Broker Fraud

FiNRA Bars Chicago-Based Broker For Market Manipulation

Published on: March 2, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has barred broker George Johnson from the industry. The regulator is accusing him of market manipulation involving the artificial inflation of a penny stock’s value. FINRA claims that Newport Coast Securities, which is the last firm where Johnson worked, let its brokers engaging in churning.

According to the self-regulatory organization, over eight days in May 2012, Johnson, while working for Meyers Associates, told customers to buy stocks of iceWEB at prices that were artificially inflated. He also suggested that certain clients sell their shares to match trades between clients.

FINRA said that Johnson manipulated stock to get business from the issuer, which agreed to compensate him for a future private offering. He purportedly worked with a stock promoter to increase iceWEB’s share price to the point that certain warrants could be exercised.

Johnson also has been accused of involvement in a second penny stock fraud and he purportedly has tried to cover up different state securities violations. He has a history of regulatory actions and customer disputes going as far back to 1994. Johnson previously worked for H.J. Meyers & Co. and Jesup & Lamont Securities, two firms that have since been expelled. Meyers Associates also has been linked to a number of regulatory probes.

Securities Fraud: SEC Charges Unregistered California Man with Fraud, FINRA Bars Two Brokers, Second Scam Lands Man in Jail Again

Published on: February 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Files Charges in $1.9M Broker Scam
A California man is facing Securities and Exchange Commission charges. The regulator is accusing Gregory Ruehle of fraudulently selling purported stock in a medical device company and keeping investors’ money. The unregistered broker purportedly raised about $1.9M from over 100 investors but did not transfer or deliver the securities that they purchased to them. Meantime, Ruehle is said to have used the funds to cover his personal spending and pay off gambling debts.

According to the SEC, Ruehle began bilking investors in 2012. He allegedly misrepresented to investors in Minnesota and California that he would sell them securities that he owned in ICB International Inc., for which he was a former consultant.

Instead, said the regulator, Ruehle sold investors more securities than what he owned and he failed to tell them that the securities that belonged to him were not transferrable. Ruehle is accused of generating fake documents that he claimed came from the company and issuing bogus company stock certificates to investors, along with a letter that falsely stated that the stock had been transferred to them.

The SEC wants permanent injunction, disgorgement, prejudgment interest, and penalties against Ruehle. The unregistered broker is also now the subject of criminal charges in a parallel case that was brought by U.S. Attorney’s Office for the Southern District of California.

FINRA Bars Two Men for Hedge Fund Fraud
In other broker news, the Financial Industry Regulatory Authority has announced that it is barring brokers Walter F. Grenda and Timothy S. Dembski from the securities industry. The industry bar is for fraud involving the sale of the Prestige Wealth Management Fund, LP, which is a hedge fund.
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Securities Fraud: Ex-Broker Jerry McCutchen Under Investigation for REIT Sales, Hedge Fund Manager Must Pay $18M to SEC, and NASAA Steps Up Fight Against Elder Financial Fraud

Published on: February 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Former Broker Is Subject of Numerous Securities Claims
If you are an investor who sustained losses after purchased real estate investments trusts with the help of former broker Jerry McCutchen, you may have grounds for a securities claim. According to the Financial Industry Regulatory Authority’s BrokerCheck Report, McCutchen is accused of making unsuitable investment recommendations and he has been the subject of over a dozen broker fraud claims alleging negligence, misrepresentations, and other claims.

In one case, McCutchen, while registered with Berthel Fisher & Company Financial Services, Inc., is accused of placing a couple’s retirement funds in speculative, illiquid, alternative investments that he misrepresented as safe investments in line with the husband and wife’s investment goal to keep their money safe. In reality the Tier REIT, the Icon Leasing Fund Twelve LLC, and others, did not have proper diversity or allocation and were not suitable for the couple.

McCutchen is not registered with any firm at this time nor is he a licensed broker at the moment. He was registered with Berthel Fisher & Co., Bay City Securities, Next Financial Group, First Funds Inc., FSC Securities Corp, Central Brokerage Services, Commonwealth Equity Services, MML Investors, Proequities Inc., and Walnut Street Securities.

NY Hedge Fund Manager Ordered to Pay $18M
Moazzam “Mark” Malik, and his American Bridge Investment Group LLC are facing SEC charges accusing them of bilking 19 clients of over $1M through the sale of limited partnership interests in a fake hedge fund that was run under different names. The SEC said that Malik claimed that the fund held $100M when that amount was never more than about $90,000. Now, the regulator is ordering Malik to pay $18M.
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FINRA Cases: Firms To Pay $1.2M Over UIT Sales, Broker Charged for Lying to a Native American Tribe, and Morgan Stanley Ordered to Pay Clients $825K

Published on: February 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Brokerage Firms to Pay $1.2M for Not Applying UIT Discounts
The Financial Industry Regulatory Authority has charged Next Financial Group Inc., Stephens Inc., and Key Investment Services with failing to grant sales charge discounts when certain customers that were buying unit investment trusts were eligible for the reduced rates. The three broker-dealers are also face charges for inadequate supervision. The self-regulatory organization is ordering the three firms to pay $1.2M in restitution and fines. The FINRA settlements stated that Stephens did not give the discounts from 1/10 to 5/15 and the other two firms did not give them from 5/09 to 4/14.

Unit Investment Trusts
A UIT is a fund that combines a fixed portfolio of income-producing securities that are bought and held to maturity and an actively managed fund. These funds usually issue securities, also known as units that are redeemable-meaning that the UIT will repurchase the units from an investor at the approximate net asset value.

FINRA has been looking into whether firms are giving clients that are entitled to purchase discounts the reduced rates. Last year, the SRO ordered a number of firms to pay $6.7M in restitutions and fines for not giving discounts to clients when selling them UITs.

Broker Accused of Fraud, Targeting Native American Tribe
Broker Gopi Krishna Vungarala is facing FINRA charges for lying to a Native American Tribe about the $11M in commissions they paid him when he sold the tribe $190M of business development companies (BDCs) and nontraded REITS. The SRO said that from 6/11 to 1/15 Vungarala, who was the tribe’s treasury investment manager and registered representative, lied to the tribe about investments he recommended to them.
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Ameriprise Financial Must Pay Woman’s Estate Over $2M For Broker Fraud

Published on: January 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Arbitration panel says that Ameriprise Financial (AMP) must pay over $2M to the estate of Glenny B. White for losses related to broker fraud committed by an ex-firm broker. The executor of White’s estate claims that Ameriprise Financial Services did not properly supervise former broker Jeffrey Davis.

In 2014, Davis admitted to stealing money from White and other clients. White was his client for almost ten years before she found out in 2013 that he was stealing funds from her. She died at the age of 91 in 2014.

Davis has since been fired from Ameriprise, and FINRA barred him from the brokerage industry. Last year, he was sentenced to over four years in prison after pleading guilty to wire fraud and admitting to stealing almost $200K from clients.

On Finra’s BrokerCheck report about Davis, it is noted that in at least two cases involving Ameriprise clients the firm had reported to the regulator that their funds were misappropriated.
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Securities Fraud News: Texas REIT’s Share Price Drops Following Ponzi Allegations, Morgan Stanley, Ex-Broker Are Found Jointly Liable in $1M Elder Fraud Case, and Brokerage Firm Resolves Variable Annuities Claims for $475K

Published on: December 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

United Development Funding IV Shares Fall After Allegations of Texas Ponzi Scheme
United Development Funding IV (“UDF IV”), a Texas-based real estate investment trust (“REIT”), saw its share price drop after Harvest Exchange published a post that said the REIT had been run like a Ponzi scheme for years. United Development was a nontraded REIT that became traded when it listed on Nasdaq last year under the symbol “UDF”.

In the report on the Harvest site, the anonymous author said that the UDF umbrella had traits indicative of a Ponzi scam, such as, it uses new capital to pay distributions to current investors and UDF companies and gives substantial liquidity to earlier UDF companies to pay earlier investors. The article said that once the funding of retail capital to the most current UDF stops, the earlier UDF companies do not seem able to stand on their own. This purportedly indicates that the structure will likely fail and investors will be the ones sustaining losses.

After the report by the online professional network of investors, UDF IV saw its share price plunge from $17.53 to $10.10. It later dropped further to $8.55/share.

Over $1M Awarded in Senior Financial Fraud Case Against Morgan Stanley and a Former Financial Adviser
A Financial Industry Regulatory Authority Inc. arbitration panel has awarded 92-year-old Genevieve Lenehan (“Mrs. Lenehan”) over $1M in her claim against Morgan Stanley (MS) and former Morgan Stanley advisor Justin Amaral (“Amaral”). Mrs. Lenehan accused Amaral of churning and reverse churning her account. Amaral also advised Mrs. Lenehan’s husband until his death five years ago.
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SEC Approves Change to FINRA’s BrokerCheck On When to Publish Firings

Published on: December 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s plan to shorten the waiting period for when certain information reported on Form U5 can be released on BrokerCheck.com from 15 days to three days. This includes information about broker firings. The modification will go into effect on December 12.

Brokerage firms use Form U5 to give notice of when a broker has been let go. This notification is published on BrokerCheck, which is a public database that includes background information about registered brokers, as well whether any of them have a disciplinary history and what that may be.

The 15 days was so that brokers could have time to explain why they were fired. FINRA, however, has now decided that it is important to notify the public of such terminations sooner than that so that the investors who are thinking hiring these brokers receive this employment history right away. The self-regulatory organization says that it believes three business days still gives a broker a chance to comment on his/her firing.

BrokerCheck.com is an excellent resource for looking up information about a broker and his/her history. It’s important as an investor that you do your due diligence when considering whether to have someone handle your investments and finances. You can also get information about a broker from the Central Registration Depository, which is a computerized database. Another way to find out about a broker is to call your state securities regulator and request access to his/her registration, disciplinary, and employment information. You can get information about how to reach your state regulator through the North American Securities Administrators Association’s website.
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SEC Cases: Ex-Stockbroker Accused of Bilking Investor for Home Renovations, Marwood Group Admits to Wrongdoing Over Compliance Failures, and Ex-Goldman Sachs Employee Faces Insider Trading Charges

Published on: November 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Former Stockbroker Raises Over $1.2M from Customers to Remodel His Home
The Securities and Exchange Commission is charging ex-stockbroker Bernard M. Parker with Securities Act of 1933 and Securities Exchange Act of 1934 violations, as well as violations of Rule 10b-5. The regulator says that Parker raised over $1.2M from long-term brokerage customers and others by getting them to think they were buying real estate tax client certificates and would make up to 9% yearly interest.

Instead, says the SEC, Parker only used a small part of that money to buy the liens. He used their other funds to remodel his house, pay his father-in-law’s bills, and make car payments. The agency also claims that the ex-broker conducted the unregistered and fraudulent investment offering using his Parker Financial Services from ’08 to ’14. He also purportedly failed to notify the investment advisory firm and broker-dealer where he was dually registered about his side business.

The Attorney’s Office for the Western District of Pennsylvania has filed criminal charges against Parker in a parallel case over the alleged broker fraud.

Political Intelligence Firm Admits to Compliance Failures
Marwood Group Research LLC has admitted to compliance failures and will settle the SEC’s case against it by paying a $375,000 penalty. According to the Commission, the firm did not properly notify compliance officers about the times that analysts received potential material nonpublic data from government employees.

The firm’s own written policies and procedures are supposed to play a key part in Marwood Group’s efforts to stop nonpublic and confidential data from reaching its clients so as not to influence their decisions regarding securities trading. Yet its misconduct happened in 2013 when analysts were looking for information about pending regulatory approvals and policies at the Food and Drug Administration and the Centers for Medicare & Medicaid Services.
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SEC Approves Rule Requiring Firms, Brokers Link to BrokerCheck

Published on: October 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Over two years after it was initially proposed, a FINRA rule requiring that broker-dealers include a link to the self-regulatory organization’s BrokerCheck database has been approved by the Securities and Exchange Commission. The rule slated to go into effect, at the latest, at 180 days after the FINRA regulatory notice is published in the Federal Register. The deadline for publishing the notice is December 7, 2015.

Per the rule, a brokerage firm will have to include an obvious reference and hyperlink to the front page of FINRA’s BrokerCheck.com. Links to BrokerCheck would also have to be included on the profile pages of each broker.

FINRA has been trying to make retail investors more aware that BrokerCheck exists. The online database includes the work history of every registered broker, where they are registered, and other information, such as if they’ve been subject to disciplinary measures or named on previous securities cases.

A previous version of the proposed rule had called for LinkedIn and Twitter profiles of brokers to also include links back to BrokerCheck. However, rather than link directly to that home page, the hyperlink would have taken an investor to the BrokerCheck profile of a particular representative. Many in the industry, however, were strongly opposed to that mandate.
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FINRA Headlines: Regulator Seeks to Curb Broker Record Expungement, Continues to Fight Elder Abuse and Issues Liquidity Risk Management Guidance

Published on: September 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Takes Action to Make It Harder for Brokers to Expunge Their Disciplinary Records
The Financial Industry Regulatory Authority’s Board has given the regulator permission to ask for public comment on a plan that would establish tougher requirements for when a broker would be allowed to expunge disciplinary actions from his/her BrokerCheck record. The proposed rule would update existing arbitration rules regarding the expungement of information related to customer disputes.

One proposed requirement is that an arbitration panel would have to get a copy of the BrokerCheck report when determining whether to grant an expungement request. The panel then would have to give more details about its reason to recommend a request.

According to a 2013 study by the Public Investors Arbitration Bar Association, expungement requests have been granted in up to 90% of cases that ended in an award or settlement. However, in 2014 the SEC signed off on a rule preventing broker-dealers from conditioning a settlement so that a claimant cannot counter expungement after the case is resolved.

FINRA Board Continues to Fight Elder Financial Abuse
FINRA’s board has given the self-regulatory authority permission to put out a rule proposal that would protect older investors and other vulnerable investors.

Under the rule, firms would be obligated to get the name and contact data of a trusted individual when opening an account for a customer. The rule also would let a firm, if it suspects financial fraud, freeze the money in accounts of senior investors age 65 and over, as well as the accounts of adults with physical or mental impairments. The concern is that such impairments may make it difficult for them to protect their best interests especially when they are being bilked.
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