Suitability

The Dangers of Oil and Gas Private Placements

April 29, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) has found private securities offerings of oil and gas ventures pose a substantial danger and risk for investor fraud. An SEC Investor Alert listed some common red flag sales pitches often made to investors including: (1) Sales pitches referring to the high price of oil and gas; (2) “Can’t miss” wells or “guaranteed” returns; (3) Promises of high returns with little risk; (4) Sales pressure to purchase quickly; and (5) Sales pitches touting new technology to get higher production out of low-producing wells.

The Financial Industry Regulatory Authority (FINRA) has also clamped down on inappropriate sales of oil and gas ventures. Recently, FINRA fined broker Jeffrey Alexander (Alexander) concerning allegations that he recommended the purchase of interests in Amazon 13-30, an oil and gas program offered by Amazon Exploration that raised funds for the drilling of a well in Nebraska. FINRA found that the recommendations made by Alexander to three investors without a reasonable basis for believing the investment to be suitable for any investors.

In August 2012, FINRA alleged that the brokerage firm Shoreline Pacific entered into an agreement with Amazon Exploration where the firm would offer and sell up to 30 partnership units in Amazon 13-30. Shoreline Pacific was to receive a “success fee” of 20% of the funds it raised, as well as five Amazon 13-30 units if the firm was able raise $1 million for the venture. FINRA alleged that Alexander worked in Shoreline’s Colorado Springs office and was the primary point of contact between the firm and Amazon Exploration and primarily responsible for finding investors for the Amazon 13-30 private placement.

Investors in LEAF Limited Partnerships May Have A Investment Claim

April 22, 2014 | by Staff Attorney

Some investment advisors have touted alternative investments as safe, stable, high return products. The truth is, these products are often laden with risks that are not disclosed and discussed with clients. In addition, alternative investments are simply unsuitable for many investors needs. The sale of these products often generates commissions of between 7-10% of the investment amount. Thus, there are unscrupulous advisors who have used misleading sales pitches designed to lure investors into putting their hard earned money into these extremely risky and unsuitable investment.

Some alternative investments are sold as private placements in limited partnership vehicles. These limited partnerships are formed to acquire, operate, and sell assets for the benefit of the partners. Investors in limited partnerships are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, limited partnerships are not listed on an exchange and are therefore illiquid and reliable pricing information is typically very difficult to obtain.

There is a line of limited partnerships held under LEAF Asset Management, LLC—a limited liability company that acts as general partner for a handful of limited partnership equipment leasing fund investment programs. LEAF Asset Management, LLC is a wholly-owned subsidiary of Resource America, Inc., a company that specializes in developing investment funds for outside investors and providing asset management services either by contract or by acting as the manager or general partner of its own sponsored investment funds.

FINRA Investigating Newest Puerto Rico Issuance of Municipal Bonds

April 14, 2014 | by Staff Attorney

On March 21, 2014, The Financial Industry Regulatory Authority (FINRA) announced that it is investigating trading in Puerto Rico, examining secondary trades in Puerto Rico’s blockbuster $3.5 billion bond deal. FINRA is looking at possible violations of rules requiring minimum sales of $100,000. The greatest concern is that the bonds are being sold to individual investors in violation of securities regulations and FINRA Rules, including FINRA Rule 2111, which requires that a trade be suitable for particular investors. Given the prospectus’ apparent intent to make these institution-only bonds, sales to individual investors would be highly improper.

The self-governed United States territory sold the debt on March 11, 2013, in the largest high-yield offering for the municipal market. The issue provided Puerto Rico with enough cash to pay its bills through June 2015, as the island attempts to prop its budget, giving officials more time to jump-start the economy.

The FINRA investigation comes amid concerns that the new bonds—which now carry junk status after Puerto Rico was cut to junk last month—are being improperly sold to individual investors. The bonds’ prospectus provides that the debt will be issued in denominations of $100,000, absent an upgrade in Puerto Rico’s credit rating. Industry professionals have noted that making the trade size contingent on credit ratings is unusual, and suggests that the writer of the documents intentionally meant to prevent trades to small investors. However, recent trading activity has shown trades in denominations of as little as $5,000—smaller size trades that are more typical of individual investors.

Gana LLP Files Churning Case Against RBC and Morgan Stanley on Behalf of Client

April 7, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against RBC Capital Markets, LLC (RBC) and Morgan Stanley Smith Barney, LLC (Morgan Stanley) accusing their registered representative Bruce Weinstein (Weinstein) of churning (excessive trading) and making unsuitable recommendations. In addition, the complaint alleged that the brokerage firms failed to properly supervise Weinstein’s activities.

The claimant alleged that he is the owner of a small business who had very little investment experience with stocks, bonds, or any other investment products. In addition, the claimant has no other financial or investment training and is generally unsophisticated in financial matters. The complaint also alleged that Weinstein knew that the claimant was providing the broker with approximately 100% of his liquid assets. The claimant alleged that even though he did not tell the broker that he desired to speculate with 100% of his liquid assets, Weinstein incorrectly marked claimant’s investment objective as speculation. Claimant alleged that the broker also incorrectly selected his investment experience in options, stocks, and bonds as being 20 years. In fact, the claimant had no options trading experience.

According to the complaint, Weinstein immediately began executing a highly leveraged and excessive trading investment strategy in claimant’s account. The claimant alleged that Weinstein’s trading was made without authorization or prior notice to the client. The claimant alleged that the broker’s trading generated exorbitant commissions for himself while providing no material benefit to his client. For example, in the May 2011, the claimant alleged that his account lost 44.8% of its value in a single month. During this month, it was alleged that the broker excessively day traded options such as Apple causing losses of $23,228 in Apple options or nearly 21% of the claimant’s entire liquid net worth.

Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers

April 3, 2014 | by Staff Attorney

Rockwell Global Capital LLC (Rockwell) brokers Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Robert Lee first became registered in 1988. From March 2005, through November 2009, Robert Lee was registered through former FINRA member firm GunnAllen. Since November 2009, Robert Lee has been registered through Rockwell.

In August 2013, Robert Lee accepted a settlement with FINRA barring the broker from associating with any broker dealer. FINRA found that between September 25, 2008, and October 31, 2008, while Robert Lee was registered with GunnAllen, Robert Lee failed to follow a customer’s instructions regarding the purchase of three securities. FINRA also found that between September 2008, and at least December 2009, while Robert Lee was registered with two member firms, Robert Lee made material misrepresentations and omissions to a customer regarding the status of their investments. Specifically, FINRA found that Robert Lee misrepresented to the client that certain investments had earned $49,591 in dividends when in fact the investments did not exist and no dividends had been earned.

Allen Olander of Centaurus Financial Sanctioned Over Variable Annuity Sales

March 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Allen B. Olander (Olander) of Centaurus Financial, Inc. (Centaurus) concerning allegations that Olander failed to disclose an IRS lien on his Form U4, borrowed money from a customer, and made unsuitable recommendations in the sale and exchange of variable annuities. This is the second Centaurus broker that we have recently reported has been sanctioned.

Olander first became registered as an registered broker in 1993. Olander holds a Series 6 license that allows him to sell only open end mutual funds and variable annuities. From October 2007, to July 2011, Olander was associated with Centaurus. Olander’s BrokerCheck discloses that customers have filed at least 12 complaints against Olander concerning his conduct in handling their accounts. Many of the complaints involve the suitability or failure to disclose certain risks and features of variable annuities.

FINRA found that in May 2011, Olander received a lien by the Internal Revenue Service (IRS) in the amount of $42,465. According to FINRA, Olander failed to amend his Form U4 to disclose the lien. Disclosure of tax liens is important for investors because it lets the public know that the broker has had financial difficulties managing their own affairs and may be tempted to recommend products and services that are overly expensive in order to satisfy debts.

National Planning Corporation Broker Matthew Westfall Sanctioned Over Outside Business Activities and Non-Traded REIT Sales

March 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Matthew Westfall (Westfall) concerning allegations that from June 2011, through December 2012, while associated with the National Planning Corporation (National Planning), Westfall engaged in business activities outside the scope of his employment with the Firm. FINRA found that Westfall solicited 18 customers to purchase lraqi Dinar currency as an investment without firm approval to engage in this outside business activity. In addition, FINRA found that National Planning had internal guidelines that limited the amount customers were permitted to invest in illiquid investments, such as non-traded Real Estate Investment Trusts (REITs). According to FINRA, Westfall submitted falsified documents that exaggerated the net worth for customers permitting investments in amounts that National Planning would have otherwise prohibited.

Westfall entered the securities industry in 1983. From 2003 until August 2010, Westfall was associated with Securities America, Inc. From September 2010 to December 2012, Westfall was associated with National Planning. Thereafter, in May 2013, Westfall became associated with Primex

FINRA found that Westfall engaged in an undisclosed outside business activity of selling Dinars to 18 National Planning customers. FINRA alleged that the 18 firm customers purchased $87,954 in Dinars through Wcstfall through a personal account that he had with an online company that sold Dinars. For these sales, Westfall received approximately $8,344 in compensation.

John Towers of VSR Financial Sanctioned Over Unsuitable Sale of Alternative Investments and Private Placement Securities

March 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned financial advisor John H. Towers (Towers) of VSR Financial Services, Inc. (VSR) concerning allegations of unsuitable sales of over $6,000,000 in alternative investments including oil and gas interests, real estate investment trusts (REITs), and other speculative private placement investments to an investor. FINRA’s determinations in this matter is significant because some in financial industry take the position that wealthy customers are automatically sophisticated and therefore fair game to recommend positions in speculative private placement securities. The theory goes that if you have a lot of money then it is ok for you to lose some of it speculating in alternative investments.

Towers entered the securities industry in 1970. From 2002 until December 2013, Towers was associated with VSR. According to Towers’ BrokerCheck at least 14 customers have filed complaints against Towers. The vast majority of those complaints involve claims concerning the improper sale of various private placement securities.

FINRA alleged that in September 2005, Towers recommended that a married couple invest $25,000 in APC 2005-B, a high risk private placement. Over the next five years, FINRA found that Towers continually recommended that the couple make an additional eighty-eight investments in private placements and REITs totaling approximately $6,259,400 and representing approximately 72% of their investments purchased at VSR. FINRA alleged that the private placements and REITS were all described in the offering documents as high risk investments. FINRA also found that the couple had stated a moderate risk tolerance on their new account forms and specified that no more than 10% of their accounts were to be invested in high risk products.

JP Turner Supervisor Sanctioned Over Failure to Supervise Mutual Fund Switches

March 13, 2014 | by Staff Attorney

As we have reported, claims of churning, excessive trading, and failure to supervise have plagued J.P. Turner & Company, L.L.C. (JP Turner) brokers, among other misconduct. Recently, the Financial Industry Regulatory Authority (FINRA) imposed sanctions against Herman Mannings (Mannings), a JP Turner supervisor, concerning allegations that from February 2009, through October 2011, Mannings failed to reasonably supervise the activities of a registered representative to prevent unsuitable mutual fund switching.

On August 20, 2002, Mannings became registered with JP Turner. On February 10, 2003, Mannings was registered as a General Securities Principal at JP Turner. FINRA’s supervisory rule provides that each brokerage firm must establish, maintain, and enforce written procedures to supervise the types of business it engages in. Supervision of registered representatives, registered principals, and other associated persons must be reasonably designed to achieve compliance with applicable securities laws and regulations.

FINRA found that from February 2009, through October 2011, Mannings was an Area Vice President for JP Turner and his responsibilities included the supervision of at least 30 branch offices and as many as 60 representatives. According to FINRA, a registered representative referred to as only by the initials “LG” was one of the representatives that Mannings supervised. FINRA found that LG effected approximately 335 unsuitable mutual fund switches in the accounts of 54 customers without having reasonable grounds for believing that such transactions were suitable for those customers.

Silver Oak Securities Fined Over Non-Traditional ETF Sales

March 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Silver Oak Securities, Inc. (Silver Oak) concerning allegations from January 2009, to December 2010, Silver Oak failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws regarding the sale of leveraged and inverse Exchange-Traded Funds (Non-Traditional ETFs). Silver Oak has been a FINRA member since 2007 and is in Jackson, Tennessee, and employs 122 registered individuals at 28 branch offices.

Non-Traditional ETFs have grown significantly in popularity since 2006. By 2009, over 100 Non-Traditional ETFs had been issued with total assets under management of approximately $22 billion. A leveraged ETF seeks to deliver two or three times an index or benchmark return the ETF tracks. Non-Traditional ETFs can also be “inverse” or “short” returning the opposite of the performance the index or benchmark. Non-Traditional ETFs contain significant risks that are not found in traditional ETFs. Non-Traditional ETFs have risks associated with a daily reset, use of leverage, and compounding.

In addition, the performance of Non-Traditional ETFs over long periods of time tend to differ significantly from the performance of the underlying index or benchmark the fund tracks. For example, between December 2008, and April 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while a leveraged ETF that tracked the index’s daily return fell six percent. Another related leveraged ETF seeking to deliver twice the inverse of the index’s daily return fell by 26 percent. These risks, among others, prompted FINRA to issue a Notice to Members clarifying brokerage firm obligations when selling Non-Traditional ETFs to customers.