Investor Lawyers Blog

Massachusetts Regulator Accuses Broker-Dealers of Not Properly Supervising Rogue Brokers

Published on: December 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to the Massachusetts Securities Division, brokerage firms that hire brokers with troubled disciplinary records are not doing a proper job of supervising them. The state, which recently released its findings from its examination of 241 broker-dealers who are registered in the state and retain an above average number of rogue brokers, said that this relaxed way of self-policing could be harming investors.

According to the division’s report, not a lot of these brokers were put on more rigorous supervision despite their questionable pasts. Massachusetts Secretary of the Commonwealth William Galvin said that it appeared to his office that certain firms were not willing to take on the duty of “zealously monitoring” the way these brokers were interacting customers.

It was in June that the Massachusetts Securities Division announced it was cracking down on broker-dealers who hired rogue brokers. The news of its sweep came soon after the Financial Industry Regulatory Authority announced it was conducting its own probe.

SEC’s Whistleblower Office Awards Another $3.5M to Tipster

Published on: December 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has awarded another whistleblower for coming forward with information that has resulted in a successful enforcement action. This time the award amount is $3.5M. This latest award ups the total awarded by the regulator’s whistleblower program to about $135M to 36 individuals since 2012. The award comes a few weeks after the SEC announced it had issued $20M to another whistleblower in a different enforcement case.

The regulator awards individuals, who voluntarily come forward with original and useful information, 10 to 30% of monetary sanctions collected from a successful enforcement action, as long as that sum collected is greater than $1M. To date, whistleblower tips have allowed the SEC to bring enforcement actions resulting in over $874M in financial remedies. Because the whistleblower’s anonymity is protected, details about each case that could expose the tipster’s identify are kept confidential.

Whistleblower Retaliation
Individuals who turn whistleblowers are supposed to be protected from retaliation under the Dodd Frank Act. However that isn’t always the case. Now, an ex-Vanguard Group employee has filed a lawsuit accusing the firm of firing her because she engaged in whistleblower activity.

FINRA Anti-Money Laundering Cases Render Huge $1M Fine for Wells Fargo and $16.5M Fine for Credit Suisse

Published on: December 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo Fined $1M Over Supervision of Consolidated Client Reports

The Financial Industry Regulatory Authority says that Wells Fargo (WFC) must pay a $1M fine for not having reasonable supervisory systems in place to oversee the generation of consolidated reports for clients. The broker-dealers that were specifically cited were Wells Fargo Advisors Financial Network (WFAFN) and Wells Fargo Advisors (WFA), also referred to as Wells Fargo Clearing Services.They agreed to settle but did not admit or deny the settlement’s findings.

FINRA’s rules mandate that consolidated reports, which are documents that include information about a customer’s financial holdings, even if they are held in different places, must be accurate, clear, and not misleading. According to the regulator, between 6/2009 and 6/2015, the brokerage firms did not enforce supervisory systems for the use of consolidated reports that registered representatives generated via a specific application. During the relevant period, Wells Fargo advisers used the application to create over five million company reports.

Massachusetts Regulator Sues LPL Financial Over Broker’s Alleged Variable Annuity Abuses Involving Retirees

Published on: December 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Secretary of the Commonwealth of Massachusetts William Galvin has filed charges against LPL Financial (LPLA) for its alleged failure to supervise one of its brokers. Roger Zullo is accused of bilking clients for years by selling variable annuities to retirees even though the investments were not suitable for them.

In his complaint, Galvin contends that Zullo lied to supervisors and generated false client financial suitability profiles so he could sell scores of high-commission, illiquid VAs to make money for himself and the firm. Because of these investments, said the state regulator, many older clients were unable to access their funds for years.

The complaint notes that for three years, Zullo and LPL received over $1.8M in VA commissions from sales. The Polarius Platinum III (B Shares) VA appeared to be the source of a large chunk of the commissions. Galvin said that of the more than $1.8M in VA annuity commissions that Zullo was able to generate, over $1.7M of it came from this particular variable annuity, which paid a 7% commission. 90% of this went to Zullo, while his firm received the rest. Also, clients whom Zullo could convince to move to the Polaris Platinum variable annuity usually had to pay surrender charges.

UBS Ordered To Pay More Than $18 million in Puerto Rico Closed-End Bond Fraud Arbitration Award

Published on: December 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) arbitration panel says that UBS Financial Services (UBS) must pay $18.6 million to customers Rafael Vizcarrondo and Mercedes Imbert De Jesus for their losses from investing in Puerto Rico closed-end bond funds. The two investors, both UBS clients, accused the broker-dealer of breach of contract, breach of fiduciary duty, and other securities violations. They claim that UBS placed their money in unsuitable investments and did not properly supervise the broker who worked with them. As part of the award, Impert De Jesus and Vizcarrondo will receive $12.7 million in compensatory damages, $2.5 million of interest, $3.2 million in legal fees and $163,000 in expert witness fees.

Vizcarrondo is a prominent lawyer in Puerto Rico. His legal team said that UBS had attempted to portray him as a “sophisticated” investor, someone who should have known what he was getting involved in when he invested in the territory’s bonds. The firm described Vizcarrondo as having been “fully informed” when he decided to concentrate his investments in UBS’s Puerto Rico closed-end funds. However, as Vizcarrondo’s attorney noted, not all professionals are “sophisticated investors.” Based on its decision, the FINRA arbitration panel obviously agreed with the claimant.

This is the largest FINRA arbitration award issued over Puerto Rico bond funds to date. There are over a thousand cases still pending. These claims were brought by investors seeking to recover the financial losses they suffered from investing in the island’s beleaguered securities. Although a number of firms, including Banco Santander (SAN), Banco Popular, Merrill Lynch and others have been named in Puerto Rico bond and closed-end bond fraud claims, UBS and affiliate UBS Financial Services Inc. of Puerto Rico (UBS-PR) have been the largest target of these claims. In fact, the TheStreet.com reports that on November 2, UBS AG, the parent company of UBS and UBS-PR, notified the U. S. Securities and Exchange Commission in a filing that about $1.9 billion in Puerto Rico municipal bond funds and closed-end fund claims have been brought against it. The firm has already paid out $740 million to claimants.

US Supreme Court Issues Ruling that Impacts The Definition of Insider Trading

Published on: December 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In a unanimous decision, the US Supreme Court justices ruled that prosecutors in insider trading cases don’t always have to demonstrate that something of value was exchanged to prove that the crime happened. The court’s ruling comes two years after another decision, in United States v. Newman, raised questions regarding what comprises insider-trading. That decision led to the dismissal of a number of insider trading cases.

This week, however, in Salman v. United States, the nation’s highest court gave the government back some of the power it lost in the earlier federal court case. The justices’ opinion upheld the prosecution of Bassam Salman, a man convicted of insider trading.

Salman admitted to trading on the information given to him by his brother-in-law Maher Kara, a Citigroup (C) investment banker. Prosecutors accused him of making $1.5M by trading on tips about biomedical company acquisitions involving Citigroup clients.

FINRA Orders Merrill Lynch to Pay $7M, Including $780K in Restitution to Customers that Invested in Puerto Rico Securities

Published on: December 1, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (“FINRA”) has fined Merrill Lynch, Pierce, Fenner & Smith Inc (“Merrill Lynch”) $6.25 million and imposed a restitution penalty of $780,000 over Merrill Lynch’s inadequate supervision of its customers that employed leverage in brokerage accounts, as well as its failure to supervise the way that these customers were able use the proceeds from their loan managed accounts (“LMAs”). LMAs are credit lines that let customers use the securities in their brokerage accounts as collateral in order to borrow funds from a bank affiliate. However, these LMAs are not supposed to be used to purchase additional securities.

The $780,000 will go to customers that invested in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds. By settling Merrill Lynch is not admitting or denying FINRA’s findings.

According to FINRA, Merrill Lynch did not have these adequate procedures and supervisory systems at issue in place from 1/2010 through 11/2014. FINRA found that even though Merrill Lynch’s policy and non-purpose LMA agreements barred customers from using LMA proceeds to buy different kinds of securities, there were thousands of times during the relevant period that, within two weeks of getting LMA proceeds, Merrill Lynch brokerage accounts collectively purchased hundreds of millions of dollars of securities. Merrill Lynch also set up over 121,000 LMAs, with Bank of America (“BAC”) extending over $85 Billion in aggregate credit. FINRA said that all of this was able to happen because the firm’s supervisory procedures and systems were inadequate.

SEC Charges Onix Capital and Its Owner With $5.7M Promissory Note Fraud

Published on: November 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed promissory note fraud charges against Onix Capital and it owner Albert Chang-Rajii. The Miami-based asset management company and Chang are accused of bilking investors who put their money into promissory notes and start-ups, as well as of falsely portraying the Chilean national as an award-winning multi-millionaire “angel” investor who had graduated from Stanford University’a business school.

According to the regulator’s complaint, Chang and Onix Capital sold over $5.7M in promissory notes that they falsely claimed he had guaranteed and told investors that the notes themselves “guaranteed” yearly returns of 12-19%. They also raised over $1.7M that Chang was supposed to invest in companies like Square, Snapchat and Uber.

The SEC said that, in truth, Onix Capital’s investment revenue was “non-existent” and Chang did not have the professional or educational background that he touted. The Commission alleges that rather than use the funds as promised, the money went to Chang and to pay other investors.

PIMCO Agrees to Pay Almost $20M to Settle SEC Charges That It Misled Exchange-Traded Fund Investors

Published on: November 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Pacific Investment Management Company (PIMCO) has agreed to settle the U.S. Securities and Exchange Commission’s charges accusing the firm of misleading investors about the performance of one of its exchange-traded funds and not placing an accurate value on certain fund securities. As part of the settlement, PIMCO will pay almost $20M and hire an independent compliance consultant.

The regulator contends that investors were drawn to the Pimco Total Return Active ETF after, within months of its launch in 2012, it did well enough to outperform the investment management firm’s flagship mutual fund. The fund was previously managed by Bill Gross, PIMCO’s co-founder, and it was intended to mirror PIMCO’s flagship Total Return Fund.

Although Pimco Total Return Active ETF’s initial success is linked to the smaller-sized bonds that were purchased to help boost early performance, in its yearly and monthly reports PIMCO purportedly gave investors other reasons for these early results that were “misleading.” Meantime, the SEC said, PIMCO did not disclose that the initial performance success was a result of an “odd lot strategy”—referring to the purchase of the smaller bonds, which were non-agency mortgage-backed securities—and that this approach that would not be sustainable as the fund continued to grow.

SAC Capital Advisers Concludes Final Insider Trading Case By Agreeing to Pay $135M to Elan Corp. Investors

Published on: November 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Stephen A. Cohen and SAC Capital will pay a group of Elan Corp. investors $135M to settle their insider trading case against him and the firm. The plaintiffs had contended that sustained they financial losses because of insider trading that involved Elan shares. A judge still has to approve the settlement.

Ex-SAC Capital money manager Mathew Martoma was convicted two years ago for making $285M for SAC Capital on trades involving Elan and Wyeth, both pharmaceutical companies. He used insider information about the clinical trials of an Alzheimer’s drug that companies were developing together. Martoma is appealing his conviction while serving a 9-year prison sentence.

Although Cohen was not charged with insider trading, his firm pleaded guilty and consented to pay $1.8B in criminal and civil penalties. SAC Capital also changed its name to Point72 Asset Management LP. Cohen, meantime, went from managing other people’s money to only being allowed to oversee his multibillion-dollar fortune.