Investor Lawyers Blog

J.P. Turner & Co. Will Pay $250,000 to Settle FINRA Charges Related to Inadequate Supervision of Stock Trade Commissions

Published on: November 5, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority and J.P. Turner & Co. have reached a settlement agreement over charges that the broker-dealer failed to put in place a proper supervisory system for making sure that its registered representatives charged clients reasonable and fair commissions on stock trades. By agreeing to settle, JP Turner is not admitting to or denying the charges involving inadequate supervision.

FINRA says that between January 2002 and March 2005, JP Turner failed to take certain relevant factors into consideration when determining how much commission they should charge clients for equity securities transactions. Instead, FINRA says that the broker-dealer let its brokers charge commissions of up to 4.5% on nearly every stock trade, with discretion on what commission to charge solely limited by whether the security’s price was higher or lower than $25/share. If the security’s price was under $25/share, FINRA says that JP Turner representatives could charge commission of up to 4.5%. They could charge commissions of up to 3.5% if the security price was higher than $25.

FINRA requires brokerage firms to put in place systems and “reasonable procedures” for determining what commission fee a customer should be charged for such transactions, while taking into consideration certain relevant factors. The SRO’s mark-up policy provides a list of these relevant factors, including: the kind of security, the price of the security, the transaction size, the order execution cost, and the availability of the security.

During the review period, FINRA says that 91% of JP Turner’s transactions involved securities priced under $25/share. While the broker dealer’s trading manager was in charge of reviewing and approving trades to make sure charges were reasonable and fair, the SRO says the reviews actually consisted of checking transactions to make sure that commissions did not go above the company’s 4.5% and 3.5% guidelines.

As part of its settlement with FINRA, JP Turner will pay $250,000. The broker-dealer has also agreed to retain an independent consultant who will evaluate for adequacy the company’s systems, policies, procedures, and training related to FINRA’s fair price ruling.
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SEC Failed in Its Oversight of Bear Stearns, Says Inspector General

Published on: October 31, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Office of the Inspector General says the agency failed to fulfill its mission in the oversight of Bear Stearns. Inspector General David Kotz says not only did the SEC neglect to order the company to cut back on risk taking, but it missed possible “red flags” leading up to JP Moran Chase & Co.’s purchase of the faltering investment bank.

Kotz’s report says that despite identifying the risks that would lead to the sub-prime mortgage crisis, the SEC staff did not exert its influence to mandate that Bear Stearns add a potential market collapse scenario to its list of possible risks.

Kotz is accusing the SEC of not making any efforts to make Bear Stearns raise money or lower its debt. He is also criticizing the agency for allowing internal audits, rather than external audits, at Bear Stearns.

Also in his report, Inspector General Cox accuses the agency of not doing anything to find the shortcomings in Bear Stearn’s risk management of mortgages and failing to avail of opportunities to prod management at Bear Stearns to deal with problems. He says the SEC should have taken more time to evaluate Bear Stearn’s 2006 annual report and get additional information from the investment firm, which would have required the company to reveal more information about its mortgage portfolio to investors.

The SEC’s division of trading and markets disagrees with Kotz’s findings and claims that that the report began with incorrect assumptions and arrived at unrealistic and inaccurate conclusions that were not practical. SEC Chairman Christopher Cox says that, if anything, the SEC’s failures occurred because the agency had not been given enough authority to oversee the investment banks and that Kotz’s report affirms this.

The sale of Bear Stearns and Merrill Lynch & Co, Lehman Brothers Holding Company’s bankruptcy, and the filings by Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies means that the SEC is no longer overseeing any large investment firms. While the agency will continue reviewing broker-dealer businesses, it is terminating its oversight program of independent investment banks’ parent companies.

Related Web Resources:

SEC Watchdog Faults Agency in a Bear Case, Wall Street Journal, October 11, 2008
SEC Office of Inspector General

Bear Stearns, A Division of JP Morgan Continue Reading ›

Former UBS AG Co-General Counsel David Aufhauser Agrees to Settle Insider Trading Charges for $6.5 Million

Published on: October 30, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The New York Attorney General’s Office says it has reached a $6.5 million settlement agreement with former UBS AG co-general counsel David Aufhauser over insider trading charges. Aufhauser is also a former general counsel for the Treasury Department.

In the complaint, Attorney General Andrew Cuomo accused Aufhauser of selling his personal auction-rate securities holdings because of inside information he received regarding UBS’s crumbling auction-rate securities market.

Among other allegations included in the complaint, which the New York Attorney General filed in New York State Supreme Court on July 24, 2008:

• A UBS executive received an e-mail on December 14, 2007 from the company’s chief risk officer discussing potential problems with ARS.
• This same UBS executive then sent an email to his financial advisor saying that he wanted to get out of the ARS market.
• AT this executive’s request, the financial advisor sold $250,000 of ARS.
• Cuomo’s complaint identifies Aufhauser as the executive and accuses him of violating New York’s Section 352-c of the General Business Law when he allegedly used insider information to commit securities fraud.
• The complaint also alleges that Aufhauser was in breach of a duty owed to the source of the insider information.

As part of his $6.5 million settlement with New York State, Aufhauser’s payments will include his $6 million UBS discretionary incentive compensation and another half a million dollars. The former UBS attorney is also barred from the industry for two years and cannot practice law or serve as an officer or a director of any public company in the state off New York for two years.

The New York Attorney General’s complaint against Aufhauser is part of Cuomo’s ongoing probe into the ARS market collapse.

Related Web Resources:
Ex-UBS Counsel to Pay $6.5 Million to Settle Auction-Rate Trading Case, NY Times, October 8, 2008
Ex-UBS general counsel settles insider trading case, Newsday, October 8, 2008
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NASAA and AARP Launch “Free Lunch Seminar Monitor Program” to Protect Seniors From Investment Fraud

Published on: October 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association and the AARP are inviting senior investors to take part in their “Free Lunch Seminar Monitor program.” Both organizations say the program will give investors a chance to report any unscrupulous promoters of inappropriate investments to security authorities in their state.

According to statistics, 80% of senior investors (age 60 and above) were invited to attend at least one free investment seminar over the last three years. Three out of five elderly investors received six or more invitations to these free seminars.

The free lunch seminar invitations usually indicate that seniors who attend will be fed a free, expensive lunch while they listen to information about how to invest and manage their money during retirement.The Financial Industry Regulatory Authority and federal and state securities regulators, however, say that these lunches are actually sales presentations, which consist of 50% “misleading” or “exaggerated” advertising claims and 25% unsuitable investment recommendations.

Last year, the SEC and securities regulators released their joint findings pertaining to “free lunch” seminars, including:

• The lunch seminars, while touted as “educational,” were actually held with the purpose of opening new investor accounts and (eventually) selling investment products.

• 59% of firms that oversaw the free seminars exhibited weak supervisory practices.

“Free Lunch Seminar Monitor Program”
Investors who would like to be part of the Free Lunch Seminar Monitor Program can bring a checklist (see below) to the lunch seminar with questions about the presenters and the products being promoted. The information from these forms will allow state securities regulators to determine whether the promoters and the information they are presenting are in compliance with securities laws and regulations.

The program gives investors an opportunity “fight back” against the promoters of these “free seminars” and gives securities regulators another way to protect seniors from investment fraud.

AARP and NASAA Launch “Free Lunch Seminar Monitor” Program, AARP.org
“Free Lunch” Investment Seminar Examinations Uncover Widespread Problems, Perils for Older Investors, SEC.gov, September 10, 2007

Related Web Resources:
What to Listen for Checklist, AARP.org (PDF)

North American Securities Administrators Association

“Free Lunch” Investment Seminars-Avoiding the Heartburn of a Hard Sell, FINRA Continue Reading ›

SunTrust Investment Services to Pay $700,000 Fine to Settle FINRA Charges of Excessive Commission and Supervisory Violations Involving Fee-Based Brokerage Business

Published on: October 23, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has announced that SunTrust Investment Services Inc. has agreed to pay a $700,000 fine to settle allegations that it engaged in supervisory violations involving its fee-based brokerage business and charged excessive commissions on low-priced stocks. By agreeing to settle, the investment firm is not admitting to or denying the charges.

SunTrust terminated its Portfolio Choice accounts, which were fee-based accounts, in 2006. The charges by FINRA involve the period between November 2002 and December 2005 when SunTrust opened more than 2,644 Portfolio Choice accounts without properly evaluating whether the accounts were the appropriate fit for customers. According to FINRA, SunTrust neglected to properly monitor the Portfolio Choice accounts to make sure that they continued to be the appropriate account choice for clients.

FINRA found that at least 36 Portfolio Choice accounts that did not engage in any trades for at least eight quarters-yet these accounts were charged more than $129,000 in fees during the last four quarters. FINRA also says that a number of SunTrust Portfolio Choice clients paid an asset-based fee and transaction commission on the same assets.

FINRA was able to identify over 900 incidents when SunTrust neglected to exclude a customer asset that was purchased with a commission from the asset base that is used to determine the account fee. The error resulted in customers being charged twice, leading to about $437,500 in commissions and excess fees for SunTrust clients.

FINRA also accused the investment firm of acting inappropriately when it let a number of customers keep their accounts and pay for them even though they had not traded for years. Between January 2002 and September 2, 2005, FINRA says SunTrust did not establish a supervisor system that could make sure that registered representatives would charges clients fair commissions on securities transactions. The firm used an automated commission system that charged commission of more than 5% when low quantities and/or low-priced stocks were sold or purchased. Because of this, some clients were billed excess commissions nearing $100,000 in total.

Also as part of its settlement, SunTrust said it would certify that it returned $713,362 in interest and fees to clients that were affected by the alleged violations. FINRA says it took this voluntary refund into account when assessing its fine against SunTrust.

Related Web Resources:

SunTrust Investment Services

FINRA
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Banorte Securities International Agrees to $1.1 Million Fine Over Charges It Recommended Class B Mutual Fund Shares Instead of Class A

Published on: October 22, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Banorte Securities International, Ltd. has agreed to a $1.1 million fine to settle charges that it recommended to customers that they buy Class B off-shore mutual fund shares even though they would have benefited more financially by buying Class A shares. The Financial Industry Regulatory Authority announced the settlement agreement last week.

By agreeing to settle, Banorte is not admitting to or denying the charges. The company also agreed to a plan that would address more than 1,400 transactions involving accounts in over 300 customer households.

Banorte had been accused of having inadequate supervisor systems to oversee the sales of off-shore mutual fund shares, including guidelines that failed to properly advise registered representatives that Class A share purchases eligible for front-end loans were more affordable than Class B Shares.

According to FINRA enforcement head Susan L. Merrill, firms are obligated to consider all share classes and pricing features that would most benefit a customer-regardless of whether or not that clients reside in the United States or abroad. The majority of Banorte’s customers reside in Mexico. Merrill also said that firms must take all relevant factors into considerations when making mutual fund recommendations to clients.

Class A Shares

These mutual fund shares come with a front-end sales charge and lower ongoing fees that are asset-based.

Class B Shares

While these mutual fund shares usually do not come with a front-end sales fee, their asset-based fees are usually higher than Class A Shares’ fees.

FINRA alleges that from 2003 until May 2004, the majority of Banorte mutual fund sales involved Class B shares even though investing in Class A Shares could have resulted in higher returns for clients.

Related Web Resources:

FINRA Fines Banorte Securities International $1.1 Million for Improper Sales of Class B Mutual Fund Shares, FINRA, October 16, 2008 Continue Reading ›

Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Ray Londo, Londo Financial Group, and Linsco Private Ledger For Improper Lending/Borrowing of Client Funds

Published on: October 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Securities fraud attorneys at the stockbroker fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP are investigating claims for clients of Ray Londo, Londo Financial Group, and Linsco Private Ledger (LPL). The firm is asking any clients of Ray Londo that lent him or anyone else in his company money to call (800) 259-9010.

According to the Financial Industry Regulatory Authority, Ray Londo was fired from LPL this year because of his failure to abide by company policy related to borrowing from or lending money to clients. FINRA registered representatives are not supposed to borrow money from clients or accept checks issued directly to a broker.

FINRA Rule 2370

Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages

Published on: October 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the US Securities and Exchange Commission filed a civil lawsuit against five World Group Securities brokers for allegedly pushing investors into refinancing their homes with subprime mortgages. The SEC is accusing the mortgage brokers of taking advantage of the clients’ lack of education, modest financial means, and poor fluency in English to fraudulently sell them unsuitable securities-primarily variable universal life policies.

Because most of the investors who were persuaded to purchase the securities lacked the funds or income to do so, the defendants allegedly persuaded them to come up with the money through the refinancing of their fixed-rate mortgages into subprime adjustable-rate negative amortization mortgages. The brokers received compensation from the securities sale and the mortgage refinancings.

The defendants in the case are Guillermo Haro, Jesus Gutierrez Kederio Ainsworth, Angel Romo, and Gabriel Paredes. The Commission says that the brokers violated the antifraud provisions of the securities laws.

The SEC says the men misrepresented the returns the investors would get back from the securities, the nature and liquidity of the variable universal life policies, and the new mortgages’ terms, as well as failed to reveal key facts to the investors. The Commision’s complaint also accuses the brokers of falsifying customer account forms and placing inaccurate securities sales information on order tickets.

The SEC calls the men’s actions and their willingness to allow their clients to risk the potential loss of their homes “egregious” conduct that will not be tolerated. The Commission is seeking disgorgement, injunctions, and financial fines against the defendants.

If you are a victim of investor fraud, it is important that you find out about the legal remedies available to you.

Commission Charges Five Registered Representatives with Fraudulent Sales of Unsuitable Securities Funded Through Subprime Mortgage Refinancings, SEC, October 3, 2008
World Group Securities brokers charged with fraud, Bizjournals.com, October 13, 2008

Related Web Resource:

Subprime Mortgage, Investopedia Continue Reading ›

Goldman Sachs Applies for New York Bank Charter

Published on: October 15, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs is applying for a New York bank charter. The application is one of the steps the New York-based investment bank is making in its move to become a commercial bank.

Goldman’s competitors, Bank of America, Citigroup, Morgan Stanley, and JP Morgan Chase are banks that have a national charter, which allows banks to open branches in different states without needing to apply for separate charters in each state. Having a New York charter, however, will not prevent Goldman Sachs from opening branches outside the state.

Goldman’s move to obtain a state charter is a sign that the company may not want a consumer-oriented business that operates on a national level. Rather than focusing on retail banking services, the firm will likely concentrate on managing rich people’s assets.

FINRA Orders Charles Schwab to Pay $542,340 Over Short-Term Bond Fund Investor Claim

Published on: October 14, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, a Financial Industry Regulatory Authority panel found Charles Schwab Corp. liable for $542,340 in an investor claim against the company over its YieldPlus short-term bond fund. This case is one of numerous individual arbitration and class action lawsuits against the San Francisco-based investment firm because of the fund.

The Schwab YieldPlus Fund had assets worth over $13 billion last year, but the fund suffered major losses this year because of mortgage-backed securities. At the end of last week, the fund’s assets were worth $432 million.

In this latest arbitration claim, investor Jeffrey Nielson accused Schwab and representative Darin Beckering of purposely misleading him when he purchased the ultrashort-bond fund because they did not fully disclose the extent to which the fund would be exposed to the subprime-mortgage market. Nielson also claims he was never informed that the Schwab YieldPlus Fund was a proprietary fund.