Investor Lawyers Blog

FINRA Deletes Certain Broker “Red Flags” From Records, Reports PIABA Study

Published on: March 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a Public Investors Arbitration Bar Association study, the Financial Industry Regulatory Authority “routinely” erases certain red flags in the records of brokers from its online BrokerCheck resource-the same tool that it tells investors to go to check on the history of financial representatives. The PIABA study looked at data about brokers found on FINRA’s BrokerCheck and compared it to other reports on the same reps, also from FINRA’s database but accessible in states that have strong freedom of information laws.

The group found that warning indicators pertaining to tests flunked by a broker, investigations into possible sales abuses involving securities, internal reviews for fraud, or regulation and rule violations could be accessed through the states but no longer through FINRA. PIABA says that other red flags that the SRO has deleted from BrokerCheck include failed qualifications tests, personal bankruptcy filings older than 10 years, and federal tax liens that have since been satisfied.

FINRA’s BrokerCheck

SEC Director Warns About Recommending Alternative Mutual Funds To Certain Investors

Published on: March 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations Director Andrew Bowden says that investment advisers should be careful when putting investors in alternative mutual funds. The agency says there has been a rise in complex trading strategies in mutual funds and nontraditional investments, with assets in alternative mutual funds reaching $168 billion in October. This is an increase from the $158 billion achieved the previous year.

While using these mutual funds may raise returns, investors can be placed at greater risk in the event that the market were to drop, especially if these products involved have limited secondary markets. Bowden says the agency intends to conduct a sweep of the $200 billion alternative find industry and examine the way it uses specific private fund strategies in public-traded investments.

It was last month that the SEC announced that it would look at both hedge fund and alternative investment strategies in exchange-traded funds, open-ended funds, and variable annuity structures. The regulator wants to look at if the ways that the funds are being promoted comply with regulations.

Fines for FINRA Sanctions Went Down 27%, Reports New Analysis

Published on: March 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a review of Financial Industry Regulatory Authority actions in 2013, fines imposed by the self-regulatory organization dropped by 27% compared to the year before, even though the number of cases during both were almost identical. Sutherland Asbill & Brennan LLP, which completed the review, said that last year FINRA imposed $57 million of fines, compared to $77 million in 2012.

The fine total from 2013 was the lowest imposed since 2010, when the regulator fined member firms and associated individuals $45 million. Also, even though the fines went down, there was 1% less disciplinary actions brought by FINRA at 1,535 actions, compared to the 1,541 submitted made in 2012. Another decline occurred in the number of firms that FINRA expelled-24 in 2013 and 30 in 2012. That said, the SRO did suspend more individuals-670 last year, up from 549 the year before-and bar more persons from 294 in to 429 last year, which is a 46% increase.

Sutherland’s believes the fines went down because many of the cases generated by the financial crisis have been tackled. This means that even with so many cases, these aren’t necessarily resulting in fees that are as high.

US Supreme Court Considers Whether to Limit Securities Fraud Lawsuits

Published on: March 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Although a decision is not likely until June in Halliburton v. Erica P. John Fund, it doesn’t look as if the US Supreme Court will seek to overturn the “fraud on the market” theory, set up in 1988 in Basic Inc. v. Levinson. In that earlier ruling, it was determined that investors are allowed to depend on a presumption that the stock price of a company reflected all public information about the entity. This theory has allowed investors to ban together through class action securities certification without having to provide individual reliance of evidence.

In the securities case before the court, the investors’ fund claims that Halliburton misrepresented its liability related to asbestos litigation, benefits obtained from a merger, and revenue from a construction contract. Meantime, Halliburton and its allies are contending that investors shouldn’t be able to bring a class action case because of an economic theory that is based on the efficiency of markets.

Four of the justices recently appeared to be welcoming a challenge to the fraud on the market theory. Justice Samuel A. Alito Jr. wrote in a concurrence in Amgen V. Connecticut Retirement Plans and Trust Funds that there has been evidence recently to indicate that such a presumption may be based on a “faulty economic premise.”

Ex-Merrill Lynch Adviser, Already Jailed for Massachusetts Securities Fraud, Now Indicted Over Ponzi Scam

Published on: March 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Even as she serves her 33-month sentence for securities fraud, Jane O’Brien, a former Merrill Lynch (MER) broker, has now been indicted for her alleged involvement in a Ponzi scam that purportedly ran for nearly two decades. The U.S. Attorney’s Office for the District of Massachusetts says that O’Brien is facing criminal charges for mail fraud, investment adviser fraud, and wire fraud involving the misappropriation of $1.3 million in client monies.

Per the indictment, between 1995 and 2013 and while she worked at Citigroup (C)’s Smith Barney and then later with Merrill, O’Brien persuaded a number of clients to withdraw money from brokerage accounts and their banks. She got their permission to invest the funds in private placements. However, instead, the 61-year-old allegedly used the money to repay other investors and cover her personal expenses.

O’Brien is also accused of making misrepresentations to clients, providing them with materially false statements, “making lulling payments,” and offering false assurances that their money was secure. She even in one instance, allegedly, got a client to invest in “Crooked Arrows,” a Hollywood film, in return for a promised 25% return, which did not happen.

Detroit, MI to Pay UBS and Bank America $85M Over Interest Swaps Settlement

Published on: March 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The city of Detroit has agreed to pay Bank of America Corp.’s (BAC) Merrill Lynch (MER) and UBS AG (UBSN) $85 million as part of a settlement to end interest-rate swaps, which taxpayers have had to pay over $200 million for in the last four years. Now, US Bankruptcy Judge Steven Rhodes must decide whether to approve the deal.

The swaps involved are connected to pension obligation bonds that were issued in ’05 and ’06. They were supposed to protect the city from interest rates going up by making banks pay Detroit if the rates went above a certain level. Instead, the rates went down, and Detroit has owed payments each month.

Under the swaps deal, the city owed $288 million. The settlement reduces the amount by 70%, which should help, as Detroit had to file for protection last year over its $18 billion bankruptcy.

Puerto Rico Senate Votes to Sell $3.5B in Bonds

Published on: February 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Senate for the Commonwealth of Puerto Rico has approved a bill authorizing the sale of at least $3 billion in bonds. The legislation is geared toward assisting the US territory from defaulting on its $70 billion of debt and boost the Government Development Bank’s liquidity. Wall Street investment banks Morgan Stanley (MS), Barclays (BCS), and RBC Capital Markets are going to handle the bond sale, which is expected to happen in March.

Among the issues that still must be resolved is where, if the Commonwealth defaults on the new issuance, the US Territory can be sued. Currently, Puerto Rico has sovereign immunity and therefore can only be sued in Puerto Rico under its own laws. However, US investors who will be needed for the sale to complete want the Commonwealth to agree to waive sovereign immunity and instead agree to be sued in New York courts if there is any dispute.

Since August of last year, Puerto Rico bonds have suffered significant losses. Recently, all three major ratings agencies downgraded Puerto Rico’s general obligation bonds, along with many other Puerto Rican issuances, to “junk” status. Many investors in the United States and in the Commonwealth have lost significant money on their Puerto Rico municipal bonds that were sold to them by UBS (UBS), Banco Santander (SAN), Banco Popular, and other brokerage firms.

SEC Staff Sold Shares Before Enforcement Actions in Securities Cases Were Made Public, Reports Study

Published on: February 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg is reporting that according to a new study, US Securities and Exchange Commissioner employees who own stock in companies that the agency is investigating are more likely than other investors to sell their shares in the months prior to the regulator’s announcement of an enforcement action. Shivaram Rajgopal, an Emery University accounting professor, and one of the study’s co-authors, said that there appears to be a suspect pattern of behavior going on even though the findings are not proof of misconduct.

Rajgopal and co-author Roger M. White, a Georgia State University doctoral student, obtained records from the SEC through a request they made under the Freedom of Information Act. Unfortunately, because individuals weren’t named, it was impossible to figure out whether the agency employees who traded were in jobs that might have given them insider knowledge about a pending action, and whether the action could lower stock prices, or if money was lost or made in the transactions.

Beginning August 2010, SEC ethics rules have forbidden employees from selling or buying shares in companies that are under investigation. They also have to get permission before trading, cannot trade in any financial firm that the SEC directly regulates, and they generally must hold any stock that they buy for six months before selling.

Lehman Makes Deal with SAP Founder, Frees Up Another $1.8B for Creditors

Published on: February 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Lehman Brothers Holdings Inc. has arrived at an agreement with Klaus Tschira, the founder of SAP AG (SAP). The German software company had been the only holdout to a multibillion-dollar settlement with the firm’s former Swiss derivatives unit Lehman Brothers Finance AG. The deal should free up another $1.8 billion that can now go to the firm’s creditors.

When Lehman failed in September 2008, this became the largest bankruptcy in our nation’s history. Markets became troubled and the global financial crisis was started. Barclays PLC (BCS) bought Lehman’s main business.

Tschira had been in a dispute with the subsidiary for years over derivatives contracts that were canceled after Lehman collapsed in 2008. The disagreement was over the way the unit calculated dames related to the termination of certain forward contracts. While two entities, a nonprofit that Tschira controls and an investment vehicle that manages his money, accused the derivatives unit of owing them $798.7 million, the unit said that the entities were the ones that owed it money.

Berthel Fisher & Affiliate Fined $775K by FINRA Over Supervisory Failures Involving Non-Traded REITs and Leveraged and Inverse ETFs

Published on: February 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc. are going to pay the Financial Industry Regulatory Authority a combined $775,000 for purported supervisory deficiencies related to leveraged and inverse exchange-traded funds and non-traded real estate investment trusts. The firm settled without deny or admitting to the allegations.

FINRA claims that from January 2008 to December 2012 Berthel Fisher had inadequate written procedures and supervisory systems to deal with the sale of alternative investment products, such as managed futures, non-traded REITs, oil and gas programs, managed futures, business development companies, and equipment leasing programs. The SRO says that the brokerage firm’s staff were improperly trained with regard to state suitability standards, and criteria wasn’t properly enforced in a number of alternative investment sales because the firm did not figure out the correct concentration levels of certain financial instruments.

FINRA also said that from 4/09 to 4/12, Berthel Fisher lacked a reasonable basis for certain ETF sales, resulting from numerous reasons, including a failure to properly review or research non-traditional ETFs before letting registered representatives make recommendations to customers. Inadequate sales training was not provided and some customers suffered losses because the brokerage firm did not monitor investment holding periods.