Financial Firms

FINRA Fines J.P. Turner, LaSalle St. Securities, and H. Beck For Report Supervision Lapses

Published on: March 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority Inc. is fining J.P. Turner & Co., LaSalle St. Securities, and H. Beck Inc. $100K, $175K, and $425K, respectively, for lapses in supervising reports sent to clients. The reports provided asset summaries, and the self-regulatory organization is concerned that they had the potential to hide fraudulent activities.

A consolidated report typically contains information regarding most if not all of a customer’s financial holdings, wherever they are held. FINRA requires that these reports are accurate and clear. Failure to supervise these documents can cause regulatory issues, such as the possibility of inaccurate communication, data that is misleading or confusing, supervisory control lapses, and the use of consolidated reports for unethical or fraudulent reasons. The SRO’s regulatory notice 10-19 states that if a firm cannot properly supervise these reports then it should not distribute them and must make sure that registered representatives abide by this restriction.

During routine exams, FINRA found that representatives from the three firms prepared and issued consolidated reports to customers even if the documents hadn’t been properly reviewed beforehand. LaSalle St Securities, which had written procedures pertaining to consolidated reports, failed to enforce these and did not properly trained representatives on how to use the reports. The disciplinary action against the broke-dealers was related to private placement-involved matters.

Oppenheimer Must Pay $2.5 Million Fine, $1.25 Million in Restitution for Not Supervising Ex-Broker

Published on: March 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Oppenheimer & Co (OPY) $2.5M for not supervising Mark Hotton. The ex-broker stole from customers and excessively traded in their accounts. Oppenheimer must also pay $1.25 million in restitution.

To date, the brokerage firm has paid over $6 million to settle customer securities arbitration claims involving Hotton. This latest restitution will go to another 22 customers who did not file claims.

According to the self-regulatory organization, Oppenheimer did not properly investigate Hotton before hiring him, despite the fact that FINRA’s own records linked him to several customer complaints and criminal charges. After discovering that Hotton’s business partners sued him for bilking them out of millions of dollars, still the firm did not heighten supervision over him.

Ameriprise Financial Settles 401(k) Fiduciary Breach Case for $27.5M

Published on: March 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Ameriprise Financial Inc. (AMP) will pay $27.5 million to settle a fiduciary breach case filed by its retirement plan participants. The plaintiffs contend that the financial firm cost them millions of dollars in excessive fees. The agreement was reached just weeks before the 401k lawsuits were set to go to trial. Even though Ameriprise is settling, the firm is not denying or admitting to the alleged breaches.

The plan participants filed their case in 2011 against the firm and the committes tasked with supervising Ameriprise’s employee benefits administration and 401(k) investments. The plaintiffs said that the investments in the 401(k) plan included money from the firm’s RiverSource Investments subsidiary and that both companies were paid fee revenues from the plan dollars of employees.

Under the deal, Ameriprise will not have to modify its plan but it will perform a request-for-proposal bidding process for investment consulting services and recordkeeping services, as well as other modifications. Aside from direct expense reimbursements from the plan, the firm cannot get paid for the administrative services it provides to the plan. Ameriprise also must continue to pay a recordkeeper, offer participants the required plan fee disclosures, and consider using separately managed accounts and collective investment trusts.

Bank of America’s Merrill Lynch to Pay $2.5M to Massachusetts Over Compliance Rule Relapse

Published on: March 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Merrill, Lynch, Pierce, Fenner & Smith, a Bank of America unit (BAC), will pay the state of Massachusetts $2.5 million to resolve charges that it did not abide by its own compliance rules. According to Secretary of the Commonwealth William Galvin, the firm did not properly supervise employees in January 2013 over two presentations that were made to financial advisers in Boston.

The presentations, which allegedly were not properly vetted by compliance staff, were geared toward helping advisers grow their business and oversee the services that they offer clients. Part of the presentations provided training on how to double production via the transfer of customer assets from brokerage accounts that were commission-based to ones with fiduciary fee-based options. Disclaimers about client suitability or advisers’ fiduciary duties were not provided.

According to Merrill Lynch’s own procedures and policies, its compliance team must approve these types of presentations beforehand. A Bank of America spokesperson, however, maintains that no clients were harmed. The firm has since reemphasized to its employees the importance of making sure that internal presentations are properly approved first.

Bank of New York Mellon Corp. Settles Currency Fraud Lawsuits Involving Pension Funds for $714M

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

Bank of New York Mellon Corp. (BK) has agreed to pay $714 million to settle claims that it bilked pension funds and others by overcharging for currency transactions. The settlements resolve cases by New York Attorney General Eric Schneiderman and Manhattan U.S. Attorney Preet Bharara, as well as both private cases and probes by the U.S. Department of Labor and the U.S. Securities and Exchange Commission.

The lawsuits involve the bank’s “standing instruction” for its foreign exchange program: Clients are supposed to let the bank unilaterally deal with foreign-exchange transactions.

The bank admitted that it notified certain clients that it was determined to obtain them the best rates possible even as the firm gave them the ones that were among the worst interbank rates. The bank had previously denied the claims because the lawsuits were submitted in 2011, not agreeing until the following year to modify pricing disclosures. In February, Bank of New York Mellon said it would modify 4tth quarter results to make room for a $598 million litigation cost as it was getting ready to resolve certain claims, including those involving foreign exchange.

Wealthfront CEO Claims Schwab is Fooling Investors Over “Free” Automated Investment Platform

Published on: March 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Adam Nash, the CEO of Wealthfront, claims that Charles Schwab & Co. (SCHW) is deceiving investors by claiming that Intelligent Portfolios, its automated investing platform, is free. Nash, whose company competes with Schwab’s new service, contends that the platform will cost consumers thousands of dollars in opportunity expenses involving expensive “smart beta” exchange-traded funds and high cash allocations. These costs, he argues, are concealed in disclosure documents.

Intelligent Portfolios lets consumers manage, rebalance, and oversee their portfolios through the Internet. The program allows investors to evaluate their goals and risk tolerances using specific questions. Investors must have at least $5,000 and they would get recommendations based on their responses.

Algorithms are supposed to help clients build and maintain their portfolios in low cost ETFs with asset classes of up to 20. Intelligent Portfolios joins Wealthfront and Betterment in the robo-field for automated investing.

Appellate Court Says Charles Schwab & Co. Must Face Financial Advisory Firm’s Lawsuit Over Mortgage Debt Involving Bond Funds

Published on: March 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A panel of U.S. Judges says that Charles Schwab & Co. (SCHW) must face a lawsuit brought by Northstar Financial Advisors Inc. The investment advisory firm claims that Schwab invested the assets of a bond-index fund in high-risk mortgage debt prior to the financial crisis. The plaintiff is proposing that this case be a class action securities claim, which could include investors who have owned the fund since 2007. In particular, notes Northstar Financial Advisors Inc., the Schwab Total Bond Market Fund (SWLBX) placed lots of risky debt into the fund, resulting in losses of tens of millions of dollars, as well as underperformance against its benchmark.

Reuters reports that the plaintiffs claim that because Schwab invested over 25% of assets in non-agency mortgage securities and collateralized mortgage obligations, the firm’s portfolio managers disregarded the fundamental investment objectives of the fund to track the Lehman Brothers U.S. Aggregate Bond Index and stay away from industry bets. Because of this, they argued, the fund lagged its benchmark from 9/1/07 to 2/27/09, suffering a 4.80% loss while the index posted a 7.85% positive total return.

Northstar Financial Advisors Inc. filed its securities case in 2008 but the complaint was mired in procedural matters until now. This latest appeal was argued in 2013 in front of three federal judges of the 9th U.S. Circuit Court of Appeals in San Francisco. Their decision, finally—albeit nearly two years later—reinstates the breach of fiduciary duty, breach of contract, and other claims.

Citigroup, Wells Fargo, JPMorgan Chase, And 27 Other Big Banks Pass Fed Stress Tests’ Phase One

Published on: March 6, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The 31 biggest banks in the U.S. all passed the first phase of the Federal Reserve’s stress test. This is the first time since the tests have been conducted on banks with over $50 billion in assets that all of them stayed above capital requirements.

Banks have been building their capital reserves, based on tougher Fed requirements, to protect against any losses. Included among the firms that did well are Wells Fargo (WFC), Citigroup (C), JPMorgan Chase (JPM), and Goldman Sachs (GS).

Based on the results thus far, the Federal Reserve said the big U.S. banks are healthy enough to keep lending if there were to be a serious recession, even if corporate debt markets failed, housing and stock prices dropped, and unemployment were to reach 10%.

Broker and Adviser News: Morgan Stanley Sues Ameriprise Broker, Former UBS Broker Alleges Investor Risk Levels Were Mischaracterized, and Ex-Bank of America Merrill Lynch Trainees Seek Overtime

Published on: March 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Accuses Ex-Broker, Now With Ameriprise, of Trying to Take Clients

Morgan Stanley Wealth Management is suing one of its ex-brokers, John McCallion, who is now with Ameriprise Financial Services (AMP). The wirehouse claims that McCallion went into Morgan Stanley’s (MS) computer system before leaving the firm and changed his clients’ phone numbers so he could take their business with him.

The firm contends that while McCallion gave it a list of his clients’ information, he put the data on a USB drive that could not be opened on Morgan Stanley’s computers because of security issues. The Ameriprise broker has consented to a temporary restraining order that blocks him from pursuing the firm’s clients. He also is facing a FINRA arbitration claim over the matter. McCallion had at first tired to argue against the temporary order and he denied taking the confidential list or trade secrets.

Morgan Stanley, DOJ Arrive at $2.6B Mortgage Bond Settlement

Published on: February 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) has reached an agreement in principal with the U.S. Department of Justice to resolve claims related to its sale of mortgage bonds. The government probe looked into allegations that the financial firm misrepresented the quality of home loans that were packaged into bonds.

The broker-dealer, however, still needs to negotiate with the DOJ about other terms, including what would be included in a signed statement of facts. The settlement doesn’t resolve probes by state litigators.

Morgan Stanley’s financial agreement is much smaller than what other firms have paid when settling with the Justice Department. Citigroup Inc. (C) paid $7 billion, J.P. Morgan Chase & Co. (JPM) paid $13 billion, and Bank of America Corp. (BAC) paid $16.65 billion.