FINRA

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements

Published on: April 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority’s board of governors has a plan that could radically modify the way brokerage firms report illiquid investments’ value on the account statements of clients. The SRO, which wants to give investors more transparency in regards to the actual value of such investments, has been trying to modify its rules about REITs and private placement valuations on client statements for well over a year.

Earlier this month, in changes it is proposing to Rule 2340, the FINRA board presented two reporting alternatives for brokerage firms. With the first option, a brokerage firm wouldn’t need to have the per-share estimated value of an REIT or a private placement that is unlisted included in customers’ account statements. The second choice lets a brokerage firm chose from three options:

• A valuation done by an external service at least one time every three years.

NBA, NFL Players Among Alleged Promissory Note Fraud Victims of Success Trade Securities, Says FINRA

Published on: April 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has issued temporary cease-and-desist order against Fuad Ahmed, the president and CEO of Success Trade Securities, Inc., to stop his alleged financial fraud activities. It also put out a complaint against him and the online brokerage firm, charging them with promissory note fraud. The notes were issued by Success Trade, Inc. Ahmed is one of its majority owners. Success Trade Securities runs LowTrades and Just2Trades.

FINRA issued the TCDO over concerns that if it didn’t, investors’ assets and funds would continue to be misused. The SRO contends that the brokerage firm, its financial representatives, and Ahmed sold over $18M in promissory notes to nearly five dozen investors, including ex- and current NBA and NFL Athletes, while omitting or misrepresenting material facts, such as how they were raising $5 million via the selling of the notes or that the sales went over 300% above the original offering.

The majority of notes promised a 12.5-26% yearly interest rate payment monthly over three years. Also, Success Trade Securities and Ahmed allegedly did not disclose both how much the brokerage firm owed investors and that it couldn’t keep paying interest payments unless it brought it new investor money. The SRO believes that note sale proceeds went to unsecured loans to Ahmed, past investor payments, and firm operations.

Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud

Published on: April 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A FINRA arbitration panel is ordering ex-broker Karl Hahn, who previously worked with Bank of America Corp’s (BAC) Merrill Lynch (MER), Oppenheimer & Co. (OPY), and Deutsche Bank AG’s (DB) Deutsche Bank Securities, to pay investor Chase Bailey $11 million because he sustained about $6 million in losses allegedly caused by securities fraud. Bailey contends that Hahn made excessive trades and misrepresented securities related to transactions involving a number of investments, including a variable annuity, approximately $2.3 million in fraudulent real estate financing involving East Coast properties, and covered calls.

In the filmmaker/Internet entrepreneur’s securities arbitration claim, Bailey named the three financial firms where Hahn previously worked. It is during this period that Bailey was allegedly defrauded. (He had moved his funds from one brokerage firm to the other each time Hahn was hired by that employer.) Bailey settled his case with Merrill for $700,000, while claims against Deutsche Bank and Oppenheimer were tossed out.

Per the FINRA arbitration ruling, Bailey is awarded $6.4 million in punitive damages and $4.1 million in compensatory damage. Ordering brokers to pay punitive damages is uncommon.

Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court

Published on: April 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Middle District of Florida is holding that an arbitration award granted to investors cannot be vacated under the Federal Arbitration Act just because an arbitrator exhibited obvious partiality when failing to reveal that he wrote a dissent in an unrelated arbitration that allegedly showed he had prejudged issues of law. The securities case is Antietam Industries Inc. v. Morgan Keegan & Co.

Petitioners Antietam Industries Inc., Janice Warfel, and William Warfel contend they sustained financial losses over their RMK fund investments. In 2011, they filed a Financial Industry Regulatory Authority arbitration case claiming that their money was lost because Morgan Keegan had made misrepresentations while failing to disclose how risky the funds were.

Last year, the panel awarded the petitioners $100,000 in compensatory damages and $100,000 in punitive damages, plus fees and interest, for negligence, breach of fiduciary duty, and other claims. When they sought to confirm the award, Morgan Keegan submitted a motion to vacate, pointing to FAA and contending that arbitrator Christopher Mass allegedly showed partiality and “misbehavior” with his failure to disclose his previous dissent. The court, however, rejected Morgan Keegan’s argument, saying it was not convinced that Mass was predisposed or had prejudged.

Investors are Not Raymond James Financial Customers for FINRA Arbitration Purposes, Rules 4th Circuit

Published on: March 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Fourth Circuit affirmed that, for purposes of Financial Industry Regulatory Authority arbitration, investors who lost the investment they made on stock they purchased from a lawyer connected to a Raymond James Financial Services (RJF) Inc. broker are not the brokerage firm’s client. The appeals court said that the investors dealings with the broker-dealer were “too remote.”

Tax lawyer David Affeldt had been recruited by an Inofin Inc. executive to recommend to investors that they buy securities from the company. That employee happened to be the college roommate of then-Morgan Stanley (MS) representative Kevin Keough, who also informally acted in a sales capacity for Inofin.

Because of his employment with the financial firm at the time, Keough had Inofin pay his compensation for the referrals to his wife instead of to him. He and Affeldt, however, agreed to equally share these referral fees-an agreement that continued even after Keough went to work with Raymond James.

FINRA CEO Says Now is Time to Make Investment Advisers and Brokers Adhere to a Fiduciary Standard

Published on: March 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum, now is the right time to make brokerage firms and investment advisers that provide personalized retail financial advice adhere to a uniform fiduciary standard. However, he warned that such a standard, whether by itself or combined with other regulatory harmonization, does not guarantee misconduct will not happen.

Establishing a uniform fiduciary duty for investment advisers and setting up new oversight for them were both recommended in Securities and Exchange Commission studies that were conducted over two years ago under the order of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Earlier this month, the SEC requested quantitative and economic information to help it decide what that standard of care should be. It also engaged in the conversation of whether investors would benefit more if rules were harmonized in other sectors of investment adviser and broker-dealer regulation, including supervision, firm licensing, advertising, individual qualification, books and records, and others.

Addressing the Consumer Federation of America earlier this month,

Financial Industry Representatives Settle FINRA Cases Over Securities Fraud

Published on: March 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

These financial representatives have settled the Financial Industry Regulatory turned in their Letter of Acceptance, Waiver, and Consent in the securities cases made against them by the Financial Industry Regulatory Authority. By consenting to the sanctions described and the entry of findings, this does not mean they are denying or admitting to the allegations.

New York Registered Principal Accused of Making Misrepresentations and Missions

Neftali Mercedes must pay $97,000, in addition to interest as restitution to customers. He is accused of intentionally making material omissions and misrepresentations about the risks related to speculative securities and an issuer’s financial state.

Financial Firms Settle with FINRA: ES Financial Services Resolves Solicitation of Non-US Investors Allegations and Lincoln Financial Securities Consents to Entry of Findings Alleging Inadequate Supervision

Published on: March 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

ES Financial Services Resolves Solicitation of Non-US Investors Allegations

E.S. Financial Services, Inc. has turned in a Letter of Acceptance, Waiver, Consent to the Financial Industry Regulatory Authority over allegations that it acted as a placement agent and solicited specific non-US investors to get involved in a commercial paper program that a foreign-based affiliate was offering. The firm is accused of providing misrepresentations in certain materials, including that like other commercial products, the program was a cash component of the customer’s portfolio, and also, that the investment was a low-risk, conservative proposition.

ES Financial is also accused of not sufficiently describing the risks involved and for close to four years failing to conduct the proper due diligence for the commercial paper program sales. FINRA’s findings note that the financial firm did not adopt, implement, or enforce written due diligence procedures customized for these instruments. Fortunately, investments were paid back in a timely manner and no investor lost funds. However, this does not mean that ES Financial succeeded in conducting a proper investigation into various issues.

Financial Representatives Settle with FINRA Over Allegations Related to Excessive Commissions, Elder Financial Fraud, and Funneling Client Funds for Personal Gain

Published on: March 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Without denying or admitting to the allegations, the following financial representatives have turned in their Letter of Acceptance, Waiver, and Consent in the securities cases made against them by the Financial Industry Regulatory Authority:

New York Registered Rep. Fined $7,500 for Charging Excessive Commissions

Enver Rahman Alijaj has been suspended for two months from associating with any member of FINRA. He is accused of charging excessive commissions in equity security trades that took place in a member firm’s client account. The trades involved the buying of common stocks. The commissions for them ranged from 4.3% to 4.9% per trade.

Texas Securities Fraud: IMS Securities Settles FINRA Case Alleging Inadequate Supervision of Wholesale Representatives

Published on: March 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

IMS Securities Inc. has settled a Financial Industry Regulatory Authority case accusing the Houston-based brokerage firm of inadequately overseeing its wholesale representatives. Per the SRO’s claims, IMS Securities allegedly failed to customize its supervisory system to its business in a manner that could allow it to be in compliance with securities laws and FINRA rules. However, despite agreeing to the $100,000 fine and censure, the financial firm is not admitting to or denying the findings.

Per FINRA, IMS Securities failed to supervise several wholesale representatives for nearly the first four years of their employment and had insufficient WSP’s detailing the steps for assessing certain securities products (even though the financial firm sold number of direct participation plans and privately-traded real estate investment trusts (REITs)). The regulator also said that there was one year when the financial firm did not conduct annual audits at two of its OSJ branches, and, for close to two years IMS Securities failed to properly maintain sales/purchase blotters, checks forwarded/received blotters, and other receipts and financial records.The SRO believes that not only did IMS Securities’ wholesale representatives send securities business-related electronic communications through outside email addresses but also, the firm did not keep the emails.

Texas Securities Fraud