Investment Fraud

Risks of Self-Directed IRAs and Third-Party Custodians Underlined

January 8, 2015 | Malecki Law Team

The North American Securities Administrators Association (NASAA), an organization comprised of State securities regulators, recently issued an Investor Alert regarding self-directed IRAs and the third-party custodians who service those accounts. In fact, the term “custodian” may be a misnomer, because generally the third-party custodian does not custody any property, and only reports information to the IRS, or from an issuer to an investor.

According to the Securities and Exchange Commission’s Self-Directed IRAs Investor Alert, close to $100 billion was held in self-directed IRAs, making them possible targets for fraud. According to the SEC, self-directed IRAs are tax-deferred Individual Retirement Accounts that carry a financial penalty for premature withdrawals before the requisite age.

Investors certainly need to be wary of self-directed IRAs holding investments recommended by their financial advisor or registered representative. Increasingly, the attorneys at Malecki Law are seeing self-directed IRAs used as a means to fraudulently take money from investors. While they can be used for legitimate purposes, Malecki Law has seen self-directed IRAs used to funnel money out of legitimate investments into other investments that may be fraudulent.

As Oil Prices Drop, Investors Lose Millions

January 6, 2015 | Malecki Law Team

As oil prices have continued to plummet and commuters across the country have regaled the resulting savings at the pump, investors in oil and gas related stocks, ETFs and master limited partnerships have been shocked by the crushing losses on their brokerage account statements.

With interest rates near all-time lows, some financial advisors with clients seeking income have strayed from the usual safe, reliable treasury bills, high-grade municipal bonds, and the like, instead recommending riskier investments in search of higher yield and more income. If such investment advisors recommended securities tied to the oil and gas sector, the last few months may have proven disastrous for their clients.

For example, financial advisors have been known to recommend “Master Limited Partnerships” (MLPs), which offer an investor the opportunity by into an oil/natural gas discovery, production and distribution enterprise. While MLPs offer typically higher rates of income than more traditional investments, investors are frequently not advised by their financial advisor of the significantly higher risks. Unfortunately, investors who were sold MLPs as safe, income producing investments, may only be learning of these previously hidden risks now that their investment has dropped significantly in value.

Are Some Customers Paying Too Much In Fees? The SEC Cracks Down on Linkbrokers

August 15, 2014 | Malecki Law Team

“Is my stockbroker charging me too much in commissions and fees?” This is a common question many investors frequently have. Unfortunately, all too often, the answer to this question is “Yes.”

In fact, just yesterday, the SEC announced that it had fined a New York based broker-dealer, Linkbrokers (an affiliate of London-based ICAP), $14 million for over-charging its customers in the form of markups (and markdowns), among other things.

Markups are the difference between the lower price a broker-dealer can buy an investment for and the higher price charged to a retail customer when they buy investments directly from the broker-dealer’s inventory, rather than on the open market. For example, if a broker-dealer were able to buy a stock at $10 per share and charge a retail customer $11 for that same share, the markup would be $1. Markups are common in the financial services industry, but to be acceptable, they must not be excessive and must be appropriately disclosed to the customer.

Bitcoin Update: Alerts and Guidance Issued by the SEC, FINRA and IRS

May 9, 2014 | Malecki Law Team

It’s Buyer Beware, according to guidance and alerts issued recently by the SEC, FINRA and IRS concerning risks inherent in Bitcoin. Bitcoin is described by all three offices as a decentralized, peer-to-peer virtual currency that can be used in place of, and traded for, traditional currencies, though is not backed by any central authority, government bank or otherwise.

First, the IRS released Notice 2014-21 on March 25, 2014 in question and answer format to describe the tax implications of Bitcoin. Generally speaking, the IRS has taken the stance that Bitcoin will be considered property, and for investors, may constitute a capital asset, requiring reporting of gain or loss based on fair market value. Given the opaque nature of Bitcoin, this may cause further risks to investing, as investors may be required, by themselves, to calculate gains and losses, a job typically taken up by banks, wire houses and clearing firms.

The SEC, in its second Bitcoin alert dated May 7, 2014, reiterated risks associated with investments in the digital medium. Given that Bitcoin is a relatively new innovation, the SEC warned that it has a potential to give rise to frauds that may propose “guaranteed” high rates of return.

Is Your Broker Charging You A Fair Commission?

April 25, 2014 | Malecki Law Team

Is your broker charging you a fair commission? Not surprisingly, many investors do not fully understand how much they are paying in fees and commissions to their broker-dealer, and disparities from firm to firm can be wide and difficult to decipher. A recent study conducted by the North American Securities Administrators Association (“NASAA”), an association of state securities regulators, highlighted this issue, finding that investors would benefit from a “greater consistency and transparency in the disclosure of fees.”

The focus of the study was to examine the fee disclosures at thirty four (34) different broker dealers to compare methods of disclosure between firms and determine whether the customers were being adequately informed of the fee structure within their accounts.

As a result of the study, NASAA recommended that model fee disclosures be adopted to ensure that investors are accurately advised. The goal for model fee disclosures is to create something that will be simple and straight-forward, making it easier for customers to understand.

Whistleblower Due To Receive $63+ Million Reward

March 21, 2014 | Malecki Law Team

Keith Edwards, a former J.P. Morgan employee is due to receive a nearly $64 million payment from the U.S. government for the tips he provided as a whistleblower. Mr. Edwards provided information that led to a payment by J.P. Morgan to the government in the amount of $614 million stemming from insurance on home loans.

Allegedly, J.P. Morgan had been falsifying certifications for Federal Housing Administration and Department of Veterans Affairs loans, going back as far as 2002. As a result, the agencies reportedly suffered substantial losses.

It was reported that the $614 million was paid by J.P. Morgan to settle the charges levied against it as a result of Mr. Edwards’ tips. In settling, J.P. Morgan reportedly admitted to approving thousands of FHA and hundreds of VA loans that did not pass normal underwriting requirements.

Berthel Fisher and PNC Fined In Connection With The Sale Of ETFs

February 25, 2014 | Malecki Law Team

Just yesterday, FINRA announced that it has fined Iowa-based broker-dealer Berthel Fisher $775,000 for failures to adequately train and supervise brokers selling alternative investments, such as real estate investment trusts (“REITs”), and non-traditional exchange traded funds (“ETFs”), including leveraged and inverse ETFs.

In addition to REITs and ETFs, Berthel brokers also reportedly sold managed futures, oil and gas investments, equipment leasing programs and business developments companies, all while having “inadequate supervisory systems and written procedures for sales” of these investments.

Firms are required to have sufficient supervisory systems and written procedures for the sale of such investments to help ensure that these potentially risky and illiquid investments are only sold to investors for whom they are suitable and appropriate. Oftentimes, these investments are not appropriate for your average investor.

Buyers Should Beware when Considering Investments Involving Bitcoin

February 12, 2014 | Malecki Law Team

Bitcoin, and the exchanges that provide a space for trading Bitcoin, have received a lot of press lately. The Wall Street Journal reported on February 11, 2014 that the price of a Bitcoin dropped to approximately $650. This would be a significant drop from a trading high of over $1,100 per Bitcoin in mid-December 2013, according to CoinDesk’s Bitcoin Price Index.

As the Journal reported, the Slovenia-based Bitcoin-trading exchange Bitstamp halted customer withdrawals while Bulgaria-based BTC-e had delays in crediting transactions. This, apparently, came as a result of a hacker attack on the exchanges. Recently, Mt. Gox, a Tokyo-based Bitcoin trading exchange recently reported that it was halting withdrawals for a period of time after it discovered a software glitch that “could give rogue traders a way to falsify transactions,” as reported by the Journal. Incidentally, according to Wired, Mt. Gox stands for “Magic: The Gathering Online Exchange” and prior to 2011 was a digital trading exchange for Magic playing cards. According to that Wired article, in 2011, the website was changed to handle transactions exchanging Bitcoin.

Back in 2011, it was reported by Daily Tech that Mt. Gox was forced to shut down trading and “roll back” trades after 478 accounts were allegedly hacked, resulting in the withdrawal of a total of 25,000 Bitcoins. Mt. Gox reportedly informed investors that they “assume no responsibility should your funds be stolen by someone using your password,” and that the hacker made off with only 1,000 of the Bitcoins stolen. According to the Daily Tech article, the hacker gained access to the investors’ passwords by hacking Mt. Gox’s database.

Leveraged and Inverse ETFs Can Spell Trouble for Investors Who Buy Them and Brokerage Firms Who Sell Them

January 15, 2014 | Malecki Law Team

Just this past week, two brokerages units of Stifel Financial were ordered by the Financial Industry Regulatory Authority (“FINRA”) to pay more than $1 million related to the sale of leveraged and inverse exchange-traded funds (“ETFs”). Of the more than $1 million to be paid, $550,000 comes in the form of a fine to be split by Stifel, Nicolaus & Co., Inc. and Century Securities Associates Inc. The firms were also ordered to pay more than $475,000 in restitution to 65 customers to compensate them for losses incurred on ETF purchases.

According to the Wall Street Journal, FINRA said that some of the brokers who were selling the ETFs did not have a full understanding of the products they were selling, including the risks associated with them.

Brokerage firms can be fined and/or sued when they allow their brokers to sell unsuitable, or inappropriate, investments to customers, especially when the brokers have not been properly trained. Industry regulations require that a broker understand both the product they are selling and the customer to whom they are selling the product. Most importantly a broker must understand the risks of the products being sold and appreciate the customer’s ability (or inability) to tolerate risk. Brokerage firms are also required to train their brokers properly, including what qualifies as a suitable, or appropriate, recommendation to a customer.

REIT Investment on the Rise – But Is That a Good Thing?

October 1, 2013 | Malecki Law Team

As reported recently by the Wall Street Journal, investment in non-traded Real Estate Investment Trusts (“REITs”) is at an all-time high and poised to continue to rise. Some estimates anticipate more than $18 billion to be invested in non-traded REITs by the end of this year.

Solicited with the prospect of annual yields of more than 6%, income-seeking investors have had their hard-earned savings steered into non-traded REITs, oftentimes without a complete disclosure of the risks involved. Many brokers and financial advisors pitch REIT investments to their retirement and near-retirement aged customers, emphasizing the perceived “safety” of real estate investment coupled with the higher than normal annual yield, but do not fully explain the associated risks and bloated commissions (as high as 15% in some cases).

What many investors are not told is that because these investments are not publically traded, while the REIT itself may report to them a specific value for their shares, the actual value of their investment may not be readily available – and could even be 10-20% lower if sold on secondary markets. This discount is often caused by the illiquidity of the investment. In other words, sellers are forced to sell for less than what they paid in order to get out of the investment (also called liquidating the investment).