Investor Lawyers Blog

Advisors Favor Exchange-Traded Funds

Published on: June 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

CNBC reports that according to a recent survey, advisors are preferencing exchange-traded funds over any other investment choice, in part because of their transparency, liquidity, and low costs. ETFs can also be traded throughout the day and are primarily passive. Their expense ratio is lower than actively managed mutual funds and they offer certain tax benefits. For example, unlike with mutual funds, capital gains are not as likely to arise with exchange-traded funds.

In the 2015 Trends in Investing Survey, conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, 81% of advisors said that they recommend or use ETFs—that’s significantly up from 2006 when the survey found that just 40 % of advisors used exchange-traded funds. Meantime, Morningstar, an investment research firm, reports that ETFs hold about $2.1 trillion of investor assets. However, the use of smart-beta ETFs is still low.

SEC Warns About Fake Investment Advisers Who Inflate or Fake Their Credentials

Published on: June 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued an alert cautioning investors to double check the credentials of financial professionals before working with them. This week, the regulator’s Enforcement Division announced two securities fraud cases against investment advisers accused of making false claims about their background and experience.

In one case, Michael G. Thomas purportedly told investors that Fortune Magazine had named him one of the “Top 25 Rising Business Stars.” The distinction does not exist. He also allegedly inflated his past investment performance, pumped up a fund’s projected performance, and made misrepresentations about who would be advising and co-managing a fund.

Thomas has consented to pay a $25,000 penalty. He agreed to not take part in the offer, issuance, or sale of certain securities for five years. Thomas is barred from associating with investment advisers, dealers, and brokers during that time.

SEC, Prosecutor Charge Miami Investment Adviser With Defrauding Retired Teachers and Law Enforcement Officers with Ponzi Scam

Published on: June 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Miami investment adviser Phil Donnahue Williamson with running a Ponzi scam and bilking at least seventeen investors. The U.S. Attorney’s Office for the Southern District of Florida has filed a parallel criminal action against him.

According to the SEC, Williamson raised over $2 million over the course of seven years-from ’07 to ’14-while making misrepresentations about the way investors’ money would be used, as well as regarding the investments’ valuations and returns. He also allegedly misused or misappropriated at least $748,000 of client money to pay for personal expenses, other businesses, and unrelated investment activities. Among his investors were several retired local law enforcement officers and teachers who were looking to put their savings in safe investments.

Williamson allegedly used the money he solicited for the Sterling Investment Fund, which supposedly invested in properties and mortgages in Georgia and Florida, to run his Ponzi scheme. He advised investors to buy an LLC interest in the fund.

The Sterling Fund’s subscription agreement stated that the minimum agreement was $25,000 and that the funds would go toward buying mortgage loans or institutional third-party financing, which was to be used to also buy mortgage loans and otherwise support the business of the company.
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SEC Files Insider Trading Charges Involving Secondary Stock Offerings

Published on: June 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is filing insider trading charges against four persons accused of stealing confidential data from investment banks and public company clients so they could trade prior to secondary stock offerings. The four of them allegedly made over $4.4 million in illegal trading profits. Some 15 stocks were reportedly involved. The insider trading scam purportedly went on for three years, from 6/10 to 7/13.

According to the regulator, Steven Fishoff, a former day trader, conspired with his brother-in-law Steven Costantin and friends Ronald Chernin and Paul Petrello. The four of them pretended to be portfolio managers and they allegedly persuaded investment bankers to share confidential information about secondary offerings that were going to take place. Essentially, after agreeing not to tell anyone about the offering or trade in the securities, the defendants were made privy to private data.

The defendants allegedly broke their promises not to tell others about the information, tipping one another with their insider knowledge so they could lower the issuer’s stock price. They would short the stock before the offering was made public. This allowed them to earn short sale profits after the stock price had plunged.

Merrill Lynch to Settle Short-Selling Case for $11M, Admits to Wrongdoing

Published on: June 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC said that Merrill Lynch (MER) would pay $11 million to resolve allegations of short-selling-related noncompliance. The regulator said that the wirehouse executed short sales in certain securities when the supply for this type of transaction was restricted.

Customers frequently ask brokerage firms to “locate” stock that can be used for short selling. The financial firms generate easy-to-borrow lists made up of the stock they believe is accessible for such locates. However, contends the SEC, from January 2008 through January 2014 Merrill used information that was dated to create these ETB lists.

For example, there were times when certain securities that were placed on the ETB list in the morning were no longer as easily available for borrowing later in the trading day. Yet Merrill’s platforms were set up so that they continued to process short sale orders according to the now-dated list—even as firm personnel appropriately stopped using the list for sourcing locates when certain shares’ availability had become restricted.

Sage Advisory Group Must Pay Over $1M for Two Securities Fraud Cases

Published on: June 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The United States District Court for the District of Massachusetts has ordered Sage Advisory Group and principal Benjamin Lee Grant (“Lee Grant”) to pay over $1M for two SEC fraud cases. The ruling comes after a federal jury found both of them liable.

In the first case, the regulator is accusing Lee Grant of using allegedly false and misleading statements to fraudulently persuade brokerage customers to move their assets to Sage, which was the firm he was starting in 2005. He purportedly told clients that the 2% wrap fee they would have to pay Sage for transaction, management, and advisory services would not cost as much in the long run as the 1% fee and trading commissions that his former employer, brokerage firm Wedbush Morgan Securities, charged them.

The SEC said that Lee Grant claimed it was First Wilshire Securities Management Inc. that was recommending that clients move their assets to Sage with him. Wilshire Securities Management was the investment adviser managing the assets of these clients at Wedbush. The regulator contends, however, that First Wilshire Securities never made such a recommendation.
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Thousands More Investors in Bernard Madoff Ponzi Scam Could Get Financial Recovery

Published on: May 31, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to Richard Breeden, the special master of the Madoff Victim Fund, about 11,000 more investors who sustained losses in the Bernard Madoff Ponzi scam could recover some of their funds. He also said that the number could possibly double as the U.S. government assesses more of the claims.

Breeden said that as of the middle of this month his office had looked at over 34,000 of the more than 63,700 claims it had received from investors who were claiming $77.3 billion of losses. They are from 135 countries.

The Madoff Victim Fund is holding $4.05 billion in investor compensation and is separate from the compensation being distributed by Irving Picard, who is the trustee of Bernard L. Madoff Investment Securities LLC. While Picard has been compensating investors who directly placed their funds with Madoff, Breeden is working to compensate investors who had accounts at feeder funds and other entities that then sent their money to Madoff for investment.

FINRA on BrokerCheck and Broker Compensation

Published on: May 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has sent its proposed rule change regarding BrokerCheck links to the U.S. Securities and Exchange Commission. Per the new measure, a broker-dealer would have to make sure that a BrokerCheck link is made accessible on its home page. The firm would also have to make sure links to the FINRA database are visible on the profile pages of its brokers.

The Commission will have to approve the rule, which was modified after concerns were raised about the original version, which called for BrokerCheck links to also be included in posts on social media websites, including Twitter. A broker would also have had to provide direct links to his/her individual BrokerCheck profile pages.

The revised version doesn’t require providing the links on social media, and any links to BrokerCheck only must take people to the home page of the firm’s site and not an individual rep’s profile.

Ex-Trident Partners Compliance Director Faces SEC Charges for Allegedly Defrauding Investors And Stealing Broker-Dealer Assets

Published on: May 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission’s Enforcement Division has filed fraud charges against William Quigley, the former compliance director of Trident Partners Ltd. According to the regulator, Quigley solicited investors to purchase stock in start-ups that were supposedly about to go public, as well as well-known companies, but never actually bought the investments. Instead, he put their money in brokerage and bank accounts in the Philippines or used ATM machines to take out the funds.

Quigley is accused of working with two brothers in the Philippines. He and his co-conspirators allegedly transferred over $500,000 of investor funds to the accounts in that country.

The SEC claims that Quigley set up three brokerage accounts, including a secret account at Trident Partners, to conduct the scam. As compliance director, he was supposed to open and correctly route incoming correspondence and wires and report suspect transfers. Instead, he stole commission checks written to the brokerage firm and put the money in outside accounts.

Ohio Stockbroker Jerry Cicolani Finally Barred From Financial Industry

Published on: May 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

After pleading guilty to two criminal counts of selling unregistered securities, The Financial Industry Regulatory Authority (“FINRA”), the agency primarily charged with regulating the nation’s stockbrokers, finally barred former stockbroker, Jerry A. Cicolani, Jr. (“Cicolani”) from the securities industry. According to FINRA’s website, “FINRA has permanently barred [Cicolani] from acting as a broker or otherwise associating with firms that sell securities to the public.”

Sadly, the bar came much too late for many of Cicolani’s former clients. For years, FINRA, had largely overlooked numerous customer complaints and other accusations of bad conduct in Cicolani’s formal record. By the time he was barred, Cicolani had amassed nearly 70 complaints over a 13 year period. The final straw seemed to be the suit brought by the U.S. Securities & Exchange Commission (the “SEC”) in May 2014 for Cicolani’s alleged role in a Ponzi scheme that defrauded dozens of investors out of roughly $7 million. Four months after the suit was filed, FINRA finally took action and barred Cicolani.

For the affected customers, FINRA did not take action fast enough, especially given the warning signs. A FINRA spokesperson, Michelle Ong, seemingly recognized this sentiment when noting, “[W]e regret that we did not bring a formal action against Mr. Cicolani earlier.” Many of Cicolani’s complaints originated from his time working for Merrill Lynch. From 1991 to his resignation from Merrill Lynch in 2010, Cicolani was named in over 60 customer complaints during that time period. Yet, time and time again, these complaints were largely overlooked by both his employer and regulators. In 2004, Cicolani was subject to an SEC inquiry based on his handling of customer accounts, yet Merrill Lynch did not terminate his employment because the SEC never sanctioned Cicolani for his conduct. Instead, Cicolani resigned years later after another investigation, this time initiated by Merrill Lynch.