FINRA

FINRA Says Investors Should Consider the Risks Before Investing in SBLOCs

Published on: February 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority and the Securities and Exchange Commission’s’ Office of Investor Education and Advocacy has issued an investor alert recommending that investors get to know the risks before deciding to invest in securities-backed lines of credit, also known as SBLOCs. Although SBLOCs can be a major revenue for securities firms, there is the chance of increased losses, especially during times of market volatility.

SBLOCs
Securities-backed lines of credit are loans that let an investor borrow money using securities that are kept in an investment account as collateral. An SBLOC allows an investor make interest-only payments each month and loans stay outstanding until they are repaid.

SBLOCs are frequently marketed as a low-cost, easy way to gain access to additional money without having to liquidate securities even as an investor borrows against assets in an investment portfolio. However, they come with certain risks, including unintended tax consequences and the possibility that an investor might have to sell his/her holdings, which could affect long-term investment goals.

SBLOCs are similar to home equity credit lines except that they involve securities as collateral rather than the home. An investor is allowed to repay part or all of the outstanding principal at any time and then borrow again in the future.

An SBLOC is a non-purpose loan. This means that the investor is not allowed to use the proceeds to buy or trade securities. However, money from an SBLOC can be utilized to finance almost anything you want, including home renovations, education expenses, or personal travel.
Continue Reading ›

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.
Continue Reading ›

FINRA Accuses Brokerage Firm of Lack of Supervision in Nontraded REIT Sales

Published on: February 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is accusing VFG Securities of failing to supervise brokers to make sure that clients’ portfolios did not become overly concentrated in illiquid investments. In its complaint against the brokerage firm, the regulator said that from 11/10 to 6/12, VFG made nearly 95% of revenue from the sale of nontraded real estate investment trusts and direct participation programs. An audited financial statement with the SEC said that by 6/30/12, the broker-dealer had nearly $4M in revenues for that past year.

The self-regulatory organization said that VFG Securities owner Jason Vanclef wrote a “The Wealth Code,” which he used as sales literature to market investments in direct participation programs and nontraded REITs, in order to bring potential investors. He purportedly claimed in the book that nontraded REITs and nontraded direct participation programs provide capital preservation and high returns—a claim that is misleading, inaccurate, and not in line with information in the prospectuses for the instruments sold by VFG Securities. Such investments are typically high risk to the extent that an investor may end up losing a substantial part of if not all of his/her investment.

Vanclef also wrote in the book that by investing in the instruments that he recommended, investors stood to earn 8-12% results and consistent returns. FINRA said that he and the firm did not give readers a “sound basis” upon which to assess such claims.

In an interview with Vanclef, InvestmentNews said that FINRA has been “persecuting” him, ever since VFG underwent an exam in 2012. That is the year when the self-regulatory organization started concentrating more of its attention on illiquid alternative investment sales. Vanclef is accusing the regulator of “character assassination.”

FINRA Warns Investors About High-Yield CDs

Published on: February 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has put out a new investor alert warning about advertisements that are marketing higher-than-average CD yields. The self-regulatory authority says that some of the ads might be an attempt to get investors to buy a much more much more expensive investment, such as a fixed or equity-indexed annuity, that is not risk free. Often, the alternative investments are insurance products.

FINRA warned that with most CD promotions that are marketing ploys, an investor would be required to go to an office or talk to a salesperson, who may try to convince the prospective buyer to purchase an alternative product that is not a CD. Typically, the minimum purchase amount is high, such as $25K. Such ploys would also tout a “bonus”-a sum the salesperson would pay you plus the average percentage yield of the CD. FINRA warns that this bonus is actually an incentive to get you to hear the pitch for the more complex product. Meantime, the seller may be earning a high commission for making the sale.
Continue Reading ›

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.
Continue Reading ›

Municipal Bond Violations: J.P. Turner to pay $140K to FINRA, SEC Fines Underwriters $4.58M Over False Statements

Published on: February 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is sanctioning J.P. Turner & Co. for violating a rule mandating that brokers must make sure that municipal securities transactions between a customer’s account and the firm’s account occur at a price that is “fair and reasonable.” The SRO contends that the firm’s supervisory system did not provide the kind of supervision that could achieve compliance with securities regulations involving fair pricing

As part of the settlement, J.P. Turner will pay a $140K fine and over $76K plus interest in customer restitution.

The brokerage firm will also pay a $75k fine related to the ongoing use of a third-party telemarketer, which continued after it made the decision to stop using the marketing firm. Because the telemarketer stopped getting a do-not-call list from the firm, it continued to call people on the registry.

J.P. Turner agreed to settle both cases without denying or admitting to the charges.

In other news, the Securities and Exchange Commission is charging and fining 14 muni bond underwriting firms for issuing inaccurate information to investors. Collectively, the firms will pay about $4.58M for federal securities law violations that purportedly occurred between ’11 and ’14. The alleged violations involved the sale of municipal debt that used offering documents with materially false statements or omissions about borrower compliance as they pertain to disclosure duties. The SEC said that the firms did not perform proper due diligence to identify issues before selling the bonds.Barclays Capital Inc. (BARC), which will pay $500K, Wells Fargo Bank (WFC) N.A. Municipal Products Group, which will pay $440K, Jefferies LLC (JEF), which will pay $500K, and TD Securities USA LLC, which will pay $500K.

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.
Continue Reading ›

FINRA Bars Ex-National Securities Broker Zachary Bader Over Investor Fraud Allegations

Published on: January 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is permanently barring former National Securities broker Zachary Bader from the securities industry in the wake of allegations filed by numerous investors. Bader, who was let go from the National Securities Corporation, also was previously registered with Craig Scott Capital and Brookstone Securities. According to BrokerCheck, five customer complaints and two regulatory sanctions have been brought against him.

Bader is accused of excessive trading, making unsuitable investment recommendations to at least 21 customers by advising them to put their money in the iPath S&P 500 VIX Short Term Futures ETN (VXX), showing reckless disregard of clients’ interests, improper due diligence, breach of fiduciary duty, churning, providing inadequate investment advice, and breach of contract.

iPath S&P 500 VIX Short Term (VXX)
The iPath S&P 500 VIX Short Term is an exchange-traded note. Many ETNs are only appropriate for short-term trading and/or institutional investors. For example, the VXX exposes investors to returns of certain futures contracts on the VIX Index and it is considered a bearish investment. It is not appropriate for certain equity positions. The VXX comes with very specific risks and over time will lose value as futures contracts on the VIX Index go down too.
Continue Reading ›

FINRA News: Regulator Seeks to Restrict Brokers’ Political Contributions, Sends SEC Proposal Regarding Broker-Compensation, and Fines Firm $2.95M Over Inaccurate Blue Sheet Data

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

The Financial Industry Regulatory Authority (FINRA) is proposing rules that would limit how much in political contributions brokers would be allowed to make to avoid conflicts of interest. FINRA is now calling for feedback during the comment period regarding the proposed rule, which runs for 21 days after notice is published in the Federal Register.

Under the proposed rule, brokers would have a contribution cap of $350 during an election year and $150 during any other year. Should a broker contribute beyond these caps, there would not be a penalty as long as a refund is issued within four months of the donation’s receipt. A failure to satisfy exemptions will lead to a bar for the broker from being allowed to solicit a government entity or official for business purposes for two years after the donation was made.

It was in 2010 that the U.S. Securities and Exchange Commission (SEC) adopted “pay-to-play” rules that placed investment advisers under the same limits.

Cantor Fitzgerald to Pay $7.3M Over Microcap Sales

Published on: December 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is ordering Cantor Fitzgerald to pay $7.3 million for selling billions of unregistered microcap shares in 2011 and 2012. The firm is also facing sanctions for not having the proper supervisory /anti-money laundering programs in place to identify suspect activity or red flags related to microcap activity.

According to the self-regulatory organization, the Cantor Fitzgerald’s supervisory system was not designed in a reasonable enough manner to fulfill its obligation to assess whether the microcap securities it was liquidating for clients were SEC-registered or, if not, then were subject to a registration exemption. FINRA said that after Cantor Fitzgerald decided to broaden its microcap liquidity business in 2011, it did not make sure its supervisory system had a meaningful and reasonable way to determine whether the sales of these securities occurred in compliance with the law. Also, said the regulator, the firm did not provide proper guidance and training about how or when to look into whether a sale was exempt from SEC registration, and supervisors were not given the tools that they needed to identify when red flags were an indicator of unregistered, illegal distributions.
Continue Reading ›