Investor Lawyers Blog

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).

Ex-Equifax Trader is Accused of Insider Trading Before Data Breach News Was Disclosed to the Public

Published on: March 14, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed insider trading charges against Jun Ying, the ex-chief information officer of an Equifax US business unit. The regulator contends that Ying engaged in insider trading in 2007 before the consumer credit reporting agency announced that there had been a major data breach exposing personal information of approximately 148 million customers in the US. Among the information that was disclosed were social security numbers, names, addresses, and birth dates.

The Commission’s complaint accuses Yin of using confidential information to determine that Equifax had experienced a major breach. The SEC said that before the company disclosed the information breach, Ying exercised all the Equifax stock options he had vested and made almost $1M when he sold the shares. The regulator claims that Ying was able to avoid losing over $117K by selling the shares when he did.

Now, the SEC, which has filed charges against Ying accusing him of violating federal securities laws’ antifraud provisions, is pursuing ill-gotten gains, interest, injunctive relief, and penalties against him. Ying resigned from Equifax after the company found out about his trades and reportedly made plans to let him go. US prosecutors have filed a parallel criminal case against Ying.

Securities Industry Headlines: Convicted Hedge Fund Manager Martin Shkreli Gets Seven Years, Zohar Investment Funds File for Bankruptcy Protection, and Ex-Morgan Stanley Investment Adviser Named in $34M Securities Arbitration Loss Lands at Pinnacle

Published on: March 13, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Martin Shkreli to Go to Prison for Seven Years

A federal judge has sentenced former hedge fund manager Martin Shkreli to seven years behind bars. Shkreli was found guilty of defrauding investors of his MSMB Capital Management hedge fund while manipulating the stock of his drug company Retrophin.

His defense team had fought for a lower sentence—12 to 18 months. They pointed out that ultimately none of the investors that Shkreli bilked lost money and he didn’t profit from his fraud. Prosecutors countered that, in fact, Shkreli had caused anywhere from $9M to $20M in losses.

A few days before his criminal sentence was issued, Judge Kiyo Matsumoto ordered that about $7.36M of the ex-hedge fund manager’s assets be surrendered, including a rare Wu-Tang Clan album that he purchased for $2M. Shkreli’s legal team plans to appeal the sentence.

Voya Holdings Subsidiaries to Repay Mutual Funds Over $2M

Published on: March 12, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Direct Services LLC and Voya Investment LLC, two Voya Holdings Inc. investment adviser subsidiaries, will pay about $3.6M to settle Securities and Exchange Commission charges accusing them of failing to make certain disclosures related to securities lending. Of that amount, over $2M will go straight to mutual funds that were impacted.

The two investment advisers worked with a number of “insurance-dedicated mutual funds” that insurers affiliated with Voya Holdings and Direct Services offer to life insurance and annuity customers. The two advisers lent fund-held securities to certain parties. They then called back the securities so that the insurer affiliates would get a tax benefit. These same affiliates were record shareholders for the funds’ shares. Meantime, this led to the funds and their investors losing income while not getting to avail of the tax benefit.

According to SEC Enforcement Division Asset Management Co-Chief Anthony S. Kelly, the mutual funds and its investors were not notified that they would be losing money in order for the affiliates to get this tax benefit. The regulator said that Voya advisors did not disclose that this conflict of interest existed.

Texas Securities Cases: Austin Investment Adviser to Pay Over $715K to Settle Cherry Picking Allegations and Dallas-Based Oil and Gas Company is Accused of $95OK Investor Fraud

Published on: March 9, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Valor Capital Asset Management LLC and its owner, Texas-based investment adviser Robert Mark Magee, have settled US Securities and Exchange Commission charges accusing them of defrauding investors by engaging in cherry picking. As part of the settlement, Magee is banned from the securities industry and will pay over $715K.

The SEC contends that while trading securities in the firm’s omnibus account, Magee would wait to allocate the trades until after watching their performances throughout the day. He would then allocate a disproportionate amount of the more profitable trades to his accounts while sending the trades that were not profitable to his clients. This allowed him to profit at cost to clients. The SEC believes that his ill-gotten gains from cherry picking was over $505K.

For example, notes the SEC, the way in which Magee traded and allocated El Pollo Loco Holdings is “representative” of how he allegedly engaged in cherry picking. For five trading days in a row, trades in LOCO that were profitable went to his own account. When the price went down on the sixth day, he allocated the shares to six Valor client accounts instead of selling the shares at a loss.

Royal Bank of Scotland Settles NY’s RMBS Fraud Case for $500M

Published on: March 9, 2018 | by Shepherd Smith Edwards & Kantas, LLP

In yet another mortgaged securities-related resettlement, Royal Bank of Scotland (RBS) has agreed to pay $500M to settle New York Attorney General Eric Schneiderman’s case accusing the bank of misrepresentations and deceptive practices related to it sale residential mortgage-backed securities (RMBS). $400M of the payment is consumer relief, while $100M is a fine that will go to the state.

NY’s probe concentrated on 44 mortgage securitizations that RBS issued leading up to the 2008 financial crisis. The NY AG said that during that time, due diligence vendors cautioned the bank that a lot of the loans it was buying were not in compliance with underwriting guidelines. Still, the bank bundled the loans and touted them as secure to investors, many of whom bought the RMBSs.

Schneiderman’s probe found that some of the mortgages backing the bonds at issue had over 100% loan to value ratios, meaning that “they were ‘underwater’.” Now, RBS is admitting that it sold mortgage bonds backed by loans that failed to abide by underwriting guidelines even as the bank maintained that they were, in fact, in compliance.

The bank also acknowledged that it had limited how much diligence it performed on mortgages, resulting in a lot of the loans being securitized even though no due diligence was conducted at all.

Securities News: Wells Fargo’s Wealth Management Division is Reportedly Under Investigation, Merrill Lynch is Accused of Gatekeeping Failures Involving Unregistered Securities Sales, and NYSE Must Pay $14M Over Regulatory Failures

Published on: March 7, 2018 | by Shepherd Smith Edwards & Kantas, LLP

SEC Reportedly Investigating Wells Fargo Over Possible Inappropriate Investment Sales to Wealth Management Clients

According to news reports, the US Securities and Exchange Commission is investigating Wells Fargo’s (WFC) Wealth Management unit to see whether its clients were inappropriately sold certain in-house investment services even though these were not in their best interests. A source told Bloomberg that the regulator’s role in the probe has not been publicly disclosed.

However, in a regulatory filing, Wells Fargo revealed that it is looking into whether inappropriate recommendations were made related to 401(k) plan rollovers, alternative investments, and brokerage customer referrals to the firm’s “investment and fiduciary-services business.” The bank noted that it was assessing these matters in its wealth management business in the wake of inquiries made by federal agencies.

Bloomberg notes that it was in 2015 that JPMorgan Chase & Co. (JPM) consented to pay $267M over allegations that its customers were not told that it had profited by placing their funds in certain hedge funds and mutual funds that charged particular fees.

FINRA Cases: Allegis Investment Adviser and Ex-Broker Ordered to Pay Nearly $405K, Former Madison Avenues Securities Broker Accused in $1.67M Unauthorized Trading Case is Barred by FINRA, and US Senator Elizabeth Warren Introduces Bill To Address Unpaid Arbitration Awards

Published on: March 7, 2018 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Arbitration Panel Awards Allegis Investment Advisors Client $404,482

A Financial Industry Regulatory Authority arbitration panel has awarded Mark Watson $404,482 in his unauthorized trading case against Allegis Investment Services, Allegis Investment Advisors, and ex-broker Brandon Curt Stimpson. Watson is accusing Stimpson of placing his life savings in investments that were too risky and complex and of making unauthorized trades involving index put options connected to the Russell 2000 Index even though he had told the broker that he only wanted up to 25% of his portfolio involved in these. Instead, Watson alleges, Stimpson invested way more of his money in the index put options.

In his securities arbitration case, Watson also alleged breach of fiduciary duty. Now, a FINRA panel has awarded him nearly $275K in compensatory damages, nearly $54K in interest, and other costs.

Stimpson was fired by Allegis last year for not abiding by the firm’s ethics code and policies. According to his BrokerCheck records, he has been named in eight other customer disputes.

Retirement Accounts : Ameriprise Settles SEC Allegations That It Overcharged for Mutual Funds & Fidelity Undergoes Customer Exodus from Flagship Funds

Published on: March 5, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed civil charges against Ameriprise Financial Services (AMP). The regulator is accusing the brokerage firm and investment adviser of recommending to retail retirement account customers that they purchase mutual fund shares that charged higher fees. Ameriprise purportedly failed to employ sales charge waivers when applicable.

The Commission’s order contends that the broker-dealer neglected to determine when certain retirement account customers qualified for mutual fund share classes that were not as costly.

Instead, the firm would recommend and sell the more costly mutual fund shares even when the less pricey options were available. Ameriprise is accused of not letting these customers know that the firm would make more from the costly mutual fund shares even as their overall investment returns were harmed.

The SEC said that about 1,971 customer accounts paid nearly $1.8M in up-front sales fees that were not warranted, costlier ongoing fees, “contingent deferred sales charges,” and other expenses because of the way that Ameriprise handled the recommendation and sale of mutual funds to retirement account clients.

The firm is cooperating with the regulator and has paid back customers that were affected with interest. Retirement account customers eligible for the less expensive mutual fund share classes have been moved to those classes free of charge.