Investor Lawyers Blog

Two Ex-JPMorgan Brokers Alleged Bilked Mentally Impaired Elderly Widow of $300,000

Published on: December 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is barring ex-JPMorgan Chase Securities, LLC (JPM) brokers Jimmy E. Caballero and Fernando L. Arevalo from the securities industry for allegedly stealing $300,000 from an elderly widow who suffers from diminished mental capacity. Although the bank reportedly was not involved in the misconduct, it has given the money that the two men had converted back to the senior investor

According to the SRO, in 2013 the elderly woman deposited about $300,000 in proceeds from two annuity sales into a bank account Arevalo had set up for her. The funds were then taken out of the account with the use of two cashier’s checks and Caballero purportedly placed the funds into a joint account that was under her name and his name at another bank. That institution asked for clarification and confirmation and Arevalo took the woman to the bank to confirm where the funds had come from. The money was then taken out of that account through checks issued to Arevalo and Caballero. Arevalo is also accused of using the account’s debit card to pay for retail purchase and loans for a car and real estate. The elderly widow had no idea these transactions were being made.

The SRO says the two men did not completely cooperate with its investigation. Without deny or admitting to the FINRA charges, Arevalo and Caballero are settling and consenting to the entry of findings.

SIFMA, ISDA, and IIB Sue CFTC Over Alleged Unlawful Rulemaking Regarding Cross-Border Rules, Swap Regulations

Published on: December 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association, Institute of International Bankers, and Swaps and Derivatives Association, Inc. are suing the US Commodity Futures Trading Commission over rules that they believe are hurting its members’ businesses, which includes among the biggest broker-dealers in the world. The plaintiffs contend that the agency engaged in unlawful rulemaking involving CFTC Interpretive Guidance and Policy Statements about Compliance With Certain Swap Regulations and other cross-border matters. They want the CTFC’s reach in its overseas rules curtailed.

ISDA, SIFMA, and IIB, whose members include swaps dealers such as Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and many others, want to vacate a number of rules having to due with cross-border application completely. According to Bloomberg.com, at least half the largest banks work with overseas clients in their swaps business. The CFTC approved the overseas swaps guidelines this summer, and last month, two staff opinions came out shedding more light on the breadth of the guidelines.

Now, the plaintiffs are contending that with these rules the CFTC illegally circumvented the Administrative Procedure Act and Commodity Exchange Act by saying its regulations were “guidance,” did not set up cost-benefit analysis even though the law mandated it, performed a rulemaking process that was flawed, and set up rules that contradict international cooperation and could hurt global markets.

Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs

Published on: December 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that National Planning Corp. must pay a $6.2 million REIT arbitration award to Minnesota investors Stacy and Ronnie Erickson. The Erickson and trusts on their behalf accused the independent brokerage firm and its ex-brokers Christopher R. Olson of negligence, breach of fiduciary duty, misrepresentations, and industry rule violations involving real estate investment trusts.

According to the FINRA award, which doesn’t name the REITs that the Ericksons invested in, the claimants also invested in real estate investments in Waterway Holdings Group, which Olson and a Preferred Resource Group Inc. employee owned. Olson has since filed for bankruptcy and all claims against him have been halted. (Olson was allowed to resign from NPC after he failed to disclose his external business activities or the involvement of his clients in these undertakings. After he quit he registered with Berthel Fisher & Co. Financial Services Inc.)

The Ericksons say that in addition to becoming the victims of broker fraud, they had to fulfill outstanding loans on mortgages on the real estate investments to avoid foreclosure. They contend that Olson manipulated them into taking on significant debt, paying millions of dollars that they cannot get back, and annuitizing, liquidating, and structuring their investment assets that were for their retirement to pay back the “staggering” debt that resulted from the real estate investment recommendations.

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections

Published on: December 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Public Investors Arbitration Bar Association (PIABA) is working with consumer rights group Public Citizen to get the US Securities and Exchange Commission to release documents about its oversight of the Financial Industry Regulatory Authority’s selection of the arbitrators who preside over disputes between broker-dealers and investors. According to PIABA President Jason Doss, because customers are “forced” into only having securities arbitration as a resolution venue when they sign documents to set up brokerage accounts (in the event of future disputes), they should be allowed to know how FINRA decides who hears the arbitration cases.

PIABA is a lawyers’ group that represents investors with securities arbitration claims. Contending that this is an issue of “transparency,” the attorneys have been trying to gain access to these documents for the last few years.

The group’s efforts started in 2010 with a Freedom of Information Act query to the SEC asking for documents that address how the regulator inspects FINRA’s process for selecting arbitrators and looking into their backgrounds. However, even though FOIA grants the public access to federal agency records, it has exemptions. (The exemption exists to protect sensitive matters, such as customer’s private financial data.)

For Investors, Closed-End Funds Come with Risks

Published on: November 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

If you are an investor who is thinking of backing a closed-end fund, it is important that you understand what this type of fund is and what are its accompanying risks before you decide to invest. While closed-end funds have been known to pay off-their high distribution rate is one of the features that make these products so popular-the losses can be substantial especially if your portfolio can’t handle them.

Closed-End Funds: What Are They?

These funds are a kind of investment company that gets money from investors to purchase securities. Closed-end funds are like mutual funds in that they manage portfolios that include investments, such as stocks, bonds, and even illiquid securities. However, they differ from mutual funds in that in an initial IPO, closed-end funds will offer a set number of shares to be traded on the exchange.

CFTC in Action: Agency Adopts Rules on SIDCOs, Reissues Relief for Contemporaneous Swaps Documentation Requirements, & Its Chair Gensler Praises Swaps Markets

Published on: November 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

CFTC Adopts Systemically Important Designated Clearing Organization Rules

The US Commodity Futures Trading Commission has adopted its final rules regarding systemically important designated clearing organizations. The new SIDCO rules line up CFTC regulations to with the Principles for Financial Market Infrastructures set up by the International Organization of Securities Commissions and the Bank for International Settlements.

Per the rules, SIDCOs can remain Qualifying Central Counterparties (QCCPs) for international bank capital standard purposes. The rules come with substantive requirements having to do with financial resources, governance, system safeguards, special default rules and procedures for shortfalls or losses that are not covered, disclosure requirements, risk management, efficiency, and recovery and wind-down procedures. The rules also tackle the procedures through which derivatives clearing organizations besides SIDCOs can choose to become subject to additional standards so they can also be considered QCCPs.

Texas Securities Fraud: SEC Accuses Two Houston-Based Advisory Firms of Making Thousands of Transactions That Clients Didn’t Know About

Published on: November 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the SEC, Houston-based advisory firms Tri-Star Advisors and Parallax Investments LLC made thousands of principal transactions through the broker-dealer they are affiliated with but did not disclose that they were doing this to clients even though they are obligated to notify customers/get their permission beforehand. Also facing Texas securities charges over the transactions are three executives: John P. Bott II, who owns Parallex, and Jon C. Vaughan and William T. Payne, who are Tri-Star officials.

The regulator’s orders of administrative proceedings say that Bott made a minimum of 2,000 undisclosed principal transactions without the permission of Parallex clients. Meantime, for each one (executed between 2009 to 2011) its affiliate broker-dealer Tri-Star Financial employed its inventory account to buy bonds backed by mortgages for these clients and moved the bonds into the accounts of clients. Bott received close to half of the $1.9 million in sales credits that Tri-Star Financial received on the transactions.

Vaughan and Payne are also accused of making over 2,000 undisclosed principal transactions during the same timeframe without the permission of their Tri-Star Advisor clients. The same broker dealer provided similar third-party services as it did for Parallex, and Vauhan and Payne got close to half of the $1.9 million in gross sales credits. SEC Enforcement Division’s Asset Management Unit co-chief Marshall S. Sprung says that Tri-Star and Parallex prevented clients from knowing that their advisers could benefit from “running the trades through an affiliated account.”

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive

Published on: November 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The hedge fund industry in the United States is worried about how managers will be treated under the proposed compensation guidance issued by the U.K. Financial Conduct Authority about the implementation of the E.U. Alternative Investment Fund Managers Directive. The Managed Funds Association is primarily concerned with how tax is dealt with as it pertains to compensation paid to American and other non-EU hedge fund managers.

The Managed Funds Association wrote a letter to the FCA asking that the agency make sure that deferral requirements factor in tax implications for fund manager employees in the jurisdiction of covered employees. The MFA wants remuneration provisions to EU fund managers restricted and not extended to their delegates.

The MFA is worried about practical issues and costs that can occur when the hedge fund regulatory regime and the taxation regime for LLPs and Partnerships in the UK interact. In that country LLPs and Partnerships are treated as tax-transparent, with the result being that partners of partnerships and partnerships of LLPs are taxed to the degree where profits are distributed to them regardless of which one did the distributing. MFA is concerned that because of the deferred remuneration provisions, LLP members and partners could end up with tax liabilities on income that is deferred without corresponding incomes to cover the liabilities.

MF Global to Pay $1.2B to Customers

Published on: November 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Court Judge Victor Marrero has ordered MF Global to pay customers over $1.2 billion. The defunct brokerage firm left an about $1.6 billion shortfall for approximately 38,000 customers when it filed for bankruptcy protection in 2008.

Now, with this court order, along with the attempts of a liquidation trustee to get back the missing funds, customers are going to get almost all of their money back. Also, in addition to paying certain creditors and customers, MF Global will pay a $100 million penalty.

The brokerage tanked financially after it revealed that it had placed bets worth billions of dollars on high risk European debt. As customers started to leave MF Global in bulk and trading partners demanded bigger margin payments, the firm used customer funds for its own purposes (more than a billion dollars was taken out of their accounts) and did not replace them. This is not allowed. Also the estimated shortfall was about $1.6 billion.

High Commission Products are Wall Street Favorites

Published on: November 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Nontraded real estate investment trusts are getting a lot of intention from Wall Street lately. One reason for this is that LPL Financial (LPLA), Ameriprise Financial Services (AMP), and other independent brokerage firms are continuing to raise billions of dollars for deals and in sales.

Already, independent broker-dealers are headed toward selling $20 billion in nontraded REITS in 2013, which is nearly twice the amount that were sold in 2012. According to LPL Financial, its commissions for nontraded REITs and other alternative investments has gone soaring, hitting $81.2 million in revenue from July to September. Even the Goldman Sachs Group Inc. (GS) has been going after alternative investments by seeking a partnership with the CAIS Group, which is an exchange for such products, including private equity funds and hedge funds.

Meantime, the Blackstone Group (BX) and KKR & Co., both private equity firms, are handling private-loan portfolios worth billions of dollars in nontraded business development companies involving sellers such as LPL and Ameriprise. And even REITs are getting involved, with Starwood Property Trust Inc. (STWD) investing $250 million into the Griffin Capital Essential Asset REIT Inc., which is a nontraded REIT, and purchasing 24.3 million shares in it.