees and this problem was not identified or corrected even after it was detected.

FINRA also alleged that MC used unapproved charts and provided consolidated statements to a customer without the firm’s knowledge or approval. Moreover, allegedly there were exception reports that highlighted the problem trading activity in several of these accounts that were simply not reviewed or not properly processed. In fact, FINRA found that one of the customers who complained about unsuitable activity in her accounts was not contacted by the firm until after she had complained despite the fact that her accounts had appeared on numerous exception reports. Similarly, FINRA found that broker SGD was also permitted by the WFG to engage in unsuitable trading in one of his customer’s accounts which included the recommendation and sale of numerous high risk equity and ETF purchases for a retired client with a conservative risk tolerance.