FINRA

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

Securities Law Roundup: Merrill Lynch Pays Customers $32M For Allegedly Overcharging Them with Unwarranted Fees, Brookstone Securities is Accused of $1.6M in Fraudulent CMO Sales to Elderly Retirees, and Planner Loses CFP Designation Following After Maine

Published on: June 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that it is fining Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8M in the wake of certain alleged supervisory failures that the SRO says led to the financial firm billing clients unwarranted fees. The financial firm paid back the $32M in remediation to affected clients, in addition to interest.

According to FINRA, from 4/03 to 12/11, Merrill Lynch lacked a satisfactory supervisory system that could ensure that certain investment advisory program clients were billed per the terms of their disclosure documents and contract. As a result, close to 95,000 client account fees were charged.

Also, due to programming mistakes, Merrill Lynch allegedly did not give certain clients timely trade confirmations. These errors caused them to not get confirmations for over 10.6 million trades in more than 230,000 customer accounts from 7/06 to 11/10. Additionally, FINRA contends that Merrill Lynch failed to properly identify when it played the role of principal or agent on account statements and trade confirmations involving at least 7.5 million mutual fund buy transactions. By settling, Merrill Lynch is not denying nor admitting to the charges. It is, however, agreeing to the entry of FINRA’s findings.

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest

Published on: June 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Broker Bruce Parish Hutson has turned in a Letter of Acceptance, Waver, and Consent to settle allegations of Financial Industry Regulatory Authority rule violations involving his alleged failure to advise Morgan Stanley Smith Barney (MS) of his arrest for retail theft at a store in Wisconsin. FINRA has accepted the AWC, which Hutson submitted without denying or admitting to the findings and without adjudicating any issue.

The Ex-Morgan Stanley Smith Barney broker (and before that he worked for predecessor company Citigroup Global Markets Inc. ((ASBXL)), had entered a “no contest” plea to the misdemeanor charge in February 2010. He received a jail sentence of nine months, which was reduced to 12 months probation. On August 16, 2010, Hutson, turned in a Form UT (Uniform Termination Notice for Securities Industry Registration) stating that he was voluntarily let go from Morgan Stanley Smith Barney because the financial firm accused him of not properly reporting the arrest.

Also, although Form U4 (Uniform Application for Securities Industry Registration or Transfer) doesn’t mandate the disclosure of a mere arrest but does contemplate a criminal charge (at least), many industry members obligate employees to disclose any arrests. Yet when it was time to update this form by March 18, 2010, FINRA says that Hutson did not report the misdemeanor theft plea. Then, when he filled out Morgan Stanley Smith Barney’s yearly compliance questionnaire on May 19, 2010, he again denied having been arrested or charged with a crime in the past year or that he was statutorily disqualified.

FINRA contends that Hutson willfully violated its Article V, Section 2 (C) by-laws by not disclosing the criminal charge. The SRO also says that his later “no contest” plea to the misdemeanor theft violated FINRA Rule 2010 (when he made the false statement that he hadn’t been charged with any crime in the 12 months leading up to his completion of the compliance questionnaire) and he again violated this same rule when it was time to fill out the questionnaire. Per the AWC terms, Hutson is suspended from associating with any FINRA member for five months and he must pay a $5,000 fine.

“A broker can have a dozen complaints by investors and lose a half-dozen claims of wrongdoing, in which arbitrators reimburse these investors only part of their millions in collective losses, yet the broker is neither fined nor suspended,” said Shepherd Smith Edwards and Kantas, LTD, LLP founder and Securities Attorney William Shepherd. “A shoplifting charge in one’s past – very bad. Repeated misrepresentations to investors – so what. Perhaps FINRA should get its priorities straight.”

Broker Bruce Parish Hutson, Forbes, June 27, 2012

More Blog Posts:
Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011

Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum

Published on: June 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At the Financial Industry Regulatory Authority’s yearly conference, the SRO’s CEO, Richard Ketchum, talked about how investment advisers and brokers that sell complex instruments to retail clients should be able to write on a “single page” the reasons why the product is in the best interest of that investor. Ketchum made his comments less than a month after FINRA fined Citigroup Inc. (C), Wells Fargo & Co. (WFC), UBS AG (UBS), and Morgan Stanley (MS) $9.1 million for their alleged failure to correctly train sales employees about the features of and risks involved with leveraged and inverse exchange-traded funds.

Shepherd Smith Edwards and Kantas, LTD, LLP Founder and FINRA Arbitration lawyer William Shepherd disagrees with this ‘single page’ approach. “Despite its name, one should know that FINRA is a self-regulatory association owned and operated by securities dealers,” he said. “A one page statement as to why an investor is being sold an investment is likely designed to become a disclaimer such as the one found on a toaster or other product. This one-pager could then be used to shift the burden of suitability from the broker to the investor. Retirees who lose their savings can then be told. ‘It is your fault, not ours.’ Beware of securities self-regulators bearing gifts.”

Ketchum also talked about how reps should talk to investors about how a product will likely do in different markets and that investment losses could result. He also suggested that broker-dealers provide more training to brokers about financial products so that they can also better explain any costs involved. Acknowledging that conflicts of interests do exist, Ketchum spoke about the need for brokerage firms to self-assess regarding which is higher priority to it: the best interests of investors or that of their own employees?

Meantime, Securities Industry and Financial Markets Association general counsel and senior managing director Ira Hammerman has spoken in favor of a uniform fiduciary standard” for both investment advisers and brokers. He said it was key that new disclosures articulate in simple English the material risks, conflicts of interest, and possible rewards.

“As for standardizing the breach of fiduciary standard in the securities industry: The goal is to water-down ‘settled law’ regarding fiduciary duty,” said Stockbroker fraud attorney William Shepherd. “Other professionals, including lawyers, have lived with this duty for centuries. Since 1945, investment advisors have existed with the current legal definition of ‘fiduciary duty.’ Wall Street brokers should simply be held to the same standard.”

FINRA Annual Conference 2012

Securities Industry and Financial Markets Association

More Blog Posts
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010 Continue Reading ›

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker

Published on: June 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered Advanced Equities, CEO Dwight Badger, and Chairman Keith Daubenspeck to pay one of their former brokers $4.5 million in compensatory damages. The ex-broker, John Galinsky, had accused all three of them of not paying certain commissions on his work to raise capital for clients, such as Alien Technology, Bloom Energy, Arbinet (ARBX), ForceIO Networks, Infinera, (INFN), Motricity (MOTR), and Peregrine Semiconductor (PSMI). He also made claims of unjust enrichment, breach of contract, retaliatory discharge, and fraudulent inducement. Daubenspeck and Badger cofounded Advanced Equities.

The FINRA arbitration panel awarded Galinksy $3.47 million in actual damages, $347,000 in interest, $211,314 in other costs related to trial, and $500,000 in punitive damages-the last due to the investment banking boutique showing a “reckless disregard” for the broker’s warrant rights while breaching its fiduciary duties to him. Additionally, Advanced Equities must pay FINRA $61,650 in session fees. (There were 51 pre-hearing and hearing sessions took place between June 2010 and April 2012, which is after Galinsky went to arbitrators.)

Advanced Equities is a Chicago-based investment firm. It makes late-stage venture capital investments in tech companies. Just last January, the Securities and Exchange Commission sent Wells notices to Badger and Daubenspeck letting them know they could face federal enforcement action over a 2009 private offering.

Galinsky worked for Advanced Equities’ retail broker unit for 10 years. He now works with National Securities Corporation.

Brokers With Arbitration Claims Against Financial Firms
“In 1972, financial firms instituted mandatory arbitration to resolve disputes between financial firms and disputes between those firms and their representatives. During the 1980’s mandatory arbitration agreements with clients of securities firms were enforced by the courts,” said FINRA Arbitration Attorney William Shepherd. “Today, while the vast majority of securities arbitration actions are between investors and firms, each year hundreds of disputes between securities firms, and between those firms and their brokers, are also resolved in arbitration.”

Among such cases, was the claim brought by Patrick M. Mendenhall against UBS Financial Securities. Last year, a FINRA arbitration panel ordered the financial firm to pay its former broker $350,000 in compensatory damages and 6% interest until the amount was paid. Mendenhall, a former UBS broker, had sought resolution over allegedly unpaid deferred compensation and unused vacation time

Ex-Advanced Equities Broker Gets $4.5 Million IOU, Wealth Management, June 3, 2012

FINRA panel orders Advanced Equities to pay $4.5 mln, Reuters, May 21, 2012
Former UBS Broker Sues Firm For $3.8 Million in Deferred Comp and Unused Vacation Time, Forbes, November 28, 2011

More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012
Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?, Institutional Investor Securities Blog, October 16, 2010
Hampton Porter Investment Bankers’s Stockbrokers, Convicted For Securities Fraud In Pump-And-Dump Scheme, To Be Sentenced This Year, Stockbroker Fraud Blog, January 9, 2007 Continue Reading ›

FINRA Initiatives Addressing Market Volatility Approved by the SEC

Published on: June 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a “limit up-limit down” proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

FINRA Enforcement Actions in 2012 Likely to Equal The Record Number Brought Last Year

Published on: May 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a senior FINRA enforcement official, the Financial Industry Regulatory Authority appears on schedule this year to bring about 1,500 enforcement actions-that’s about the same amount a last year, when this was then considered a record number. He said that the actions tend to be “isolated cases,” with dishonesty playing a factor.

The FINRA enforcer, who spoke at an enforcement panel during the SRO’s yearly conference in DC on May 23 (panelists were not identified by name), also noted that the self-regulatory organization is concentrating on complex products. He talked about how important it was for firms to fully comprehend the products that they are selling.

Meantime, another FINRA enforcer encouraged brokerage firms to pay attention to recent actions involving four firms that consented to pay $9.1 million to settle allegations that without supervision they sold leveraged and inverse exchange-traded funds valued at billions of dollars. (The SRO had accused the Wall Street broker-dealers of not having “reasonable” grounds for recommending these instruments to retail clients.) The FINRA official said that similar FINRA cases are expected-a clear indicator that it is integral for financial firms to supervise the products that they sell. She also talked about how when examining real estate investment trusts and private placements under regulation D, FINRA is looking at the areas of supervision, advertising, due diligence, suitability, misstatements, training, risk disclosure, and product understanding.

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Published on: May 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases

Published on: May 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Inc. arbitrator Alvin Green is ordering David Lerner Associates Inc. to pay claimants Florence Hechtel and Joseph Graziose $24,450 for the Apple REITs that they bought from the firm. They will get the money after returning the Apple REIT 9 shares to the company. The Apple REIT is the 14th largest nontraded real estate investment trust in the US. David Lerner & Associates also will have to reimburse them their $425 FINRA claim filing fee.

According to Graziose and Hechtel, the financial firm misrepresented the Apple REIT 9, as well as breached its fiduciary duty and contract to them. Other Apple REIT investors have made similar claims. However, of the hundreds of arbitration claims (there are also securities lawsuits) that have been pending, this is the first one to go to hearing.

Per FINRA, since 1992 David Lerner & Associates has sold close to $7 billion in Apple REITs, making about $600 million in revenue from the sales (60-70% of the firm’s business since 1996). It is the only distributor of Apple REITs.

Last year, the SRO charged the financial firm with soliciting investors to buy Apple REIT Ten shares (a $2 billion non-traded REIT) without performing a reasonable investigation to make sure the REITs were suitable for these clients. Many of its Apple REIT investors are not only unsophisticated investors but also they are elderly. David Lerner & Associates also allegedly offered misleading information about the distribution online.

Several months ago, FINRA also sued firm owner David Lerner for similar alleged misconduct, including misleading clients about the valuation and risk involved in their Apple REIT Tens. The complaint against Lerner follows statements he is accused of making to investors after FINRA made its charges against the financial firm.

Per the amended complaint, Lerner wrote to over 50,000 clients to “counter negative press.” This letter also talked about a potential opportunity for Apple REIT shareholders to take part in a listing or a sale on a national exchange to get rid of their shares at a reasonable price. Also, at a seminar he hosted Lerner allegedly made statements to investors that were misleading.

For the last nine months, our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD, LPP has been investigating claims on behalf of investors who sustained losses in Apple Real Estate Investment Trusts that they bought from David Lerner Associates. For many investors, these non-traded REITs were unsuitable for them.

First Apple REIT case goes against Lerner, Investment News, May 23, 2012

FINRA Charges David Lerner & Associates With Soliciting Investors to Purchase REITs Without Fully Investigating Suitability; Lerner Marketed REITs on its Website With Misleading Returns, FINRA, May 31, 2011

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REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›