Suitability

Gana LLP Files Puerto Rico Municipal Bond Claim Against UBS On Behalf of Client

August 9, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP has recently filed securities arbitration case on behalf of an investor against UBS Financial Services, Inc. and UBS Financial Services, Inc. of Puerto Rico (UBS) involving allegations that UBS’ misleading sales tactics and inappropriate recommendations surrounding Puerto Rico bonds in the Claimant’s portfolio. According to the complaint, UBS encouraged a 26 year-old unemployed single mother to invest her life savings in just three Puerto Rico municipal bonds—Puerto Rico Employees Retirement System Bonds (ERS Bond), Puerto Rico Commonwealth Public Buildings Authority Bonds (Commonwealth Bond), and Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) Industrial Revenue Refunding Bonds (AFICA Bond). In addition, the complaint alleged that UBS recommended that the Claimant take out significant loans to leverage up her investment in these three bonds that were all hovering just above junk status.

The Claimant is a 26 year-old single mother, dedicates all of her time towards caring for her eighteen-month-old daughter. Unfortunately, the Claimant’s father passed away in October 2010 causing Claimant to receive life insurance proceeds from his passing. The Claimant used some of those proceeds to pay off the debts that she had accrued over the years and sought to use the remaining portion to invest for the future of her and her daughter.

Claimant alleged that UBS completely disregarded the risks inherent to the Puerto Rico municipal bonds and constructed a portfolio comprised solely of these soon-to-be-defunct securities. Claimant’s brokers Ramon M. Almonte (Almonte) and Juan E. Goytia (Goytia), recommended an approximate 130% concentration, through the use of leverage, in municipal debt. Claimant alleged that the bonds were portrayed as safe, secure, fixed-income securities that would preserve her principal while providing tax-free income. Contrary to UBS’ portrayal, the bonds recommended are volatile investments carrying a multitude of risks. According to the complaint UBS’ unsuitable recommendations and inappropriate asset allocation ultimately cost the Claimant most of her money.

Broker Kevin Nevin Sanctioned Over Alleged Sales of Private Securities Transactions

August 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Kevin Nevin (Nevin) concerning allegations that Nevin participated in 11 private securities transactions totaling $690,000 over the course of two years without first disclosing his participation his member firm. Through this conduct, FINRA found that Nevin violated NASD Conduct Rules 3040 and 2110.

Nevin entered the securities industry in 1994 and is currently a representative of Capital Guardian, LLC. In March 2006, Nevin became associated with VSR Financial Services (VSR) until February 2011, when he was terminated. In addition, to the recent FINRA complaint, Nevin has also been subject to three customer complaints. Some of the customer complaints concern allegations of unsuitable sales practices and securities fraud concerning variable annuities. Another customer complaint concerns the recommendation of oil & gas and real estate related private placements.

FINRA alleged that during part of the time he was registered with VSR, Nevin operated out of an office with another VSR registered representative referred to by the initials “PL.” FINRA found that PL was involved with at least three private placement offerings involving real estate and/or appurtenant property rights entities in the state of Colorado: Breakwater Capital Group, LLC; Yokam Land Holdings, LLC; and South Platte Land & Water, LLC. FINRA found that PL assured Nevin that he had informed VSR of the involvement in the Colorado water rights and real estate activity and that the private placement offerings were conducted entirely under the operations of PL’s real-estate agency. According to FINRA, PL told Nevin that he could recommend investments in these offerings to his customers and earn commissions on any ensuing investments if he obtained a real-estate license.

Bank Loan ETFs – Buyer Beware

July 11, 2014 | by Staff Attorney

A recent statement by BlackRock Inc (BlackRock) Chief Executive Larry Fink concerning leveraged exchange traded funds (Leveraged ETFs) has provoked a chain reaction from the ETF industry. Fink runs BlackRock, the world’s largest ETF provider. Fink’s statement that structural problems with Leveraged ETFs have the potential to “blow up the whole industry one day” have rattled other ETF providers – none more so than those selling bank loan ETFs. Naturally, sponsors of Leveraged ETFs, a $60 billion market, called the remarks an exaggeration.

As a background, leveraged ETFs use a combination of derivatives instruments and debt to multiply returns on an underlining asset, class of securities, or sector index. The leverage employed is designed to generate 2 to 3 times the return of the underlining assets. Leveraged ETFs can also be used to return the inverse or the opposite result of the return of the benchmark. While regular ETFs can be held for long term trading, Leveraged ETFs are generally designed to be used only for short term trading – sometimes as short as a single day’s holding. The Securities Exchange Commission (SEC) has warned that most Leveraged ETFs reset daily and FINRA has stated that Leveraged ETFs are complex products that are typically not suitable for retail investors. In fact, some brokerage firms simply prohibit the solicitation of these investments to its customers, an explicit recognition that a Leveraged ETF recommendation is unsuitable for virtually everyone.

Despite these dangers, bank loan Leveraged ETFs may be an easy sell to investors. Investors in fixed income instruments are compensated based upon the level of two sources of bond risk – duration risk and credit risk. Duration risk takes into account the length of time and is subject to interest rate changes. Credit risk evaluates the credit quality of the issuer. For example, U.S. Treasury’s have virtually no credit risk and investors are compensated based on the length of the bond. At the other end of the safety spectrum are low rated floating-rate debt – what bank loan Leveraged ETFs invest in. These funds are supposed to reset every 90 days in order to get exposure to the credit side but not take on much duration risk.

Broker Douglas Cmelik Sanctioned by FINRA Over Soliciting Penny Stock Purchases

July 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned broker Douglas Cmelik(Cmelik) concerning allegations that Cmelik improperly marked order tickets for penny stock purchases as “unsolicited” when the purchases were solicited. Cmelik’s conduct allegedly violated NASD Conduct Rule 3110 and FINRA Rule 2010.

Penny stocks are securities that carry significant investment risks. A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a company with less than $100 million in market capitalization. Penny stocks are also often called “low-priced securities” because they typically trade at less than $5 per share. Many penny stocks are very thinly traded and consequently liquidity for the stock can vary day-to-day.

Penny stocks are typically not suitable for many retail investors and consequently many firms prohibit their advisors from soliciting investments in these issuers. First, penny stocks may trade infrequently or very thinly making it difficult to liquidate a penny stock holding. Consequently, penny stocks often fluctuate wildly day-to-day. Penny stocks are often the target of unscrupulous individuals for fraudulent purposes. One scheme employed is the “pump and dump” scheme. In a pump and dump scheme, an unfounded hype for a penny stock the pumper already owns is created to boost the stock price temporarily. The penny stock pumper then sells their shares for a profit causing intense downward pressure on the penny stock and the security quickly loses value. The defrauded investors suffer huge losses as a result of the scheme.

Gana LLP Files Claim Against JHS Capital Advisors Concerning Broker Enver Alijaj’s Activities

July 7, 2014 | by Staff Attorney

On June 27, 2014, Gana Weinstein LLP filed a statement of claim against JHS Capital Advisors, LLC, formerly known as Pointe Capital Inc, on behalf of an Arkansas couple. The claims stem from the misconduct of Enver R. “Joe” Alijaj, a former Pointe Capital financial advisor who has worked at several different firms and has a record laden with customer complaints and FINRA violations. The statement of claim brought by Gana Weinstein LLP on Claimants’ behalf alleges (1) unsuitable recommendations, (2) failure to supervise, (3) breach of fiduciary duty, (4) fraudulent misrepresentation, and (5) breach of contract.

Around July 2008, Claimants, a couple from Arkansas nearing retirement, received a cold call from Mr. Alijaj—a broker with Respondent JHS. (A cold call is the solicitation of potential customers who were not anticipating such an interaction. Cold calling is a technique whereby a salesperson contacts individuals who have not previously expressed an interest in the products or services that are being offered). Mr. Alijaj aggressively pursued the Claimants’ business, promising them that he would preserve their retirement capital while providing them with increased returns.

Mr. Alijaj allegedly persuaded Claimants to give him approximately $250,000, which they believed was being safely and practically invested to accommodate their needs. Instead, Mr. Alijaj put all of Claimants’ funds into just three extremely thinly traded and highly volatile stocks. The three stocks were A-Power Energy Generation Systems Ltd. (“APWR”), Silicon Motion Technology Corp (“SIMO”), and Yingli Green Energy Holdings Co. (“YGE”). By January 2009, only five months after Mr. Alijaj made the purchases, APWR, SIMO, and YGE were each down 81%, 66%, and 59% respectively. At no point during this five-month freefall did Mr. Alijaj adjust the Claimants’ accounts or even communicate to them an explanation for the price depreciation or potential remedial action.

FINRA Sanctions Polar Investment Over Penny Stock Transactions

July 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Polar Investment Counsel, Inc. (Polar Investment) concerning allegations from 2011 and 2012, a firm advisor of Polar recommended various low-priced securities (penny stocks) received a total of 14 purchase orders for those securities. FINRA alleged that the representative marked eight of the orders as “unsolicited,” meaning that the customer instructed the advisor to purchase the security without any prompting from the advisor. FINRA found that the unsolicited marking was incorrect given that the advisor had brought the securities to the customers’ attention. FINRA found that the mismarked orders caused the firm’s books and records to be inaccurate. In addition, FINRA determined that Polar Investments did not permit brokers to recommend penny stock transactions and mistakenly assumed that all 14 transactions were unsolicited and did not conduct a sufficient supervisory review of those transactions.

Polar Investment has been registered with FINRA since 1997, its main office is in Thief River Falls, Minnesota, and is also registered as an investment advisor with the SEC. Polar Investment has 18 registered representatives operating out of 12 branch locations.

FINRA alleged that throughout 2011 and 2012, Polar Investment’s written supervisory procedures prohibited representatives from recommending penny stocks to the firm’s customers. As a consequence, Polar Investments presumed that all penny stock transactions were unsolicited and the firm did not subject advisors to adequate supervisory review. Instead, FINRA found that the firm had the customer sign a penny-stock disclosure form. FINRA found that between June 2011 and April 2012, a Polar Investment advisor by the initials “MV” brought various penny stocks to the attention of some of his customers. The advisor’s actions, according to FINRA, resulted in at least 14 orders to buy those securities.

Dawson James Securities Sanctioned Over Alleged Supervisory Failures

June 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Dawson James Securities, Inc., (Dawson James) concerning allegations that the firm did not provide for supervision reasonably designed to comply with certain applicable securities laws and regulations.

FINRA has stated that at a minimum, written supervisory procedures should describe: (a) identification of the individual responsible for supervision; (b) supervisory steps and review procedurals to be taken by the supervisor; (c) the frequency of reviews; and (d) the documentation of reviews. FINRA found that the Dawson James’ written supervisory procedures failed to provide for one or more of the four above-cited minimum requirements for adequate written supervisory procedures for conduct concerning: (1) disclosure of potential conflicts of interests to clients; (2) trading in the opposite direction of solicited customer transactions; (3) certain broker sales practice concerns such as unauthorized trading, suitability, excessive trading, and free-riding; (4) concentration of securities in clients’ accounts; (5) the sharing of profits and losses in clients’ accounts; (6) wash transactions; (7) coordinated trading; and, (8) the review of representatives’ electronic communications, among other violations.

FINRA alleged that the firm failed to investigate numerous ”red flags” relating to the activities of one registered representative referred to by the initials “DM”, including: (1) numerous exceptions generated on the firm’ s supervisory reports which included commissions charged to DM’s clients; (2) high concentrations of one security in DM’s clients’ accounts; and, (3) numerous cancel rebill requests for DM’s clients’ accounts. FINRA also found that James Dawson failed to enforce its written supervisory procedures that required electronic correspondence be reviewed on a daily basis. FINRA also found that from January 2007 through February 2008, the firm failed to ensure that the firm’s Head Trader, referred to as the initials “AE” carried out his delegated supervisory responsibilities relating to proprietary trading; trade reporting; clock synchronization; short sale compliance; compliance with the manning rule; mark ups and mark downs; and, compliance with inventory guidelines.

Ameriprise Slammed With $1.17 Million Decision Concerning Tenants-in-Common (TIC) Investments

June 17, 2014 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel recently ordered Ameriprise Financial Services Inc. (Ameriprise) to pay two elderly California investors $1.17 for recommending the investments in Tenants-in-Common (TIC), real estate related investments that eventually failed.

Brokerage firms, such as Ameriprise, having increasingly turned to alternative investment products such as TICs in recent years. The sales of TIC interests grew from approximately $150 million in 2001 to approximately $2 billion by 2004. FINRA has warned brokerage firms to put investors on notice of the risks of these illiquid investment for which no secondary market exists. In addition, subsequent sales of TIC property may occur at a discount to the value of the real property interest causing the investor substantial losses. FINRA has also warned that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with the IRS Section 1031 Exchange. FINRA requires that all member brokerage firms have an obligation to comply with all applicable conduct rules when selling TICs. These rules include the obligation to conduct proper due diligence and to ensure that promotional materials used are fair, accurate, and balanced.

In a recent InvestmentNews article, it was reported that in May, a FINRA arbitration panel in San Francisco ruled that Ameriprise had inappropriately advised two retired schoolteachers to invest a total of $1.03 million into three TICs in office complexes and hotels in early 2008. One of the TICs has subsequently failed and the two others have suffered declines in value. According to the investors, the couple lost most of their life savings. The couple invested in TICs known as ARI-Onyx Office Plaza Tenant In Common; Moody Springhill Suites Pittsburgh Tenant in Common; and Moody Marriott TownePlace Suites Portland Scarborough Tenant in Common.

Sales of Non-Traded REITs Contributes to Increased Broker Dealer Revenues

May 21, 2014 | by Staff Attorney

Despite the broad market’s recent volatility, 2013 brought the twenty-five largest independent broker dealers double-digit revenue growth on average, according to an Investment News report. After a weak 2012, these independent broker dealers roared to a 13.2% year over year increase in revenue, recording $18.46 billion in 2013 according to this year’s Investment News survey.

The overall strength of the S&P 500, gaining 29.6% in 2013 was one contributing factor to the 2013 success of independent broker dealers. The other factor however, was a flood of commissions generated from record sales of alternative investment products, namely non-traded real estate investment trusts (REITs). As Eric Schwartz, chief executive of Cambridge Investment Research explained, “There were two reasons for last year’s results. The stock market was up 30%, and there was an unusually high percentage of dollars in alternatives and REITs being sold. Remember, a number of REITs had public listings, and clients reinvested back into other REITs.”

According to the Investment News survey, the top ten independent broker-dealers with the most growth from alternative investments include: (1) Independent Financial Group; (2) Triad Advisors; (3) Royal Alliance Associates; (4) National Planning Corp.; (5) First Allied Securities; (6) Lincoln Financial Network; (7) Cambridge Investment Research; (8) Commonwealth Financial Network; (9) Ameriprise Financial Services; 10) LPL Financial.

The Risks of Investing In Variable Annuities

May 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred broker Mark R. Talley (Talley) formerly of Fifth Third Securities, Inc. concerning allegations of misrepresenting the properties of a variable annuity product to a customer. Our firm has received complaints concerning variable annuities from a number of clients complaining that their broker failed to explain the risks of these complex products.

A variable annuity is an investment and insurance product with significant risks and features the investor should be aware of before investing. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. The SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.”

A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you. The investor chooses investments to be made in the annuity and the value of the variable annuity will vary depending on the performance of the investment options chosen. The investment options for a variable annuity are usually mutual funds.