Investor Lawyers Blog

Broker Fraud Allegations Lead to Finra Bars for Northwestern, Fortune Financial, and Morgan Stanley Representatives

Published on: March 24, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has barred three brokers in separate, unrelated cases for alleged misconduct. They are ex-Morgan Stanley (MS) representative Thomas Alain Meier, ex-Fortune Financial broker Michael Giokas, and ex-Northwestern Mutual broker Michael Cochran.

Former Morgan Stanley broker Thomas Alan Meier is accused of making unauthorized trades in customer accounts. In the self-regulatory organization’s letter of acceptance, waiver, and consent, FINRA stated that from 7/2012 through 3/2016, Meier “effected” over 1000 transactions that were not authorized in six customers’ accounts. His allegedly unauthorized transactions involved discretion without written permission or the accounts garnering discretionary acceptance and impacted four clients.

Between 4/2016 and 10/2017, Morgan Stanley submitted 21 amended Forms U5 for Meier. The forms showed that 14 customer complaints were filed against Meier, including two arbitration cases. AdvisorHub reports that because of Meier’s alleged misconduct, customers sustained $818K in losses and over $2M in unrealized losses. To date, the brokerage firm has paid customers about $2.5M in settlements and resolved 13 of the claims.

FINRA Panel Orders UBS to Pay $204K in Puerto Rico Bond Fraud Claim

Published on: March 22, 2018 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Panel has ruled that UBS must pay claimant Antonio Gnocchi Franco $204,000 in compensatory damages and $66,000 in costs for his Puerto Rico bond fraud case. Franco, a Puerto Rico resident who was also the trustee of his law firm’s pension plan, accused the brokerage firm of negligence, misrepresentation, breach of fiduciary duty, breach of contract, unauthorized trading, unsuitability, overconcentration, failure to supervise, unauthorized use of loan facilities, and unjust enrichment. According to the complaint, UBS had recommended that Franco invest in UBS bond funds and Puerto Rico bonds.

This customer win is yet another in a long line of customer wins against UBS for its investment and brokerage services provided in Puerto Rico. To date, FINRA arbitrators have ordered UBS to pay hundreds of millions of dollars to investors and UBS has paid many hundreds of millions more in settlements. Recently, UBS Puerto Rico and UBS Financial Services lost another Puerto Rico bond fraud case and were ordered to pay five former customers $521,000 in compensatory damages.

In total, UBS has been named in FINRA arbitration claims brought by thousands of investors that lost money from investing in UBS-packaged bond funds and Puerto Rico bonds. UBS Puerto Rico brokers, especially, have come under fire for allegedly recommending customers concentrate their investments in UBS Puerto Rico products, even when they were not suitable for customers in almost any amount. Moreover, many of these investors have alleged that UBS encouraged them to borrow against their own accounts so that customers could invest more. For example, the firm’s financial representatives are accused of advising clients to leverage their accounts and use them as collateral, sometimes for the purposes of purchasing even more UBS investments. This is a practice that should have never happened.

Judge Says Ex-F-Squared CEO Must Pay More Than $13M Related to AlphaSector Strategy and ETF Fraud

Published on: March 22, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Howard Present, the ex-CEO and cofounder of F-Squared Investments, must pay more than $13M—nearly $11M of disgorgement, almost $1.4M of interest and a nearly $1.6M penalty. The final judgement, issued by U.S. District Judge Leo Sorokin in Boston, comes after a federal jury found Present liable for the false and misleading statements made to investors.

It was in 2014 that the US Securities and Exchange Commission charged Present and his investment management firm with misleading investors about its AlphaSector strategy. At the time, F-Squared was the biggest market of index products that use exchange-traded funds.

The SEC accused F-Squared of false advertising related to its touting of a “successful seven-year track records” for its AlphaSector strategy that it claimed was based on real investments, real clients, and real performances, when, in fact, the algorithm that the company claimed to use didn’t even exist during that time period of this supposed success. Instead, the data that the F-Squared marketed was a product of backtesting—not real testing—even though Present and his firm specifically stated that their AlphaSector strategy had not been backtested.

Goldman Sachs Gives LPL Financial Holdings Clients Access to Securities Lending

Published on: March 20, 2018 | by Shepherd Smith Edwards & Kantas, LLP

LPL Financial Holdings (LPLA) brokers and investment advisers will now be able to offer their clients securities lending services through Goldman Sachs (GS). Under the new arrangement, LPL clients can borrow anywhere from $75,000 to $25 million against the securities held in their accounts.

In a press release, Goldman Sachs spoke about how through its Goldman Sachs Private Bank Select, LPL clients would be able to borrow these funds for “life events,” including travel or education, without having to sell their investments. However, the money borrowed cannot be used to purchase more investments. Goldman noted that its “high-tech platform” would be able to reduce wait time for a non-purpose securities- based loan from weeks to days, with no fees charged.

Over 15,000 LPL financial advisors will now be able to offer clients access to Goldman’s securities lending capabilities. The independent investment advisory firm joins 40 other such firms and broker-dealers on Goldman’s GS Select platform.

Securities Lending Comes with Significant Risks

The ability to borrow against securities is often touted as a benefit to investors. However, securities lending may not be the best choice in the long run for many investors. While such loans allow clients to borrow against what is in their accounts, certain risks come with this advantage, including forced liquidation of accounts during bad market moves.

SEC Grants $83M in Whistleblower Awards in $415M Bank of America Settlement

Published on: March 19, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has awarded two whistleblowers almost $50M and another over $33M in the largest whistleblower awards that the regulator has issued to date. This ups the total of SEC whistleblower awards granted to $262M to 53 individuals in the last six years.

According to the SEC Office of the Whistleblower Chief Jane Norberg, these latest awards show that whistleblowers can offer information that is “incredibly significant,” making it possible for the regulator to go after serious violations that could have gone “unnoticed. “ Until these latest awards, the largest SEC whistleblower award granted was $30M in 2014.

Whistleblowers who provide quality, unique information involving securities law violations that lead to a successful enforcement action rendering over $1M in monetary sanctions may be eligible to receive an award that is 10-30% of the funds collected.

Stock Fraud: Fyre Festival Founder to Pay $26M After Guilty Plea, Promoter is Accused of Defrauding Gold Mining Stock Investors, and SEC Prevents Alleged Pump-And-Dump Scam

Published on: March 17, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Fyre Festival Founder Pleads Guilty to Wire Fraud and Must Pay Back Investors

Billy McFarland, the founder of the failed Fyre Festival who pleaded guilty to two counts of wire fraud, must may pay back millions of dollars to investors whom he bilked. In Manhattan federal court, McFarland acknowledged that he received more than $26M in investor funds for the Bahamas festival that promised catered dining, luxury accommodations, and renowned performers. Instead, attendees were greeted with no food or tent accommodations.

Billboard reports that eventually prepackaged sandwiches were served, local musicians performed, and the festival was postponed even though it had already begun. Travelers who headed back home encountered rescheduled and delayed flights. Many festival employees went unpaid.

The FBI arrested McFarland last summer. He has since admitted that he solicited investors using bogus documents touting financial holdings that he didn’t possess.

Theranos and Founder Elizabeth Holmes Charged in Alleged $750M Fraud

Published on: March 16, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed fraud charges against Theranos Inc., its CEO and founder Elizabeth Holmes, and its ex-President Ramesh Balwani. The regulator contends that they engaged in a years-long fraud that raised over $700M from investors.

According to the SEC’s complaint, the three of them made statements that were false, exaggerated, and/or misleading regarding the company’s business, finances, and technology. They purportedly did this in presentations to investors, media articles, and product demos.

Because of these erroneous, deceptive, and inflated statements, investors thought that Theranos’s main product, which is a portable blood analyzer, could perform comprehensive blood tests with minute blood samples. Also, Theranos claimed that the company had the technologies needed to transport a finger stick sample of blood, place the sample in a specialized device that would go into an analyzer, and the analyzer could determine the results. The findings could then be sent to the care provider or patient. Theranos’ technology was supposedly able to offer cheaper, speedier, and more accurate results than any other blood testing labs—not to mention that it was portable.

Strategic Return Notes

Published on: March 16, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The attorneys at Shepherd Smith Edward & Kantas are investigating the claims of investors who purchased Strategic Return Notes (“SRNs”). Bank of America and Merrill Lynch created Strategic Return Notes, which are an unsecured promissory note issued by Bank of America. Bank of America has no obligation to and will not make any interest payments throughout the duration of the notes, which go through 2016 if held until maturity. Investors also have no guarantee of getting back the original purchase price of the note at maturity. Instead, investors are paid back a variable amount based upon the performance of an underlying index, the Investable Volatility Index (“VOL”).

The VOL is a complicated index which measures the volatility of the S&P 500, essentially attempting to calculate how volatile the stock market as a whole is and predict how volatile it will be in the coming months. If the computation indicates that the market will be less volatile, or that the market will fluctuate less in the time period, then the index falls. Conversely, if the computation indicates that the market will be more volatile in the coming months, then the index rises. The result is that investors in these SRNs achieve returns or losses based not upon how high the market rises or how low it falls, but rather on how wildly the market was swinging on the way there.

These products are very complicated, and are only suitable for certain types of investors. It is believed that many investors who were sold these products were not told the risks that were involved, or were promised that this product could be used as a hedge to reduce overall portfolio risk when that was not true. Many investors have suffered substantial losses in these products.

Massachusetts Investigates Wells Fargo Advisers

Published on: March 16, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US state of Massachusetts is investigating Wells Fargo Advisors (WFC) over whether the firm engaged in unsuitable recommendations, inappropriate referrals, and other actions related to its sales of certain investment products to customers. The news of the probe comes after Wells Fargo disclosed that it was evaluating whether inappropriate recommendations and referrals were made related to 401(K) rollovers, alternative investments, and the referral of customers from its brokerage unit to its own investment and fiduciary services business.

Secretary of the Commonwealth William Galvin said it would examine Wells Fargo’s own internal probe and wants to make sure that Massachusetts investors who were impacted by “unsuitable recommendations” would be “made whole.” He noted that while moving investors toward wealth management accounts brings “more revenues to firms,” these accounts are “not suitable for all investors.”

As Barrons reports, referring clients to managed accounts tend to earn fee-based advisors significantly more. The article goes on to note that Galvin is looking into the use of managed accounts related to the US Department of Labor’s Fiduciary Rule, which includes best practices standards for the protection of consumers. The Massachusetts regulator recently referred to that same rule when the state became the first one to file such related charges in its case against Scottrade over sales contests. In that case, Galvin accused the broker-dealer of improper sales practices, including contests that offered incentives to agents who targeted retiree clients and prospective retiree clients in particular.

Investigation Underway of Asset Management Fund’s (“AMF”) Ultra Short Fund (AULTX) and the Role of Shay Asset Management

Published on: March 15, 2018 | by Shepherd Smith Edwards & Kantas, LLP

When investors placed funds in The Ultra Short Fund (Nasdaq: AULTX), managed by The Asset Management Fund (“AMF”), they believed their funds were safely on the sidelines in a money market alternative. Later surprised by substantial losses in this fund, many now seek legal representation.

On its website, AMF describes itself as a no-load mutual fund complex managed by Shay Assets Management, Inc., a privately-held investment adviser registered with the Securities and Exchange Commission (“SEC”). The AMF Funds are distributed by Shay Financial Services, Inc., a member of FINRA and SIPC. Shay Asset Management’s corporate headquarters are located in Chicago, Illinois.

The Ultra Short Fund’s objective is listed as “current income with a very low degree of share-price fluctuation.” However, the fund has declined more than 15% year to date. For investors seeking modest income and very low degree of price fluctuation, such losses are unacceptable, said Kirk G. Smith, a partner of the law firm Shepherd Smith Edwards & Kantas LTD LLP (SSEK).