Investor Lawyers Blog

Former Fidelity Brokerage Reps Says They Were Pressured to Make Sales That Conflicted With CFP Ethic Codes

Published on: April 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A number of Fidelity Brokerage Services LLC representatives who left the company last year say that they were obligated to acquire certified financial planner certification but were also barred from revealing that part of their bonuses were affected by whether they sold certain proprietary products. About half of Fidelity brokers’ compensation is salary and the remainder is in bonuses. The ex-brokers say they were pressured into selling Fidelity’s life insurance products and Portfolio Advisory Services.

One ex-broker said that he had to meet 80% of his sales target in PAS in order to qualify for the investment portion of the manager bonus and not receive an employment warning. Other brokers say that they were monitored weekly and comparisons were made between them and other representatives to spur productivity. Still another ex-broker said they were warned that representatives who didn’t get the CFP by mid-2009 would be let go.

The Fidelity Investments brokerage unit removed the CFP mandate this January, the same month that that the Certified Financial Planner Board of Standards Inc. instituted a new code of ethics and professional responsibility that obligates certified planners to notify clients about any conflicts of interest. A number of ex-Fidelity brokers says that Fidelity Brokerage withdrew the requirement because approximately 18% of the more than 275 account executives with its Private Client Group resigned last year.

Fidelity disputes the former brokers’ accounts and says that attrition isn’t unusual, broker compensation doesn’t conflict with clients’ best interests, and bonuses are not affected by proprietary products’ sales. A company spokesperson also says that the CFP requirement was withdrawn so that qualified candidates wouldn’t be discouraged from joining the private-client unit and the decision had no connection to service offering. Fidelity says it still encourages representatives to get the CFP.

Related Web Resources:
Ex-Fidelity reps claim sales pressure, Investment News, April 5, 2009
Certified Financial Planner Board of Standards Inc.
Continue Reading ›

Morgan Keegan Ordered by FINRA to Pay Investors $267,711 Plus Interest for Losses in RMK Bond Funds

Published on: April 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Separate Financial Industry Regulatory Authority arbitration panels have issued awards to investors who suffered financial losses in Regions Morgan Keegan mutual funds. Last week, a FINRA panel awarded two California residents $267,711 plus interest for their losses-the largest bund fund arbitration award that Morgan Keegan has been ordered to pay to date.

In two arbitration cases last month, investors were also awarded six-figure sums, with one award amount larger than the damages claimed by investors. To date, FINRA panels have awarded over $871,000 to investors for their Morgan Keegan-related claims.

All of the arbitration claims accuse Morgan Keegan of concealing the actual risks associated with their bond funds. The investors have accused Morgan Keegan of selling certain funds as relatively conservative investments when they were actually exposed to a number of high risk debt instruments, including collateral debt obligations and subprime mortgage securities. They say Morgan Keegan engaged in a scheme to defraud investors of certain bond funds and misrepresented the extent of their holdings in riskier investments.

Merrill Lynch & Co Ordered to Pay FINRA Arbitration Panel $39.8 Million

Published on: April 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch & Co. must pay an investor $39.8 million in compensatory damages because of negligence on the part of one a subsidiary broker-dealer. A Financial Industry Regulatory Authority arbitration panel issued the award to Trustees of the Masonic Hall & Asylum Fund, which is an endowment for an Utica health-care facility. This is one of the largest awards against a Wall Street firm.

The fund’s arbitration claim had accused Merrill Lynch and subsidiary Advest Inc. of misrepresentation, negligence, breach of fiduciary duty, and breach of contract. The claim had also accused Advest Inc. of encouraging it to buy into Sphinx Managed Futures Index Fund LP, which was owned by Refco Inc. However, Refco Inc. collapsed in 2005 after giving notice that its chief executive had concealed bad debts valued at about $430 million from firm auditors. The fund says it lost money because of Advest Inc.’s poor recommendation.

The FINRA panel awarded the fund $30.6 million plus $9.2 in interest from as far back as November 2005. Merrill Lynch announced that it was not pleased with the ruling and says that the case stemmed from investments that occurred before the Wall Street firm acquired Advest.

The FINRA panel said Merrill Lynch can seek damages in bankruptcy proceedings for the Refco unit in charge of the Sphinx fund, and the broker-dealer says it will do so.

One way for investors who have lost money because of securities fraud to recover their investments is to go through the arbitration process.

Related Web Resources
Merrill to Pay $40 Million in Refco Case, Wall Street Journal, March 30, 2009
Merrill socked with historic arbitration ruling, Crain’s New York Business, March 31, 2009 Continue Reading ›

“Reversible Convertible” Risks are Now a Reality for Investors Dealing with Substantial Losses

Published on: April 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A year ago, a Wall Street Journal article warned about the risk of investing in “reversible convertibles.” Now, these risks have become a reality for many investors, who have experienced substantial losses due to these products.

It began with Wall Street tempting investors who were hungry to make money with these risky complex securities while boasting of their potentially extravagant yields. These securities, which are usually linked to a single stock’s performance, can result in yields of 7% to 25% or greater.

In the past couple of years, sales of these notes soared, while yields for numerous fixed-income investments dropped. For example, in 2007, Arete Consulting LLC reported that small US investors purchased about $8.5 billion in reverse convertibles-an 81% increase from the year prior.

Morgan Stanley, ABM AMro Holding NV, and Barclays PLC are among the firms that have issued reverse convertibles, while firms including Wells Fargo and others were also active in the sales of these securities. These products are supposed to offer small investors a high level of income in return for a minimal investment. However, if the stocks drop dramatically, investors can lose most of their investment-especially if they didn’t take part in any of the underlying stock’s gains.

Reverse Convertibles
A reverse convertible is usually sold in notes of $1,000 increments that provide regular interest payments during the investment term. Upon the maturity of the note, an investor will receive their full original investment back in cash-except when certain conditions tied to a set “barrier” level apply.

However, if the underlying stock price drops under that level during the note’s term and finishes under the initial stock price, the investor doesn’t get cash and instead receives beaten down stock shares. This can be very dangerous for investors when reverse convertibles are linked to stock shares.

Reverse convertible buyers, who are selling a “put” option on the underlying stock, are obligated to purchase the shares if they go below a certain amount. The more high risk the stock, the greater the put option, and the higher the yield that investors can get paid.

Reverse convertibles also come with other challenges. An investor who tries selling a reverse convertible before it matures may have problems recovering his or her original investment.

In 2007, the Financial Industry Regulatory Authority sent inquiries to structured providers about their sales and marketing practices. Regulators wanted issuers to better monitor how they market reverse convertibles to small investors.

Issuers stand to gain financially from selling this product, which usually come with substantial fees (generally in the 2% or 3% range) and are priced into the yield that investors are getting. The issuer’s profit will depend on how it hedges against the risk of issuing the note.

Brokerage firms have been known to compare reverse convertibles to investments that are typically safer. FISN INC. lists reverse convertibles on its Web site under “CD Alternatives”-even though CD’s come with a lot less risk. The NASD, in 2005, recommended limiting the sale of structured products to investors who have options trading approval. Yet even sophisticated investors can run into problems with reverse convertibles.

With the markets becoming more volatile, the March 2008 WSJ article warned that circumstances could get “rougher”. Yet at that time last year, issuers were still claiming that even with the risks, reverse convertibles were still a good bet for investors.

Reverse convertibles have left investors with beaten-down shares. For example, investors who purchased reverse convertibles linked to Countrywide Financial Corp. (whose share prices sank over 70%) lost over 50% of their money by the time the notes matured.

Related Web Resources:
Risky Strategy Lures Investors Seeking Yield, The Wall Street Journal, March 28, 2008
Reverse Convertibles Can Turn The Tide On Investor Returns, Investopedia Continue Reading ›

GM, Ford, Chrysler Retirees: Beware of Financial Advisors After Your Severance!

Published on: April 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

About 7,500 General Motors workers recently agreed to a buyout of early retirement incentives and leave the company. Chrysler, Ford and many suppliers of the industry have also made offers to entice workers to take early retirement. This follows tens of thousands of other industry workers who have been bought-out of pension and other benefits in recent years.

Many who retire have little if any experience in investing and are soon beseiged by droves of salespersons hawking financial plans. In the past, strict laws and regulations were enforced regarding investors’ funds, especially retirement funds. However, as we have recently witnessed, securities regulators appear to be overwhelmed or incompetent.

For decades, Wall Street has blamed any abuse of investors on a few “rogue” brokers. Yet, many now believe that Wall Street is actually rotten to the core. In fact, the majority of financial advisors sincerely and diligently seek to serve their clients, although many of the investment products they are told to sell are inappropriate, riddled with costs or just plain fraudulent. Sadly, too many of the worst advisors attract unwary investors with false promises.

Victims of financial abuse are often unaware that they can seek recovery of undue investment losses according to the law. But investors must understand that the regulators “police” the securities industry and write tickets when they catch the bad guys. In order to recover, victims must hire an attorney to represent them in court or in securities arbitration.
Continue Reading ›

US Supreme Court Won’t Hear InfoSpace Founder’s Appeal Requesting to Sue Attorneys and Stock Management Company for Allegedly Botching Insider Stock Trading Case

Published on: March 31, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has decided not to listen to an appeal filed by InfoSpace founder Naveen Jain requesting that he be allowed to sue JP Morgan Securities and his former attorneys for allegedly mishandling an insider stock trading lawsuit.

What happened was that InfoSpace Inc. INSP shareholder Thomas Dreiling filed a derivative action against Naveen and his wife, InfoSpace cofounder Anuradha. Dreiling contended that they violated short-swing trading prescriptions that prevent corporate insiders from selling and buying or buying and selling company stock during a six-month period.

The federal court ruled in Dreiling’s favor and the Jains were ordered to pay $246.1 million in disgorgement. The lawsuit was eventually settled for $105 million.

The Jains, however, then sought to get the amount they were fined for participating in illegal short-swing transactions from their stock management company and their attorneys. He and his wife had accused the defendants for the language in his company’s initial public offering prospectus that contributed to such a healthy judgment against them. Their lawsuit alleged breach of fiduciary duty, negligence, malpractice, and equitable indemnity.

Since then, the lower courts, including the Washington Court of Appeals, have thrown out their lawsuit because federal law bars complaints that blame security companies for such trades. The appeals court, in affirming the initial dismissal, noted that an insider who violates Section 16B of the Securities Exchange Act cannot receive indemnification from others for any liability that results. While the state court acknowledged that the rule against indemnification might protect some securities professionals from the repercussions of their misconduct, Congress still wants corporate insiders to be held strictly liable for short-swing violations.

Related Web Resources:
Supreme Court turns down appeal from InfoSpace founder, Seattle Times/AP, March 9, 2009
InfoSpace

Supreme Court of the United States
Continue Reading ›

GM, Ford, Chrysler Retirees: Beware of Financial Advisors Seeking to Invest Your Severance!

Published on: March 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

About 7,500 General Motors workers have agreed to a buyout of early retirement incentives and leave, the company reported today. Chrysler has also agreed to extend its offers bo buy-out workers beyond tomorrow. This follows tens of thousands of other autoworkers workers who were in recent years persuaded to retire and retire early and receive large sums of money.

Unfortunately, many retiring persons have little if any experience in investing. Enter droves of salespersons hawking financial plans. In the past, strict laws and regulations were enforced regarding investors’ funds, especially retirement funds. As we have recently witnessed, securities regulators are apparently overwhelmed or incompetent. This has resulted in tragic results recently as retirees have not only lost their careers but also their only safety net.

For decades, Wall Street has blamed abuse of investors on a few “rogue” brokers. Now many believe it is Wall Street itself that is rotten to the core. In fact, the majority of financial advisors sincerely and diligently seek to serve their clients. Yet, many products they are told to sell are inappropriate, riddled with costs or just plain fraudulent. As well, too many of the worst of advisors attract unwary investors with false promises.

Victims of financial abuse are also often unaware they can recover undue investment losses according to the law. They must understand, however, that regulators “police” the industry, and write tickets when they catch the bad guys. In order to recover, victims almost always have to hire an attorney to represent them in court or securities arbitration.

Our law firm has represented thousands of investors, most who lost retirement funds, and many who are former autoworkers. If you or someone you know has lost retirement funds you feel were invested improperly, contact us today for a free consultation.
Continue Reading ›

First New York Securities LLC and Four Ex-Traders to Pay $435,000 in FINRA Sanctions Over Short Selling

Published on: March 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

First New York Securities LLC and four of its ex-traders have reached a settlement with the Financial Industry Regulatory Authority over allegations that they improperly covered short positions involving secondary offering shares, as well as engaged in associated oversight failures.

Per the FINRA settlement, First New York Securities LLC will pay $170,000 and disgorge $171,000. The former First Securities New York traders are to pay: $7,500 from Kevin Williams, $50,000 from Joseph Edelman, $30,000 from Michael Cho, and $30,000 from Larry Chachkes. By agreeing to settle with FINRA, the firm and its former brokers are not admitting to or denying the allegations.

FINRA says the trading addressed by the short selling case took place during a specific restricted period (usually five business days) when the Securities and Exchange Commission doesn’t allow for short sales to be covered with securities from secondary offerings and before the secondary offering is priced. This matter is addressed in Rule 105 of Regulation M.

The self-regulatory organization says that a 2005 probe found that the investment bank violated the rule related to five public offerings. The SRO says First New York Securities and its traders engaged in short selling during the period when they weren’t allowed to and covered short positions using shares from the offering. FINRA says that as a result, the firm and its four traders earned $171,504 and effectively got rid of their market risk.

FINRA also accuses the investment firm of neglecting to properly supervise its traders, as well as neglecting to establish proper supervisory procedures or to enforce such a system. The SRO also accuses First New York Securities of failing to maintain the proper books and records connected to the transactions that are being addressed.
Continue Reading ›

Associated Securities Ordered by Arbitrators to Pay $8.8 Million to Investors for Losses in APEX Equity Options Fund

Published on: March 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Members of 16 different California households were sold shares of APEX Equity Options Fund which collapsed in August 2007. Collectively, these investors lost almost $9 million. They contacted an experienced securities law firm which advised them to jointly file a claim in Securities Arbitration through The Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD)

The investors claimed that Jeffrey Forrest of WeathWise LLC failed to properly advise them when selling the shares of the APEC fund. Because Forrest was licensed as a securities broker by Associated Securities, the claim in arbitration included claims against Associated, which is responsible to supervise the activities of its brokers.

Because of the large number of parties involved, hearings on the arbitration claim lasted for 12 days. After the conclusion of the hearings the three person arbitration panel deliberated, then rendered an award requiring the respondents to pay back these investors all of their losses of $8.8 million.

Houston Broker at Deutsche Bank Alex Brown Leaves Suicide Note Suggesting Clients Sue over Aravali Fund

Published on: March 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Tales of the stock market crash of 1929 contain images of victims jumping from windows of Wall Street buildings. An eerily sign of the similarities to the current 21st Century crash may be the recent suicide of a despondent broker at Deutsche Bank Alex Brown Securities (Deutsche Bank), who left a note telling clients to contact a lawyer to seek recovery of losses.

A law suit, with Smith’s suicide letter attached, was soon filed by Bernard and Joan Spain, of Pennsylvania, and Lonnie Duncan, of California, trustee of the Duncan Family Trust. The initial paragraph of the letter states:

“Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.”