variable annuities

Broker Investigation: Robert Blake’s Sale of Tenants-in-Common (TIC) Real Estate Investments

July 10, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Robert Blake (Blake) has been the subject of at least six customer complaints, one criminal activity, and three regulatory actions. Customers have filed complaints against Blake alleging a number of securities law violations including that the broker made unsuitable investments, misrepresentations and false statements in connection with recommendations to invest in several different types of investments including private placements such as tenants-in-common (TICs) interests, variable annuities, and equity-indexed annuities.

Blake first became registered with a FINRA firm in 1974. From 2001 until November 2011, Blake was registered with Presidential Brokerage, Inc. Thereafter, Blake has been registered with Cambridge Investment Research, Inc. in the firm’s Greenwood Village, Colorado office. Blake operates out of business entity called Speer Wealth Management.

Both TICs and investment annuities have caused significant investment losses. The failure of the TIC investment strategy as a whole across the securities industry, TIC investments have virtually disappeared as offered investments. According to InvestmentNews “At the height of the TIC market in 2006, 71 sponsors raised $3.65 billion in equity from TICs and DSTs…TICs now are all but extinct because of the fallout from the credit crisis.” In fact, TICs recommendations have been a major contributor to bankrupting brokerage firms. For example, 43 of the 92 broker-dealers that sold TICs sponsored by DBSI Inc., a company whose executives were later charged with running a Ponzi scheme, a staggering 47% of firms that sold DBSI are no longer in business.

Senior Abuse in the Securities Industry A Major Ongoing Concern

June 23, 2015 | by Staff Attorney

As long time readers of our blogs know senior abuse is an ongoing concern in the securities industry. See Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors; The NASAA Announces New Initiative to Focus on Senior Investor Abuse; The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective.

Recently, a number of regulatory agencies have begun new initiatives against investment fraud targeted at seniors with the intent to provide resources to seniors and financial advisors. Regulators fear senior abuse in the investment sector will be a growing trend over the next couple of decades if not addressed soon.

According to a National Senior Investor Initiative report cited by the Financial Industry Regulatory Authority (FINRA), the Social Security Administration estimates that each day for the next 15 years, an average of 10,000 Americans will turn 65. According to the U.S. Census Bureau in 2011, more than 13 percent Americans, more than 41 million people, were 65 or older. By 2040, that number is expected to grow 79 million doubling the number that were alive in 2000.

Gana LLP Broker Spotlight: Pasquale “Pat” Vitucci Sales of Variable Annuities

April 27, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Pasquale “Pat” Vitucci (Vitucci) has been the subject of at least 19 customer complaints over the course of his career. Customers have filed complaints against Vitucci alleging that the broker made unsuitable investments primarily in variable annuity related products. Other claims concerning Vitucci’s handling of customer accounts include allegations of misrepresentations, breach of fiduciary duty, churning, and fraud. In total investors have complained of over $1 million in losses.

Vitucci has been registered with FINRA since 1992. From October 2005 until October 2008, Vitucci was registered with AIG Financial Advisors, Inc. Thereafter, Vitucci has been associated with National Planning Corporation (National Planning). According to public records Vitucci operates out of a DBA business called Vitucci & Associates Insurance Services.

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Thus, the product or investment strategy being recommended must be appropriate for the investor and the advisers must convey the potential risks and rewards before bringing it to an investor’s attention.

Foothill Securities Fined $210,000 Over Supervisory Failures

March 31, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Foothill Securities, Inc. (Foothill) alleging between May 17, 2010, and September 16, 2012, Foothill did not have an adequate supervisory system and written procedures to monitor its securities business, failed to follow the supervisory system, and failed to establish and enforce policies reasonably designed to supervise the firm’s securities business. Also included in FIRNA’s complaint was Stephen Shipp, Jr. (Shipp), as CCO of Foothill, FINRA alleged that he was responsible for the firm’s supervisory system, its written procedures, and the enforcement of its supervisory system causing the violations.

Foothill is a dually registered broker-dealer and investment advisor firm and has been a member of FINRA since 1962. The firm has approximately 255 registered brokers operating from approximately 138 branch offices. The firm conducts a general securities business in the following products: equities, mutual funds, corporate and municipal debt, US government securities, oil and gas interests, options, private placements, direct participation programs, and variable contracts.

FINRA alleged that Foothill’s supervisory procedures were deficient in many ways. A small sample of FINRA’s findings include that between May 17, 2010 and September 16, 2012, Foothill acting through Shipp: (1) heavily relied upon a proprietary data system for the supervision of its brokers securities transactions but that the trading information captured by the proprietary system was not consistently accurate or complete; (2) allowed nine of its ”dual Office of Supervisory Jurisdiction branch offices to have two producing managers supervise each other’s activities, even though this supervisory structure is prohibited under the FINRA Rules; (3) had an inadequate supervisory system relating to the heightened supervision of its producing managers; (4) the firm’s procedures required all producing managers’ correspondence to be forwarded to the home office for review and approval by the CCO but that procedures failed to specify the details of what the CCO’s correspondence reviews would entail and how the reviews would be evidenced; (5) at least one producing manager never sent any of his correspondence to the CCO for review or approval which was not caught by the firm; (6) failed to adequately and accurately disclose the required details of certain outside business activities of its brokers in 34 of 87 sampled disclosures; (7) failed to timely update its registered representatives disclosures in at least 13 instances; (8) failed to timely file five customer complaints, and four other customer related disclosures with FINRA; (9) failed to evidence the daily review and approval of daily reports of approved private securities transactions for one of its registered representatives

FINRA Fines Sigma Financial Over Supervisory Failures Part II

January 27, 2015 | by Staff Attorney

This post continues our prior report on the Financial Industry Regulatory Authority’s (FINRA) recently sanctions against Sigma Financial Corporation (Sigma Financial) alleging from April 25, 2011, through June 24, 2012, supervisory deficiencies existed at Sigma including the firm’s supervision of registered representatives, the firm’s suitability processes and procedures, some of the firm’s implemented procedures relating to customer information, and also branch office registration for trade execution.

FINRA found that Sigma Financial permitted its representatives to create and use consolidated statements with their customers that reflected the customers’ holdings of investments away from the firm. However, FINRA found that Sigma Financial did not adequately supervise its representatives’ creation and use of such statements in that the firm neither centrally tracked the number or identity of representatives who were using consolidated statements nor the customers who received such statements. Instead, FINRA found that Sigma Financial relied upon the representatives themselves to submit only the initial template of the consolidated statements they created and intended to use with their customers and the firm did not actually receive or review the statements shared with the customers.

Another supervisory deficiency noted by FINRA was that Sigma Financial had four preferred vendors through which brokers could establish and maintain websites. But use of these vendors, was not required and FINRA found that 134 representatives maintained non-preferred vendor websites, or approximately 20% of all websites. FINRA found that non- preferred vendors failed to notify Sigma Financial if registered representatives made any changes to their websites. In this way FINRA found that Sigma Financial did not conduct adequate supervision of those non-preferred vendor websites.

FINRA Alleges SWS Financial Services Failed to Supervise Variable Annuity Transactions

December 19, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) filed a complaint against brokerage firm SWS Financial Services, Inc. (SWS Financial) over allegations that from September 2009, to May 2011, SWS Financial had inadequate supervisory systems procedures to supervise its variable annuity (VA) securities business. Specifically, FINRA alleged that SWS Financial: (1) failed to establish and maintain supervisory systems to supervise its VA securities business in violation of NASD and FINRA Rules; (2) failed to implement rules requiring a registered principal review and approval prior to transmission of a VA application to the issuing insurance company for processing and that a registered principal only approve VA transactions that he or she has determined that there is a reasonable basis to believe that the transaction is suitable for the customer; (3) failed to implement surveillance procedures to monitor a broker’s recommended exchanges of VAs to identify inappropriate exchanges; (4) failed to have policies and procedures to implement corrective measures to address inappropriate VA exchanges; and (5) failed to develop and document specific training policies or programs to ensure that principals supervisors who reviewed VA transactions had sufficient knowledge to monitor the transactions.

SWS Financial is a registered broker/dealer since 1986 and is headquartered in Dallas, Texas. The firm employs 313 registered personnel. From September 2009, to May 2011, SWS Financial derived the majority of its income from its business lines selling equities, mutual funds, variable life insurance or annuities, and municipal securities.

FINRA alleged that from September 2009, to May 2011, SWS Financial derived 16% to 20% of its total revenues from sales of VAs to customers. However, despite this fact, FINRA alleged that SWS Financial failed to establish and implement adequate supervisory systems for this aspect of its securities business. FINRA alleged that the firm’s brokers sold VAs both in branch offices where a registered branch manager was onsite as well as in offices where there was no onsite supervisor. FINRA alleged that the firms procedures required that VA transactions initiated by representatives in branch offices with a branch manager were reviewed and approved by the banch manager and then forwarded to SWS Financial’s home office for final review and approval employees at an affiliated insurance company, Southwest Insurance Agency (Insurance Agency).

Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors

November 23, 2014 | by Staff Attorney

According to InvestmentNews, LPL Financial, LLC (LPL Financial) was recently fined by Massachusetts securities regulators fined for sales practices concerning variable annuities and agreed to reimburse senior citizens $541,000 for surrender charges they paid when they switched variable annuities. LPL Financial and its brokers have been on the defensive from securities regulators many times in recent years concerning a variety of alleged sales practice and supervisory short comings as shown below.

An Examination of LPL Financial’s Recent Regulatory Woes

October 7, 2014 | by Staff Attorney

LPL Financial, LLC (LPL) is one of the largest independent brokerage firms in the United States employing approximately 13,840 registered reps and advisers. However, the firm’s growth has come with a host of regulatory actions focusing on the firm’s alleged supervisory failures.

Recently, InvestmentNews reported that the firm was hit with a $2 million fine, and ordered to pay $820,000 in restitution, for failing to maintain adequate books and records documenting variable annuity exchanges. The mounting firm fines have led to flat second quarter earnings at LPL. The firm has stated that the company is instituting enhanced procedures with a view to ensuring that surrender charges incurred in connection with variable annuity exchange transactions are accurately reflected in the firm’s books and records as well as in any disclosures given to clients. The firm is also purportedly taking steps to make sure that its advisers are adequately documenting the basis for their variable annuity recommendations.

LPL has been on the radar of FINRA and several state regulators that have focused on the firm’s supervisory and other record systems as well as examining sales of investment products, including non-traded real estate investment trusts (REITs). In February 2013, LPL settled with the Commonwealth of Massachusetts to pay at least $2 million in restitution and $500,000 in fines concerning the firm’s non-traded REIT practices. In addition, in the last year, FINRA has fined LPL Financial $7.5 million for significant e-mail system failures. Moreover, we have reported on numerous LPL registered representatives who have been fined over the past year for a variety of misconduct ranging from misappropriation of funds, sales of alternative investments, selling away activities, and private placements.

Regulators On the Look Out for “Reverse Churning”

October 4, 2014 | by Staff Attorney

It is relatively easy to grasp the concept of excessive trading activity or “churning” in a brokerage account. Churning trading activity has no utility for the investor and is conducted solely to generate commissions for the broker. Churning involves both excessive purchases and sales of securities and the advisors control over the account. But regulators are also looking at another growing trend referred to as “reverse churning.” According to the Wall Street Journal (WSJ) the Securities and Exchange Commission (SEC) states that “reverse churning” is the practice of placing investors in advisory accounts that pay a fixed fee, such as 1-2% annually, but generate little or no activity to justify that fee. Regulators are watching for signs of “double-dipping” whereby advisers generate significant commissions in an investor’s brokerage account and then moves the client into an advisory account in order to collect additional fees.

As a background there are many standalone brokerage firms and investment advisor firms where the option does not exist for a client to be switched between types of accounts. However, there are also many dually registered firms which are both broker-dealers and investment advisers. These firms, and their financial advisors have tremendous influence over whether a customer establishes a brokerage or investment advisory account. In the WSJ, the SEC was quoted as saying that “This influence may create a risk that customers are placed in an inappropriate account type that increases revenue to the firm and may not provide a corresponding benefit to the customer.”

However, dumping a client account into an advisory account after the broker ceases trading is only one strategy that should be included in the category of “reverse churning.” There are many other creative ways that brokers can generate excessive commissions for themselves while providing no benefit to their clients. For example, if a broker recommends a tax deferred vehicle, such a as a variable annuity, in an IRA account there is no additional tax benefit for the client. While the recommendation would not result in excessive trading, the broker would earn a huge commission for an investment that cannot take advantage of one of its primary selling points.

LPL Financial Fined For Failure to Properly Supervise Variable Annuities Transactions

September 26, 2014 | by Staff Attorney

LPL Financial was recently fined $2 million and ordered to pay $820,000 in restitution, for violations pertaining to variable annuity exchanges. This settlement, which was reached with the Illinois Securities Department, resulted from LPL’s inadequate maintenance of books and records with regards to documenting 1035 exchanges. A 1035 Exchange is a tax-free exchange of an existing annuity contract for a new one. In order for the new contract to qualify as a Section 1035 Exchange, the policyholder must have exchanged his or her existing contract for an equivalent new contract. The annuitant or policyholder must also remain the same.

According to LPL’s BrokerCheck file, LPL “failed to enforce its supervisory system and procedures in connection with the documentation of certain salespersons’ variable annuity exchange activities.” LPL has indicated that it will seek to enhance its procedures relating to surrender charges that often result from variable annuity exchange transactions. This, LPL believes, would ensure accuracy in their books and records along with client disclosures.

The product at issue was variable annuities, which have been closely watched by regulators dues to the complexity of the product and high fee structures. Elderly investors have often been sold variable annuities, when they were entirely unsuitable, just so that brokers could earn increased commissions. Regulators have paid especially close attention to those advisors who have switched their clients from one variable annuity to another, just to enhance their commissions.