Investor Lawyers Blog

LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments

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

FINRA says that LPL Financial, LLC must pay a fine of $950,000 for supervisory deficiencies involving the sale of alternative investment products, such as oil and gas partnerships, non-traded real estate investment trusts, managed futures, hedge funds, and other illiquid pass-through investments. By settling, the independent broker-dealer is not denying or admitting to the FINRA charges. LPL however, has agreed to an entry of the self-regulatory agency’s findings.

A lot of alternative investments establish concentration limits and certain states have even stipulated their own concentration limits for alternative investment investors. LPL also has set its own limits.

According to FINRA, however, from 1/1/08 to 7/1/12 LPL did not properly supervise the sale of alternative investments that violated of concentration limits. The SRO contends that even though initially LPL employed a manual system to assess if an investment was in compliance with requirements for suitability, the brokerage firm sometimes relied on inaccurate and dated data. Later, when LPL put into place a system that was automated to conduct the reviews, the system was purportedly not updated to make sure current suitability standards were correctly reflected and the programming in the database was flawed.

Securities America Under Investigation by Pennsylvania in Nontraded REIT Probe

Published on: March 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Pennsylvania Department of Banking and Securities is looking into the sales of nontraded REITs by Securities America employees. Ladenburg Thalmann & Co. Inc., which owns the broker-dealer and two other independent brokerage firms, said in its yearly report that the state regulator wants the brokerage firm to provide data about nontraded REITs that Pennsylvania residents have been buying since 2007. The request was made in October.

According to InvestmentNews, it is not known at this time if Pennsylvania regulators are just looking at nontraded REIT sales at Securities America or the investigation extends to other firms. It was just last year that Securities America, along with other independent brokerage firms, settled with the Massachusetts Securities Division over nontraded REIT sales.

Securities America paid $8.4 million in restitution to clients in that state along with a $150,000 fine. According to that probe, firms had difficulties abiding by their own policies as well as to the Massachusetts rule that an investor’s purchase of REITs cannot go beyond his/her liquid net worth.

Securities Class Action Lawsuits Don’t Help Investors Recover, Says New Study

Published on: March 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a study commissioned by the US Chamber Institute for Legal Reform, securities class action lawsuits are not a help to investors seeking to recover their investment losses. The study, which was released by Navigant Consulting, found that class action litigation costs investors close to $39 billion annually even as they recover only about $5 billion.

To arrive at the finding, the authors of the calculated the wealth lost by shareholders when lawsuits were announced right after a class period had ended. Usually, at this point, the class members consisted largely of the same shareholders who experienced the first drop. Per the study, a significant percentage of proceeds from the settlement was given to plaintiffs who almost always would not have recovered anything if a securities case was litigated. However, said the authors, after looking at 50 allocation plans for large settlement, they discovered that when redistribution of the wealth happens it hardly resembles the alleged injury. Instead, an analysis of more than 14,000 class action securities cases from 1996 to now showed, shareholders who were alleged fraud victims and the plaintiffs of these claims sustained “an incremental wealth loss” of over $262 billion because class action securities cases were filed.

In a report also issued last month based on its own study, consumer advocacy group Public Citizen found that it is private securities lawsuits that are effective when it comes to deterring fraud. Lisa Golber, the co-author of the study. said that institutional investors widely see these cases as a way to keep up their investments’ sustainability. The report found that private securities fraud cases compensate investors and do what the SEC sometimes can’t because of its lack of resources.

SEC To Examine Exchange Traded-Fund Regulation Again

Published on: March 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is getting ready to revisit a 2008 rule proposal about exchange-traded funds. In the wake of new issues that have cropped up since then, changes to the original proposal are likely.

Speaking at the Investment Company Institute’s Mutual Fund and Investment Management Conference this week, SEC’s Division of Investment Management associate director Diane Blizzard said that a revised rule would likely address the differences between index and active funds, transparency of underlying and direct instruments, inverse leverage, and creative flexibility within the funds.

Currently, there is no specific timeline for a revised proposal roll out. Since no rule is in place at the moment, the Division of Investment Management is in charge of making individual choices about whether to approve new exchange-traded funds. This SEC division is also looking at enhancing disclosure requirements related to variable annuities, including whether senior investors and those seeking to build their retirement funds are being properly and thoroughly notified of the benefits, complexities and costs.

Credit Suisse to Pay $885M To Settle RMBS Fraud Lawsuit with FHFA, Continues to Face Allegations It Hid US Accounts from Internal Revenue Service

Published on: March 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse (CS) will pay $885 million to resolve securities allegations related to the sale of approximately $16.6B in residential mortgage-backed securities that it made to Freddie Mac (FMCC) and Fannie Mae (FNMA) prior to the financial crisis. The RMBS settlement is with the Federal Housing Finance Agency, which oversees both government-controlled financing companies. It closes the books on two lawsuits.

The mortgage cases accused Credit Suisse of making misrepresentations when selling the RMBS to the two companies. Because the deal was reached prior to Credit Suisse submitting its financial results for 2013, the Swiss bank says it will take a related $312 million charge for last year, as well as post a loss for the most recent fourth quarter.

In other Credit Suisse news, one of the firm’s ex-bankers has pleaded guilty in federal court to assisting US clients so that they could avoid paying taxes to the IRS. Andreas Bachmann is one of seven employees at the firm indicted on a criminal charge that he helped Americans conceal assets of about $4 billion.

SEC Fraud Charges Filed in $1.9M Microcap Stock Scalping Scam

Published on: March 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed securities fraud charges against the promoter behind affiliated microcap stock promotion websites. The regulator us accusing John Babikian of using PennyStocksUniverse.com and AwesomePennyStocks.com to engage in “scalping” which is a type of securities fraud. The SEC has also obtained an emergency asset freeze.

According to the Commission, the websites, knowing collectively as “ABS,” sent out e-mails to about 700,000 people on February 23, 2012 and recommended that they invest in America West Resources Inc. (AWSRQ), which is a penny stock. However, the e-mails did not disclose that Babikian was the holder of over 1.4 million of the stock shares, which he had positioned and was going to sell right away via a Swiss bank.

Because of the emails, there was a huge increase in the share price of America West’s stock and trading value. Babikian used this to get rid of the stock during the last 90 minutes of the trading day and raked in over $1.9M.

Former Morgan Stanley Broker and Two Others Allegedly Ran $5.6M Insider Trading Scam, Swallowed The Information

Published on: March 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In an alleged insider trading scam that could have been ripped out of the plot of a movie, prosecutors are accusing three men of engaging in methods of spycraft, including eating the evidence, as they ran an insider trading racket that netted about $5.6 million. The information they used was purportedly obtained from Simpson Thacher & Bartlett, LLP, which is the premier mergers-and-acquisitions law practice in New York. The firm is known for its work involving mergers and acquisitions and private equity.

Prosecutors say that Steven Metro, a managing clerk at the law firm, used his employer’s computer system to gather information about deals and other corporate developments involving clients. He then shared the information, which, according to The Wall Street Journal, included data about Tyco International Ltd.’s intentions to purchase Brink’s Home Security Holdings Inc., as well as the Office Dept. Inc. Office Max Inc. merger, with an unnamed mortgage broker during coffee shop and bar meetings. That person then allegedly gave the info to broker Vladimir Eydelman, who until recently, was with Morgan Stanley (MS) (and before that (Oppenheimer & Co. (OPY)) Edylman, 42, then traded on the data.

Metro and Eydelman were arrested this week and then released on $1 million bond. They face numerous criminal charges, including securities fraud. Meantime, the unnamed mortgage broker is working with prosecutors and is expected to consent to a plea deal.

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules

Published on: March 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The non-traded real estate investment trusts industry wants to delay the implementation of the Financial Industry Regulatory Authority disclosure rule until the end of 2015. The rule would require that investors be given more accurate data about the valuation of direct participation programs and non-traded REITs.

This should provide investors with a more accurate picture of how much it costs to buy non-traded REIT shares. Currently, the self-regulatory authority’s proposal would put the rule change into effect at the end of 2014, which would be about six months after obtaining Securities and Exchange Commission approval.

Almost all non-traded REIT vendors are independent brokerage firms. Generating close to $20 billion in sales last year, which is twice as much as the year prior, broker-dealers and their representatives have gotten commission boosts due to their typical 7% commission.

FINRA Orders Securities America and Triad Advisers to Pay $1.2M Over Reporting Violations

Published on: March 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Securities America and Triad Advisors $625,000 and $650,000, respectively, for not properly supervising the way consolidated reporting systems were used. Triad must also pay $375,00 in restitution. Even though they are settling, the two firms are not denying or admitting to wrongdoing.

The self-regulatory organization said this inadequate supervision led to statements containing inaccurate valuations that were sent to customers. The two firms are also accused of disobeying securities laws by not keeping appropriate consolidated reports.

A consolidated report is a document that includes information about the bulk of a customer’s financial holdings. The report is a supplement to official account statements.

Will Castlight Health IPO Prove Too Costly for Investors?

Published on: March 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Castlight Health (CLST) saw its share price soar from $16/share to close to $40/share on the first day of its IPO last week. Despite bringing in just $13 million in revenue yearly thus far, its market cap still managed to hit $3 billion. Now some are wondering if this is an indicator that the IPO market may be approaching bubble territory. (Morgan Stanley (MS), Goldman Sachs (GS), and other top underwriters had priced the shares at $16, just over the raised and expected range of $13 to $15 per share)

Motley Fool analyst Ron Gross observed on Friday’s Investor Beat that this is the ninth IPO to double during its first trading day in the last nine months. Previous to that only five IPOs had done the same in the last 12 years. So yes, he says this is bubble area. Gross expressed concern that investors might be getting into stocks with super high valuations in light of the momentum yet later find that they are framing themselves for failure because they didn’t purchase the stocks at the right price.

However, reports USA Today, Castlight EO Giovanni Cilella is saying that the company sold its shares at the right time and financing is being done to keep up with customer demands. The company makes software to help employers and companies control the costs of healthcare.