Investor Lawyers Blog

FINRA Arbitration Panel Issues $1.2M in Awards in Case Against BBVA Securities of Puerto Rico, Inc.

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

In a FINRA arbitration case filed by claimants Felix Bernard-Diaz, Julian Rodriguez and Luz Rodriguez against BBVA Securities of Puerto Rico, Inc., Jorge Bravo, Rafael Colon Ascar, Julio Cayere, and Sonia Marbarak, a Financial Industry Regulatory Authority Panel has awarded $1.2M to the claimants. The Rodriguezes and Felix Bernard-Diaz asserted unsuitable investments, breach of fiduciary duty, gross negligence related to an allegedly unsuitable naked option trading strategy, excessive trading, margin use, and churning.

The respondents denied the accusations and asserted a number of affirmative defenses. They also asked for the CRD files of two of the respondents, Bravo and Marbarak, to be expunged. Last year, respondent Cayere sought bankruptcy protection. The arbitrators did not issue a determination against him.

The FINRA panel said Ascar and BVA were liable, severally and jointly. Now, the respondents must pay Bernard-Diaz $635K in damages and $15K in expenses. The Rodriguezes were awarded $547K in damages and $15K in costs.

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

Published on: October 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.

North American Securities Administrators Association Releases 2013 List of Top Threats to Investors

Published on: October 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association has issued its yearly list of the top investor threats. The list is compiled through a poll of its member state securities administrators. With the enactment of Jumpstart Our Business Startups Act, which takes away the advertising restrictions when it comes to soliciting securities and other investments, now more than ever investors should be cautious.

The List:
Private Offerings (especially fraudulent private placement offerings, also known as Reg D/Rule 506 offerings): These are limited investment offers that are very liquid, poorly regulated, and have very little transparency. They are risky and might not be suitable for individual investors. Now, with the JOBS Act, these private placement offerings can be promoted to the general public, which means ads for them may be placed on billboards, social media, and other platforms even though not everyone who sees them is qualified to invest.

REITs: Real estate investment scams may involve new development projects or buying, or beleaguered properties. Non-traded real estate investment trusts that are owned by banks or waiting for foreclosure or short-sale can be problematic for customers, as can investment funds purportedly tied to interest in real property that has no equity and is very leveraged.

Ponzi Scams and High-Yield Investments: High-yield typically translates to greater risk. This type of investment program and Ponzi scams promise great returns and low risk while justifying why the opportunity is so great. Financial fraudsters will typically tout bogus credentials or belong to a certain organization or group and early investors get a return as they market to new investors. Such financial scams eventually collapse.

Affinity Fraud: This type of financial fraud targets members of a particular organization or group. Often, the fraudster is trusted because of the shared affiliation (ie. age demographic, membership, alma mater, ethnicity, religion, etc.)

Self-Directed IRAs Used to Cover up Fraud: Self-directed individual retirement accounts, which are typically safe investments, can be used to conceal a financial scam. Fraudsters may claim that the custodian of an account has more obligations than actual to investors, causing the latter to wrongly believe that their investments are protected from loss and/or legitimate.

High Risk Oil and Gas Drilling Programs: Energy investments that for some investors are becoming a preference over traditional bonds, stock, and mutual funds. They are very risky and really only appropriate for investors that can take huge losses. Unfortunately, some promoters will hide these risks and pressure customers to invest.

Proxy Trading Accounts: This can involve allowing individuals who say that they are experienced traders to manage or set up a trading account for you. It is not recommended for investors to let unlicensed persons have access to your brokerage account information or set up an account for you. Anyone who manages such an account for an investor should be properly registered and have a clean record.

Digital Currency: Virtual money such as PP Coin, Bitcoin, and others. Such coinage isn’t backed by tangible assets, not subject to a lot of regulation, and not government issued. Digital currencies’ value can be very volatile.

NASAA’s Top Investor Threats, North American Securities Administrators Association
Securities and Exchange Commission

Financial Industry Regulatory Authority

More Blog Posts:
SEC Looking to Simplify Disclosure Rules to Minimize “Information Overload” for Investors, Stockbroker Fraud Blog, October 16, 2013

Puerto Rican Bond Crisis Places Oppenheimer Funds at Risk, Institutional Investor Securities Blog, October 15, 2013
Detroit Becomes Largest US City to File Bankruptcy Protection, Institutional Investor Securities Blog, July 18, 2013 Continue Reading ›

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams

Published on: October 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has just listened to oral argument about how the Fifth Circuit appeals court interprets the breadth of the Securities Litigation Uniform Standards Act’s (SLUSA), which precludes the majority of state class action cases involving plaintiffs claiming misrepresentations related to the buying or selling of a security that it covers. The case stems from Allen Stanford’s $7B Ponzi scam, in which one of his banks put out certificates of deposit that were supposedly safe, liquid investments when, in reality, the investments did not exist. The bank used money from new CD sales to issue redemption payments and interest on older CDs.

Following the discovery of the Stanford securities shame, two sets of investors filed securities fraud cases in Louisiana court against several Stanford companies and employees contending law had been violated. The defendants got the cases sent to federal court.

The securities lawsuits were then sent to the Northern District of Texas, which threw out the fraud lawsuits on the grounds that SLUSA precluded them. That court said that the CDs weren’t covered but that the investors had alleged misrepresentations having to do with securities that were covered. The Stanford bank had claimed it invested in securities that were issued by multinational companies and solid governments and led investors to think investments SLUSA-covered securities at least partially backed the CDs. he Fifth Circuit then reversed that decision.

SEC Looking to Simplify Disclosure Rules to Minimize “Information Overload” for Investors

Published on: October 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission will review corporate disclosure rules to possibly get rid of disclosure rules that are creating “information overload” for investors. Speaking to the National Association of Corporate Directors, SEC Chairwoman Mary Jo White said that as the quantity and types of issues that companies have to disclose become greater and “more detailed,” she wonders whether investors need or benefit from all that information-or if ‘information overload’ makes it hard for customers to glean what they should know to make the best investment choices for them.

Commission rules, company efforts, and congressional mandates seeking to prevent lawsuits are what have led to such extensive disclosures. Now, the SEC may consider a possible overhaul after a study of company filing-rules, which was mandated by the 2012 Jumpstart Our Business Startups Act, is released. The JOBS Act mandates that the regulator figure out how to simplify rules for smaller companies.

White said that certain disclosure details are no longer necessary in the wake of such information that is now widely available online, including via social media. She pointed to examples of information being disclosed that may not be as relevant now as before, such as the ratio of earnings to fixed charges or dilution disclosure requirements. White also spoke about how it might be prudent to begin getting certain information to investors sooner than what current rules and forms mandate for timeframes or whether this could become an added burden to companies.

Puerto Rican Bond Crisis Places Oppenheimer Funds at Risk

Published on: October 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Investment News, along with the much publicized-UBS Puerto Rican Bond Funds, the municipal bond funds of OppenheimerFunds appear to have also been hit by Puerto Rico’s financial problems. The Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX), valued at $125 million, is down by over 15%, which places it last in the lineup of single-state municipal bond funds.

Such losses could prove an unpleasant surprise for investors in Virginia. The media publication blames the fund’s poor performance on the huge bet is placed on the Puerto Rican bond funds, which have not done very well in the wider municipal bond market because of the territory’s financial issues and the bonds’ low rating.

Investment research firm Morningstar Inc. says that the single-state municipal bond funds with over 25% of assets in the beleaguered bonds are The Oppenheimer Rochester North Carolina, Massachusetts, Arizona, and Maryland funds, with each fund down through last week by over 11%. A median single-state municipal bond fund usually holds no more than 2.38% of assets in the bonds from Puerto Rico.

Massachusetts Regulator Makes Puerto Rican Municipal Debt-Related Inquiries to UBS, FIdelity, and Oppenheimer

Published on: October 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts Securities Division has written inquiry letters to UBS Financial Services (UBS), Massachusetts Mutual Life Insurance Co.’s Oppenheimer Funds, and Fidelity’s FMR Co. Inc. about the sales of Puerto Rican municipal debt obligations that were made investors in the state.

The regulator wants to know exactly to what extent these customers were exposed to the bonds’ risks, whether they were adequately warned of the risks involved, and if the bonds were correctly priced. The debt obligations were usually sold via mutual funds.

The bond funds at issue are heavily invested in Puerto Rican-backed municipal bonds and many were very highly leveraged. Due to tax and benefits and favorable yields, a lot of state-specific municipal bond funds in Massachusetts, and other states, are heavily concentrated in Puerto Rican debt. For example, close to 17% of the Oppenheimer Rochester Massachusetts Municipal Fund’s assets ($69M) are in Puerto Rico debt. These bonds are often low rated (BBB or lower) and carry significant risks.

SEC Officers Guidance on Liability and Compliance for Brokerage Firms

Published on: October 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has published answers to frequently asked questions as guidance about liability that may come out of the Exchange Act related to the responsibilities of chief compliance officers and other legal and compliance staff at broker-dealers. The advisory was issued so firms could consider which circumstances and facts may result in grounds for supervisory liability.

In the FAQ, the SEC notes that for purposes of the Exchange Act Sections 15(b)(4) and (6), a person is a supervisor depending on the specifics of a case and whether he/she had the required ability, responsibility, or authority to impact the behavior of the employee(s) whose conduct is in question. There are, however, legal personnel and compliance staff who can assume a key role without assuming such supervision.

The Commission said that brokerage firms are responsible for establishing compliance programs that make sure compliance with regulations and laws occurs. Firms may want to include processes to identify incidents of noncompliance, a robust monitoring system, and procedures delineating who is tasked with what responsibility and/or supervisory role. The regulator says that compliance and legal staff do play a key part in broker-dealers efforts to create and put into effect a compliance system that works.

US Treasury Doesn’t Intend to Provide Aid Over Puerto Rico Bond Fund Debacle, Says Spokesperson

Published on: October 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Hope that the US Treasury will save ailing Puerto Rico bonds does not appear to be warranted. According to a spokesperson for the department, who did not wish to be named, the Treasury will not be providing help to the US territory over the municipal bond fund debacle.

However, reports Fox News, the federal government is expected to provide incentives to enhance Puerto Rico’s failing economy. Right now, Puerto Rico’s debt, which is mostly in mutual funds, is at about $70 billion. That’s close to 2% of the $3.7 trillion municipal bond market. This is significantly higher than Detroit’s $18 billion debt that forced that city to file for municipal bankruptcy earlier this year.

Yet even as Puerto Rico’s debt continues to grow, it won’t be allowed to file for Chapter 9 bankruptcy because like US states, territories cannot seek such protection. That said, officials in Puerto Rico maintain that it isn’t bankrupt yet.

Puerto Rico Municipal Bonds

Published on: October 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The securities attorneys with Shepherd Smith Edwards & Kantas are investigating claims of investors who purchased Puerto Rico municipal bonds. Many of the largest brokerage firms that operate in Puerto Rico, including UBS, Banco Popular, and Banco Santander, have been selling huge amounts of securities which directly or indirectly were supposed to be investments in Puerto Rico municipal bonds. Those bonds have been viewed as attractive investments by many investors for years as a result of their tax incentives and relatively high yield.

Interest paid by municipal bonds issued by Puerto Rico is exempt from taxation of any type in the United States. This is a significant incentive over municipal bonds issued by United States government entities, which are typically only exempt from Federal income tax, and would still be considered income by state and/or local income taxes. (The exception for the State and local taxes is that most states exempt their own issuances from income taxes, but tax municipal bonds issued by other states.) Additionally, municipal bonds issued by Puerto Rico have, for years, carried relatively high-interest rates. Those high rates, coupled with the preferential tax treatments, have made it easy for brokers to convince their clients, particularly in Puerto Rico, to invest heavily in these securities.

However, even as early as 2009 there were strong indications, as well as publicly available information, that these bonds were in trouble. In 2009, Puerto Rico’s governor declared a state of fiscal emergency. At the time, the territory carried approximately $47 billion in debt and was already bordering on junk-bond/high-risk credit ratings. Yet at the same time, Puerto Rico’s economy shrank by roughly 5.5% in the same year, marking huge challenges for Puerto Rico’s ability to support such a level of debt.