FINRA

FINRA Says Securities Arbitration Claims Increased by 85% in 2008

Published on: January 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that between 2007 and 2008, the number of securities arbitration claims increased by 85%. While Investors filed 1,985 claims against brokerage firms in 2007, last year, 3,667 cases were filed.

Between November 30 and December 31, 2008, 462 securities arbitration claims were filed with FINRA. Through November 30, FINRA received 3,215 claims.

Some of the reasons why there were so many more claims last year than the year before are that the market has been so volatile and certain investment products have experienced losses. Among these are the frozen auction-rate securities market and losses from the Regions Morgan Keegan bond funds and a number of Charles Schwab YieldPlus funds.

Investors, frustrated that brokerage firms placed them in a position to experience such losses, are seeking to recover through arbitration and in court. Unfortunately, it is a challenging time for many investors to recover their losses, especially those involving defaults and bankruptcy. This is one reason why investors are filing their cases now instead of waiting to do so years later.

FINRA’s Arbitration Process
Arbitration provides parties with a way to resolve their securities industry-related disputes. This alternative to filing a securities fraud lawsuit is considered a less costly and more rapid way for investors to resolve their claims with broker-dealers.

The resolution of an arbitration case is considered final and binding. Parties who choose to resolve their case through arbitration have generally given up their right to bring the case to court.

Related Web Resources:
Charles Schwab YieldPlus funds
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ARS Investors Can Seek Consequential Damages Recovery Through Special Arbitration Procedure Introduced by FINRA

Published on: December 23, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Financial Industry Regulatory Authority introduced a special arbitration procedure that auction-rate securities investors can avail of to recover consequential damages. This procedure can be used by customers who are allowed to file for such damages under the ARS-related settlements that have been concluded with the Securities and Exchange Commission or with FINRA.

Under the special procedure, investment firms cannot contest liability related to ARS product sales or the illiquidity of ARS holdings. The companies also cannot use as its defense an investor’s choice not to borrow money from the firm (if it offered the ARS holder a loan option) or his or her decision not to sell ARS holdings prior to the settlement date.

Investors have the option to seek their recovery through this procedure or in other applicable forums, including through standard arbitration rules. FINRA Dispute Resolution President Linda Fienenberg says the special procedure offers a quicker, more affordable resolution for clients claiming consequential damages. Any fees related to the special arbitration procedure will be paid for by the firms.

A single public arbitrator will hear consequential damage claims under $1 million. If the amount is larger, the parties have the option, by mutual consent, to have their claim heard by a three-person arbitration panel.

Consequential Damages
These damages are the financial harm that was experienced by ARS investors because the market collapsed. This may include losses incurred by investors whose ARS assets are frozen, as well as opportunity costs.

As of the end of last month, 275 ARS arbitration claims had been filed under FINRA’s standard arbitration procedure. Investors that limit claims to consequential damages can opt to have their case heard under the special arbitration procedure.

In the wake of the ARS market’s downfall last February, FINRA has been working with the SEC and state regulators to provide investors recovery options. FINRA is also investigating some two dozen firms for alleged misconduct involving their handling of ARS.

FirstSouthwest Co and WaMu Investments have reached final settlement agreements with FINRA. Agreement in principles have been reached with City National Securities, Mellon Capital Markets, SunTrust Investment Services, Comerica Securities, SunTrust Robinson Humphrey, Harris Investor Services, and NatCity Investment, Inc.

Related Web Resources:

FINRA Provides Details on Special Arbitration Procedure for ARS Consequential Damages, MarketWatch, December 16, 2008
Special Arbitration Procedures for Investors Involved in Auction Rate Securities Regulatory Settlements, FINRA
FINRA
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Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigate Securities Fraud Claims Involving Former World Group Securities Representatives David Olson and Edward Allen

Published on: December 9, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that former World Group Securities representative David Olson was named in a customer complaint filed in October 2008. The customer claims Olson persuaded him to buy real estate, which was leased back to the representative. The customer alleges that Olson agreed to pay the customer mortgage payments plus interest.

The customer says Olson defaulted on their deal and stopped making payments. The customer is also accusing the representative of soliciting three promissory notes for purchase and earmarking proceeds to buy other real estate properties.

It is considered improper for a FINRA registered representative to issue promissory notes, borrow money from clients, or engage in undisclosed, outside business.

Shepherd Smith and Edwards is investigating securities fraud claims involving David Olson and business partner Edward Allen, as well as their business entities WFG and A&O Companies. Allen also used to work for World Group Securities.

World Group Securities
World Group Securities brokers have been in the headlines recently following news that the US Securities and Exchange Commission was suing five of them due to allegations that they persuaded investors to use subprime mortgages to refinance their homes. The brokers allegedly were compensated for securities sales and mortgage refinancings.

Related Web Resources:

Shepherd Smith Edwards & Kantas LTD LLP Investigates Claims for Clients of David Olson, Edward Allen and World Group Securities, Inc., Marketwatch.com, December 3, 2008
Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages, Stokbroker Fraud Blog, October 16, 2008 Continue Reading ›

Citigroup Global Markets Ordered to Pay FINRA Fine for Inadequate Supervision

Published on: November 17, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority Inc. says it is fining Citigroup Global Markets Inc. $300,000 for its failure to reasonably supervise the commissions that clients were charged for stock and options trades. Citigroup Global Markets is Citigroup Inc’s brokerage and securities arm.

FINRA says that between April 2002 and January 2006, then-Citigroup representative Juan Carlos Hernandez charged 27 clients unreasonable commissions that substantially exceeded the firm’s calculated rate for appropriate charges. One client was reportedly overcharged about $1.2 million.

Citigroup let Hernandez go in February 2006 and one month later, without admitting to or denying FINRA charges, he consented to the findings made against him and was barred by FINRA.

FINRA contends that Hernandez was able to overcharge clients because Citigroup neglected to properly supervise him. FINRA also found that it wasn’t until October 2007 that Citigroup told its brokers about its calculated commission rates or that they weren’t allowed to charge commissions higher than these rates. In the cases when commissions were greater than Citigroup’s calculated rates, FINRA says the firm lacked the proper procedures and policies for determining whether a commission was inappropriate.

By agreeing to settle, Citigroup is consenting to FINRA’s findings but is not admitting or denying the charges. The firm offered to reimburse customers who were affected.

J.P. Turner & Co. Will Pay $250,000 to Settle FINRA Charges Related to Inadequate Supervision of Stock Trade Commissions

Published on: November 5, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority and J.P. Turner & Co. have reached a settlement agreement over charges that the broker-dealer failed to put in place a proper supervisory system for making sure that its registered representatives charged clients reasonable and fair commissions on stock trades. By agreeing to settle, JP Turner is not admitting to or denying the charges involving inadequate supervision.

FINRA says that between January 2002 and March 2005, JP Turner failed to take certain relevant factors into consideration when determining how much commission they should charge clients for equity securities transactions. Instead, FINRA says that the broker-dealer let its brokers charge commissions of up to 4.5% on nearly every stock trade, with discretion on what commission to charge solely limited by whether the security’s price was higher or lower than $25/share. If the security’s price was under $25/share, FINRA says that JP Turner representatives could charge commission of up to 4.5%. They could charge commissions of up to 3.5% if the security price was higher than $25.

FINRA requires brokerage firms to put in place systems and “reasonable procedures” for determining what commission fee a customer should be charged for such transactions, while taking into consideration certain relevant factors. The SRO’s mark-up policy provides a list of these relevant factors, including: the kind of security, the price of the security, the transaction size, the order execution cost, and the availability of the security.

During the review period, FINRA says that 91% of JP Turner’s transactions involved securities priced under $25/share. While the broker dealer’s trading manager was in charge of reviewing and approving trades to make sure charges were reasonable and fair, the SRO says the reviews actually consisted of checking transactions to make sure that commissions did not go above the company’s 4.5% and 3.5% guidelines.

As part of its settlement with FINRA, JP Turner will pay $250,000. The broker-dealer has also agreed to retain an independent consultant who will evaluate for adequacy the company’s systems, policies, procedures, and training related to FINRA’s fair price ruling.
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SunTrust Investment Services to Pay $700,000 Fine to Settle FINRA Charges of Excessive Commission and Supervisory Violations Involving Fee-Based Brokerage Business

Published on: October 23, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has announced that SunTrust Investment Services Inc. has agreed to pay a $700,000 fine to settle allegations that it engaged in supervisory violations involving its fee-based brokerage business and charged excessive commissions on low-priced stocks. By agreeing to settle, the investment firm is not admitting to or denying the charges.

SunTrust terminated its Portfolio Choice accounts, which were fee-based accounts, in 2006. The charges by FINRA involve the period between November 2002 and December 2005 when SunTrust opened more than 2,644 Portfolio Choice accounts without properly evaluating whether the accounts were the appropriate fit for customers. According to FINRA, SunTrust neglected to properly monitor the Portfolio Choice accounts to make sure that they continued to be the appropriate account choice for clients.

FINRA found that at least 36 Portfolio Choice accounts that did not engage in any trades for at least eight quarters-yet these accounts were charged more than $129,000 in fees during the last four quarters. FINRA also says that a number of SunTrust Portfolio Choice clients paid an asset-based fee and transaction commission on the same assets.

FINRA was able to identify over 900 incidents when SunTrust neglected to exclude a customer asset that was purchased with a commission from the asset base that is used to determine the account fee. The error resulted in customers being charged twice, leading to about $437,500 in commissions and excess fees for SunTrust clients.

FINRA also accused the investment firm of acting inappropriately when it let a number of customers keep their accounts and pay for them even though they had not traded for years. Between January 2002 and September 2, 2005, FINRA says SunTrust did not establish a supervisor system that could make sure that registered representatives would charges clients fair commissions on securities transactions. The firm used an automated commission system that charged commission of more than 5% when low quantities and/or low-priced stocks were sold or purchased. Because of this, some clients were billed excess commissions nearing $100,000 in total.

Also as part of its settlement, SunTrust said it would certify that it returned $713,362 in interest and fees to clients that were affected by the alleged violations. FINRA says it took this voluntary refund into account when assessing its fine against SunTrust.

Related Web Resources:

SunTrust Investment Services

FINRA
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Banorte Securities International Agrees to $1.1 Million Fine Over Charges It Recommended Class B Mutual Fund Shares Instead of Class A

Published on: October 22, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Banorte Securities International, Ltd. has agreed to a $1.1 million fine to settle charges that it recommended to customers that they buy Class B off-shore mutual fund shares even though they would have benefited more financially by buying Class A shares. The Financial Industry Regulatory Authority announced the settlement agreement last week.

By agreeing to settle, Banorte is not admitting to or denying the charges. The company also agreed to a plan that would address more than 1,400 transactions involving accounts in over 300 customer households.

Banorte had been accused of having inadequate supervisor systems to oversee the sales of off-shore mutual fund shares, including guidelines that failed to properly advise registered representatives that Class A share purchases eligible for front-end loans were more affordable than Class B Shares.

According to FINRA enforcement head Susan L. Merrill, firms are obligated to consider all share classes and pricing features that would most benefit a customer-regardless of whether or not that clients reside in the United States or abroad. The majority of Banorte’s customers reside in Mexico. Merrill also said that firms must take all relevant factors into considerations when making mutual fund recommendations to clients.

Class A Shares

These mutual fund shares come with a front-end sales charge and lower ongoing fees that are asset-based.

Class B Shares

While these mutual fund shares usually do not come with a front-end sales fee, their asset-based fees are usually higher than Class A Shares’ fees.

FINRA alleges that from 2003 until May 2004, the majority of Banorte mutual fund sales involved Class B shares even though investing in Class A Shares could have resulted in higher returns for clients.

Related Web Resources:

FINRA Fines Banorte Securities International $1.1 Million for Improper Sales of Class B Mutual Fund Shares, FINRA, October 16, 2008 Continue Reading ›

Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Ray Londo, Londo Financial Group, and Linsco Private Ledger For Improper Lending/Borrowing of Client Funds

Published on: October 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Securities fraud attorneys at the stockbroker fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP are investigating claims for clients of Ray Londo, Londo Financial Group, and Linsco Private Ledger (LPL). The firm is asking any clients of Ray Londo that lent him or anyone else in his company money to call (800) 259-9010.

According to the Financial Industry Regulatory Authority, Ray Londo was fired from LPL this year because of his failure to abide by company policy related to borrowing from or lending money to clients. FINRA registered representatives are not supposed to borrow money from clients or accept checks issued directly to a broker.

FINRA Rule 2370

FINRA Orders Charles Schwab to Pay $542,340 Over Short-Term Bond Fund Investor Claim

Published on: October 14, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, a Financial Industry Regulatory Authority panel found Charles Schwab Corp. liable for $542,340 in an investor claim against the company over its YieldPlus short-term bond fund. This case is one of numerous individual arbitration and class action lawsuits against the San Francisco-based investment firm because of the fund.

The Schwab YieldPlus Fund had assets worth over $13 billion last year, but the fund suffered major losses this year because of mortgage-backed securities. At the end of last week, the fund’s assets were worth $432 million.

In this latest arbitration claim, investor Jeffrey Nielson accused Schwab and representative Darin Beckering of purposely misleading him when he purchased the ultrashort-bond fund because they did not fully disclose the extent to which the fund would be exposed to the subprime-mortgage market. Nielson also claims he was never informed that the Schwab YieldPlus Fund was a proprietary fund.

FINRA Rolls Out New Arbitration Process for Auction-Rate Securities Claims

Published on: August 21, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it has set up an arbitration process designed to resolve claims involving auction-rate securities. Parties now have the option to have their claims reviewed by an arbitration panel with members that are not connected with any firm that may have recently sold the securities.

FINRA says the process was developed following the system it set up for Citigroup’s settlement with the Securities and Exchange Commission. Earlier this month, Citigroup Inc. reached an agreement with state and federal regulators to redeem $7.3 million in illiquid auction rate securities that retail investors had purchased, as well as pay $100 million in fines. The agreement was to settle charges over misconduct related to sales practices.

FINRA Dispute Resolution President Linda Fienberg says it is only fair that all investors with auction-rate securities claims be given the opportunity to resolve their disputes in the same way. She said that FINRA would work hard to put the process in place so that claims wouldn’t be delayed unnecessarily. Persons that since January 1, 2005 have sold auction-rate securities, worked for a company that sold the securities, or supervised the selling of the securities cannot be on the panels.

FINRA Creates Process for Arbitrations Involving Auction Rate Securities, Marketwatch.com, August 7, 2008
Citigroup Returning $7 Billion To Auction-Rate Securities Investors, The Star, August 8, 2008
FINRA
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