FINRA

FINRA Panel Orders Wedbush Securities to Pay $233,000 in Securities Fraud Damages

Published on: March 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) arbitration panel says Wedbush Securities Incorporated must pay Karen E. Ray $233,000 in damages. Ray had accused the brokerage firm of numerous causes of action, including negligence, purposely negligent misrepresentations, and violating FINRA Rules of Fair Practices.

Rays case isn’t the first one against the broker-dealer. FINRA’s broker report on the financial firm noted that Wedbush has been at the center of a number of customer complaints and over 40 regulatory inquiries brought by the Securities and Exchange Commission, FINRA (previously NASD), the NYSE Division of Enforcement, as well as regulatory bodies in Colorado, Washington, New Jersey, Georgia, Idaho, and Oregon.

Among the allegations are those involving supervisory failures and market timing. The broker report also noted that Wedbush had received over 40 securities arbitration claims by customers alleging unsuitability, negligence, excessive margin, churning, misrepresentation, and/or breach of fiduciary duty. Their cases involved different kinds of securities, such as mutual funds, bonds, stocks, municipal securities, annuities, and options.

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO’s Records Dismissed

Published on: March 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority wants the District of Columbia Court of Appeals to reverse the D.C. Superior Court’s decision to not dismiss Amerivet Securities Inc.’s lawsuit against the SRO. The broker-dealer wants to inspect FINRA’s records and books.

Amerivet Securities filed its complaint in August 2009 under the Delaware General Corporation Law’s Section 220, which lets a shareholder examine a company’s records and books for “any proper purpose.” The broker-dealer says it needs to inspect FINRA’s books and documents in order to expose the corporate wrongdoing related to the SRO’s 2008 investment losses and and allegedly inflated executive pay practices.

When our securities fraud attorneys covered this case more than a year ago, we noted that Amerivet had accused FINRA of failing to supervise and regulate a number of its larger member firms, including Lehman Brothers, Merrill Lynch, Bernard L. Madoff Investment Securities Inc., Bear Stearns and Co, and Stanford Financial Group. The broker-dealer also claimed that FINRA recklessly pursued high-risk investment strategies that were not appropriate for preserving capital. (Read our previous Stockbroker Fraud Blog post to find out more.) Last month, Judge John Mott ruled in favor of Amerivet and noted that pursuant to Section 220, the broker-dealer had asserted a proper purpose for wanting to make its inspection.

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into

Published on: March 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

At a Financial Industry Regulatory Authority fixed income conference earlier this month, FINRA CEO and Chairman Rick Ketchum says securities regulators are questioning whether investors looking at risky investment, including high-yield corporate bonds, fully understand what they are getting into when they delve into the high-yield market. Last year, approximately $200 billion in high-yield debt were sold-a significant increase from the $49 billion that were sold in 2008. Also, during the first six weeks of 2010, about $6.7 billion in junk bond mutual funds were sold.

However, with all this activity in the past year, Ketchum says regulators are asking if registrants are fully familiar with the risks and complexities of the products they are selling and whether clients’ understand the risks involved. For example, he asked, “In a lower interest rate environment, are investors chasing yield, or being led to chase yield?”

As a result of such concerns, FINRA, for its compliance programs, is focusing on the areas of commodity-based exchange-traded funds, municipal securities, disclosure practices, and investor suitability. Ketchum says to expect several formal actions that will tackle “deficient procedures for disclosing material information” and other actions related to “failure to deliver official statements during the primary offering disclosure period” and insufficient “time-of-trade disclosures of material information.”

Ketchum also says that in addition to taking a closer look at municipal bond underwriters to ensure the fairness of new-issue pricing practices and fees, regulators will be checking for any inappropriate efforts by ratings agency officials to favorably affect how municipal securities issues are rated.

Our securities fraud lawyers represent clients who were inappropriately advised about where to put their funds and as a result sustained significant investment losses.

Related Web Resources:
FINRA

FINRA looks into muni-bond practices, Chicago Breaking Business News/Reuters, March 7, 2011 Continue Reading ›

SEC Needs to Keep a Closer Eye on FINRA, Says Report

Published on: March 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Boston Consulting Group, the US Securities and Exchange Commission should step up its oversight efforts over the Financial Industry Regulatory Authority. The BCG released its findings following a six-month review of the SEC’s internal operations, an examination that was ordered under the new Dodd-Frank law. The consulting group’s job was to examine the SEC’s structure, internal operations, personnel, resources, relationships with self-regulatory organizations, and technology.

BCG notes that with FINRA now providing the majority of market surveillance for most US equity trading, the SEC’s scrutiny of the SRO is now more important than ever. BCG also believes that the SEC should keep a closer watch on FINRA’s member regulation and enforcement units.

Currently, the SEC’s Office of Compliance Inspections and Examinations employs about 50 people tasked with inspecting 12 SROs. Still, BCG says that these SROs are under no obligation to regularly disclose information about their regulatory operations to the SEC. BCG believes that this disclosure of data should become a formal requirement. Also, even though there are over 100 staff attorneys at the SEC’s Division of Trading and Markets looking at SRO filings, the consulting group believes these employees could stand to deepen their understanding of the markets.

FINRA Orders Charles Schwab to Pay $18M to Fair Fund for YieldPlus Investors

Published on: March 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulation Authority wants Charles Schwab & Company, Inc. to pay $18 million to a Fair Fund set up by the SEC to payback investors of the Schwab YieldPlus Funds. FINRA found that even after changes to the fund’s portfolio resulted in it being affected by the mortgage-backed securities market crisis, Schwab did not change its marketing of the fund and instead provided inaccurate material.

The FINRA order was announced just as the Securities and Exchange Commission revealed that $119 million settlement was reached with Charles Schwab & Co., Inc. and Charles Schwab Investment Management for their alleged misleading of Schwab YieldPlus Fund investors and failure prevent nonpublic information from being misused. According to the SEC, investors were not adequately told about the risks associated with the Schwab fund. Instead, they were provide with allegedly misleading statements, such as those claiming that investing in the ultra-short bond funds was only slightly riskier than investing in a money market fund. Read our earlier stockbroker fraud blog post for more information.

Schwab has said that it is still facing about 20 individual securities arbitration claims asking for $3 million in damages related to the YieldPlus Fund. Last year, it resolved federal and California state law claims-for $200 million and $35 million, respectively, over the fund.

In other recent Charles Schwab Corp. news, FINRA has announced that it isn’t going to recommend disciplinary action over the firm’s auction-rate securities sales to clients. Charles Schwab had received two Wells notices in 2009 indicating that regulators were recommending enforcement actions.

Related Web Resources:
UPDATE: Finra Won’t Discipline Schwab For Auction-Rate Securities-Filing, The Wall Street Journal, February 25, 2011
SEC Reaches $119 Million Settlement with Charles Schwab, The Blog of Legal Times, January 11, 2011
FINRA Orders Schwab to Pay $18 Million to Investors for Improper Marketing of YieldPlus Bond Fund, FINRA, January 11, 2011

More Blog Posts:
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010 Continue Reading ›

SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court

Published on: March 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Recently, the U.S. Court of Appeals for the Second Circuit dismissed Standard Investment Chartered Inc.’s lawsuit against the Financial Industry Regulatory Authority, New York Stock Exchange Group Inc., and NASD over alleged misstatements in a proxy to obtain member approval for bylaw changes that ultimately resulted in the creation of FINRA. In a per curiam decision, the court held that self-regulatory organizations and their officers are immune from lawsuits over bylaw amendments because these are “inextricable” from the SRO’s regulatory roles.

The plaintiff, broker-dealer and former NASD member Standard Investment Chartered Inc., claims that NASD and certain officials issued material misrepresentations in the proxy statement that solicited approval of bylaw amendments so that the merger between NASD and parts of NYSE Regulation Inc. that became FINRA would take place. The broker-dealer contends that the proxy statement misrepresented that $35,000 was the most that the Internal Revenue Service had authorized NASD to pay members over the union.

Last March, the U.S. District Court for the Southern District of New York dismissed Standard Investment Chartered Inc.’s lawsuit, as well as a similar claim submitted by NASD member Benchmark Financial Services Inc. The court said that the union between the SROs was “entitled to absolute immunity” because it was part of their delegated regulatory functions. Standard Investment Chartered appealed the ruling.

Now, the Second Circuit has affirmed the district court’s ruling. The court also noted that NASD can’t change its bylaws without Securities and Exchange Commission approval.

Other defendants in the lawsuit include Securities and Exchange Commission chairman Mary Schapiro, who was NASD’s CEO when the regulatory body merged with NYSE, Pershing LLC Chairman Richard Brueckner, and FINRA senior vice president Howard Schloss.

Related Web Resources:
Appeals Court Upholds Lower Court Ruling on Finra Damage Suits, Bloomberg, February 23, 2011
Court Finds SROs Immune From Lawsuit Over Bylaw Changes to Effect FINRA Creation, BNA – Securities Law Daily, February 23, 2011
Continue Reading ›

SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option

Published on: February 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposal to give investors the choice of having their securities claims against broker-dealers heard by an arbitration panel that doesn’t include any industry members. FINRA says that its Rule 12403, which lets investors choose between a majority-public panel and all-public panel, will go into effect right away. Arbitration cases that began prior to the SEC’s decision to approve the proposal will be notified of this new rule.

Prior to submitting its proposal to the SEC, FINRA tested the idea as a pilot program for more than two years. FINRA says that while investors regularly chose to have nonpublic arbitrators hear their securities case, it became clear that giving them other options improved their perception that the arbitration process was a fair one.

State securities regulators are praising the SEC’s decision. However, they are calling for even more reform.

Optional All Public Panel Rule 12403(d):
FINRA will send the parties three lists. One list will contain the name of 10 non-public arbitrators. The other list will name 10 chair-qualified public arbitrators. The other list will name 10 public arbitrators. Each party will be able to strike up to four arbitrators from the public and chair-qualified lists. Parties can strike the names of all 10 arbitrators from the non-public arbitrator list.

Majority Public Panel Rule 12403(c):
This panel will include one non-public arbitrator, one public arbitrator, and one chair-qualified public arbitrator. The same three lists as the ones mentioned for the All Public Panel will be sent to the parties. Up to four arbitrators from each list can be struck.

Related Web Resources:
Notice to Parties – New Optional All Public Panel Rules, FINRA

SEC Approves FINRA Proposal to Give Investors Permanent Option of All Public Arbitration Panels, FINRA, February 1, 2011

Related Blog Posts:
FINRA Wants to Make All-Public Arbitration Panel for Investors Permanent, Stockbroker Fraud Blog, October 7, 2010
Number of FINRA Arbitration Claims Rose in 2009 Following Market Crisis, Stockbroker Fraud Blog, January 13, 2010
FINRA Says Number of Stockbroker Fraud Arbitration Claims by Plaintiffs is Rising, Stockbroker Fraud Blog, July 14, 2009 Continue Reading ›

Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney

Published on: January 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Harold Haddon, the civil attorney for car accident victim Dr. Steven Milo, Morgan Stanley (MS) failed to disclose to the Financial Industry Regulatory Authority that financial adviser Martin Erzinger had been charged with a felony. Securities firms have 30 days from the time anyone working for them is charged with a felony to file a “Form U4” notifying FINRA.

Erzinger, who works with approximately $1 billion in accounts, was charged with a felony after he struck bicyclist Steven Milo in a car crash last July and then fled the collision site. Milo sustained serious injuries in the traffic crash. In December, the Morgan Stanley Smith Barney financial adviser struck a plea agreement. The felony charge against him was dropped and he pleaded guilty to misdemeanors. Erzinger claimed that at the time of the auto accident, he was suffering from undiagnosed sleep apnea, fell asleep at the steering wheel, and did not realize that he had hit anyone with his vehicle.

Erzinger was sentenced to community service and probation. Judge Fred Gannett also ordered him to tell FINRA about the felony charge. Attorney Haddon, however, says the court-ordered disclosure, which was submitted on December 22, doesn’t meet requirements because it only reveals that Erzinger was charged with a felony crime that was later dropped but does not mention the financial adviser’s misdemeanor guilty pleas or the sentence he must now serve.

Milo had opposed the plea agreement. Dow Jones Newswires reports that in court, Milo’s father-in-law Tom Marisco, who founded Marisco Funds and used to manage Janus mutual funds, blamed Morgan Stanley for not making the disclosures, which are mandatory. Morgan Stanley, however, says it contacted FINRA about the issue last July and believes that it satisfied all reporting requirements.

FINRA spokesperson Nancy Condon says the only way to notify FINRA about a reporting requirement is to electronically submit a Form U4.

Related Web Resources:
Lewis: Simple question tough for Morgan Stanley to answer, Denver Post/Dow Jones, January 8, 2010
Financial manager Martin Erzinger to accept plea bargain in Vail hit-and-run, 9News, November 2010
Form U4 Checklist, FINRA
Institutional Investors Securities Blog
Continue Reading ›

Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes

Published on: January 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered Securities America Inc. and broker Randall Ray Talbott to pay an investor nearly $1.2 million in damages over the sale of allegedly fraudulent Medical Capital notes. Claimant Josephine Wayman had charged the respondents with a number of actions, including securities fraud, deceit, breach of fiduciary duty, industry rules violation, financial elder abuse, and negligence. Ameriprise Financial Inc. owns Securities America.

The award includes $734,000 in compensatory damages, $250,000 in punitive damages, and $171,000 in expert witness and legal fees. Punitive damages are not common in FINRA arbitration awards.

Dozens of other claimants are pursuing securities claims against Securities America over the sale of private placements prior to the financial collapse in 2008. The securities divisions of Montana and Massachusetts are among those suing the broker-dealer. Meantime, Securities America has said that Medical Capital Holdings Inc., which issued the private placements, is the one that should be held liable for investors’ financial losses.

From 2003 to 2008, dozens of independent broker-dealers sold private Medical Capital notes, with Securities America considered the biggest seller at nearly $700 million. The private placements raised $2.2 billion. Unfortunately, many of the medical receivables that were supposed to be underlying the notes were in fact non-existent. Medical Capital has been accused of running a Ponzi-like scam and using newer investors’ funds to pay promised returns to older investors. Securities America has said that it did not act inappropriately when selling the MedCap notes.

Medical Capital is bankrupt and $1.1 billion of investors’ funds are gone. In 2009, the Securities and Exchange Commission charged Medical Capital with securities fraud.

Related Web Resources:

Securities America and Rep to Pay Over $1 Million in FINRA Fraud Case, AdvisorOne, January 5, 2011
Arbitrators hit Securities America, rep with $1.2 million in damages, legal fees over MedCap, Investment News, January 3, 2011
Financial Industry Regulatory Authority Continue Reading ›

Financial Services Institute Wants FINRA to Serve as SRO for RIAs

Published on: January 3, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Services Institute wants the Financial Industry Regulatory Authority to be the main watchdog over registered investment advisers. FSI, which represents 126 broker-dealers’ interests, endorsed FINRA in a letter to the Securities and Exchange Commission. Many of the broker-dealers that FSI represents are also RIAs.

FSI believes that not only has FINRA shown the ability to “equitably” distribute enforcement, examination, technology, and surveillance resources, but also, that the latter is knowledgeable about “the overlapping nature” of the services and financial products that both investment advisers and broker-dealers may offer. Coordinated Capital Securities, Inc. and 2010 FSI chair and president Mari Buechner believes that having a regulatory structure that puts the same emphasis on examining broker-dealers, investment advisers, and their affiliated financial advisers will improve investor protection.

Currently, pursuant to Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is analyzing the need for improved oversight of investment advisers. Already, FINRA closely scrutinizes broker-dealers, while the SEC has acknowledged that insufficient resources prevents it from regularly inspecting over 11,000 registered advisers.