Problem Brokers

Malecki Law Founder Offers Insights on FINRA-Barred Brokers Continuing to Work in the Financial Services Industry

October 17, 2024 | Adam G. Schreck

Despite the weight that a FINRA Bar carries in the financial services industry, investigations show that barred financial professionals have had little trouble remaining employed in the financial services industry. Financial Advisor IQ, along with its sister publication Life Annuity Specialist, is conducting investigations into individuals barred by FINRA who continue to sell financial products, like insurance and annuities, to public investors under state-issued insurance licenses.

The publications have uncovered nearly 350 individuals who are barred by FINRA but maintain active insurance licenses in at least one state. These individuals often continue to sell financial products (other than insurance) to public investors well after they were barred from the industry by FINRA, but when pressed, merely disclose that they are selling “insurance.” If you have been defrauded by a FINRA Barred Broker, you should consult experienced Securities Arbitration Counsel, like the attorneys at Malecki Law in New York.

While insurance regulation varies state by state, some states treat a FINRA Bar as sufficient reason to revoke an individual’s state insurance license. However, other state regulators take a more laissez faire approach, requiring additional misconduct on the part of the barred individual before revoking their insurance license. The inconsistent approach amongst states leaves investors vulnerable to bad actors in the financial services industry.

How Might a Brokerage Firm Fail to Supervise Its Brokers’ Misconduct?

September 19, 2022 | Malecki Law Team

Securities Industry Background

The securities industry is one of the most regulated industries in the United States. Statutes, common law, and federal regulations all govern the conduct of securities firms and their representatives. Securities firms must register with the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulated organization (SRO) that protects investors by ensuring that the securities industry operates honestly and fairly. An SRO is an organization that has power to create and enforce industry regulations on its own. This means that FINRA has the authority to create and enforce its rules on securities firms that register with FINRA. A broker-dealer is a securities firm that must register with FINRA. Broker-dealers engage in the business of buying and selling securities. Broker-dealers also offer services such as trade execution, selling securities out of inventory, and lending. Since all broker-dealers and its registered representatives (its individual brokers) must register with FINRA, FINRA’s rules and regulations apply to broker-dealers. If you notice all your investments declined at the same time, it may be a clue that your broker engaged in misconduct. Your brokerage firm has a duty to supervise its brokers to detect and prevent misconduct. You may have a failure to supervise claim. You need a New York Failure to Supervise Lawyer like the lawyers at Malecki Law to review your portfolio, at no cost.

Failure to Supervise Broker Misconduct

Malecki Law Files Comment in Response to FINRA’s Proposed Modification to Rule 3240 Prohibiting Borrowing or Lending Arrangements Between Brokers and Their Customers

February 15, 2022 | Malecki Law Team

Yesterday, Malecki Law filed its official response to FINRA’s proposed changes to FINRA Rule 3240, in which FINRA seeks to modify the five current exceptions to the general rule that prohibits any “registered person” with a brokerage firm, from borrowing or lending to their customers. The rule applies to registered persons, which is most typically the account’s stockbroker, but applies to any licensed person with the firm. While FINRA has proposed this rule to “narrow the scope” of certain exceptions to the rule, Malecki Law filed its comment because of concerns that some of the modifications do not go far enough and still leaves room for possible abuse of the customer.

The five existing exceptions that currently permit borrowing or lending arrangements with a customer under Rule 3240 are if the customer is (1) a member of the registered person’s immediate family; (2) if the customer is a financial institution; (3) if the customer is also a registered person with the same firm; (4) if the lending arrangement is based on a personal relationship with the customer such that the arrangement would not exist had the personal relationship not existed in the first place; and (5) if the lending arrangements is based on a business relationship external to the broker-customer relationship.

Malecki Law is in favor of Rule 3240’s general prohibition against borrowing or lending to customers, because, as noted in Malecki Law’s filed comment, “there are thousands of brokers and advisors in America,” and therefore plenty “available to take over the debtor or lender’s investment account until the loan is repaid.” So while we support any proposal that narrows the rule, we believe that the inherent conflicts of interest in allowing such arrangements, even with a narrowed set of exceptions, could be entirely avoided in the first place.

Malecki Law Files Lawsuit On Behalf of Retired Investors Against Long Island Brokerage Firm Henley & Company LLC, Claiming Henley Failed to Supervise its Broker Philip Incorvia, Who Allegedly Operated a Ponzi Scheme for Fifteen Years out of a Henley Branch Office Until he Died

October 12, 2021 | Malecki Law Team

Malecki Law filed an expedited FINRA arbitration complaint today on behalf of a retired couple from New York alleging that their brokerage firm Henley & Company LLC failed to supervise its recently deceased, registered representative Philip Incorvia and the Henley branch office he worked out of. The complaint claims losses of approximately $2.5 million and that Henley essentially allowed Mr. Incorvia’s Ponzi scheme to flourish since about the time he joined Henley in 2006. Through these alleged supervisory failures and extreme negligence, the complaint alleges that Henley effectively promoted Mr. Incorvia’s fraudulent practices, including allowing him to freely run his own business, Jefferson Resources, Inc., out of the satellite branch office of Henley’s affiliate, SEC-registered investment advisory firm, Henley & Company Wealth Management, LLC, located at 10 Beatty Road, Shoreham, New York. Mr. Incorvia operated his Ponzi scheme out of this Jefferson entity housed right inside a Henley office, soliciting investor funds away from investor accounts at Henley to be invested directly into private “alternative” (i.e., fictitious) investments with Jefferson. Mr. Incorvia’s recent passing is what caused the Ponzi scheme to unravel. A Henley executive named in the complaint has further admitted to the existence of numerous other Henley customers who are only just discovering that they have been victimized as well.

The complaint alleges that Henley knew about the existence of Jefferson being run out of its own office but failed to follow industry rules to both report and supervise the activity. According to Henley’s BrokerCheck Report published by the Financial Industry Regulatory Authority (FINRA), the defendant brokerage arm of the firm (Henley & Company LLC) apparently failed to disclose the existence of its10 Beatty Road satellite office to FINRA. However, Henley’s advisory arm (Henley & Company Wealth Management, regulated by the SEC) did disclose it as an operational branch office in a public ADV filing to the SEC. The ADV filing further disclosed Henley’s awareness of Jefferson by reporting Mr. Incorvia’s association with Jefferson as its “President.” According to BrokerCheck, both Henley firms are under common supervisory control, have the same main office address in Uniondale, New York, and are owned by the same CEO, Francis P. Gemino, with common oversight by their managing director, Michael J. Laderer. Both Gemino and Laderer are named in the lawsuit as liable control persons.

FINRA’s supervisory rules require all brokerage firms to disclose and report all outside business activities of its registered representatives, further requiring firms to audit and supervise those businesses, especially if they are small branch offices. Both FINRA and the SEC have made clear that supervision of small, satellite branch offices require the same level of supervision as a main office. The SEC, for instance, takes the position that geographically dispersed offices staffed by only a few people are more at risk of fraud because “[t]heir distance from compliance and supervisory personnel can make it easier for registered representatives [like Mr. Incorvia] to carry out and conceal violations of the securities laws.”

Has Your Broker Employed an Options Trading Strategy That Suits Your Investment Goals and Priorities?

October 5, 2021 | Malecki Law Team

It is usually a bad sign when a retiree or the typical conservative investor suffers investment losses and brings a case to us where their broker was trading options. In such instances, it at least bodes well for a customer’s legal case when the investor has limited investing knowledge yet has somehow been approved by their brokerage firm for options trading. It is a sign that the investor may have been misled by a broker who was not properly supervised by the firm, as firms have a duty to know their customers and recommend investment strategies that are suitable to each investor’s risk tolerance and objectives. Very generally, options are not considered safe for conservative investors, but there are circumstances where they could be.

Options are considered high risk because they are derivatives of an underlying stock price, which gives investors a completely separate asset class of investment to speculate in. The speculation is a bet that not only tries to predict whether the stock price will go up or down to a particular price (known as a “strike price”), but whether it will reach or exceed that level within a specified timeframe (i.e., by the option contract’s expiration date). As the time frame gets closer and closer to expiration, the value of the options contract decays and becomes worth less and less over time, until it expires worthless, which is what happens with most options contracts. Moreover, when buying a stock, you simply pay the price of the stock. When buying an option contract, you pay a premium in addition to the price of the stock (should you decide or have the ability to later exercise that option). Therefore, buying shares in a specific stock is almost always a safer strategy than buying options for that same security.

Options differ from other asset classes in that they give the buyer (or seller) the right, but not the obligation, to buy (or sell) an underlying stock at a specific price on or before a specific date. It is the premium paid on an option that gives the purchaser the right (but not obligation) to later buy or sell, no different than placing a down payment on a home that you intend to later purchase at the agreed upon price. You could walk away from the purchase later and you only lose the premium. So by granting an investor a right, rather than an obligation, to transact in a certain security, options provide investors with the opportunity to speculate on the future price movement of that security. Although options allow investors to hedge, add cash flow, and leverage returns, options are inherently risky product because they are complex products that are wholly based on price speculation. It is, therefore, highly critical that your broker discuss all applicable risks with you before having an options trading strategy deployed in your account.

Is it Possible to Recover Stock Market Investment Losses? For Retirees Misled by a Broker, the Answer is Yes.

July 15, 2021 | Malecki Law Team

While the stock market and S&P 500 continue to hit all time highs, many investors still have the 2008 market collapse fresh in their memories and know that this historic bull run could, and likely will, come to an end. There are many signs that the market is overheated, leading some to have speculated that a correction is inevitable, if not imminent. One of many lessons from prior market collapses is that the investment portfolios most at risk are those which are not properly diversified and may be overly concentrated in either one security or one particular sector of the market. For retirees, in particular, it is possible to sue and recover such investment losses when following the advice of a licensed financial advisor.

The cratering of an investment portfolio can come as a shock to most investors, particularly retirees who have increased medical and age-related expenses, and are thus unable to afford a long wait until the market bounces back. In some instances, legal action may be necessary to recover the lost funds. While there is less legal recourse for investors who choose their own investments through a self-directed brokerage platform, the opposite is true for investors who still rely on licensed stockbrokers for financial advice. Both financial advisors and their brokerage firms can be held liable for recommending investment decisions that are poorly suited to the investor’s needs.

The brokerage industry is regulated by the Financial Industry Regulatory Authority (FINRA), which, until recently, has long imposed FINRA Rule 2111, known as the “Suitability Rule” on all licensed stockbrokers and the brokerage firms that employ them. Under Rule 2111, brokers were required to have a reasonable basis for recommending a transaction that reasonably considers a broad range of factors, which “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”

SEC Action and Criminal Charges Brought Against Michael Barry Carter of Morgan Stanley

August 2, 2020 | Malecki Law Team

On July 20, 2020, the Securities and Exchange Commission brought investment advisor and former registered representative Michael “Barry” Carter up on multiple federal charges relating to the alleged misappropriation of over $6 million in funds. Mr. Carter allegedly stole this money from his brokerage customers, including nearly $1 million from one elderly client, defrauding them in the process in an effort to remain undetected. His alleged fraudulent acts occurred between the fall of 2007 and spring of 2019 while working at Morgan Stanley, with over 40% of the misappropriation occurring in the last five years, all to sustain his extravagant lifestyle.

Mr. Carter was reportedly fired from Morgan Stanley in the summer of 2019 for misappropriation of funds. Later that fall, FINRA launched an investigation into his alleged crimes and he was then barred by FINRA for refusing to turn over documents relating to the alleged misappropriations.

Additionally, the state of Maryland reportedly brought criminal charges against Mr. Carter, to which he has already pled guilty to the investment advisory fraud charges and wire fraud; as part of his plea agreement he will, according to prosecutors, be required to pay back about $4.3 million, the total net proceeds of his illegal activities.

What To Expect When You File a FINRA Arbitration Claim

July 9, 2020 | Malecki Law Team

Filing a claim for most investors is a walk over a new bridge and involves doing something they have never done before: filing a “lawsuit.” Most people never wanted to have anything to do with the law, but if you lost your life savings, you really do not have much of a choice but to fight to get it back. The stress you may feel engaging in this process can be mitigated by understanding what lies ahead to prepare yourself mentally, emotionally and physically – by getting your evidence lined up. Outlined below is the process of filing a claim in arbitration through the final days of trial, which will hopefully bring ease to questions you may have regarding investor arbitrations.

In today’s world, many people invest their money as a way to increase their income. Some choose to invest on their own, while others use brokers and investment advisors. As with any job, unfortunately in these professions, bad apples do exist. Where wrongdoers exist, they cause harm to their clients and to their clients’ investment accounts. If this happens, clients can sue their broker by filing an arbitration claim within the dispute resolution forum of the Financial Industry Regulatory Authority (FINRA) – the only forum for retail investors to sue brokers and brokerage firms. The initial claim papers filed details the party or parties that have wronged you, specifies the relevant facts of the events leading up to and causing the harm in your investment account(s), and lists the remedies requested. When deciding on whether to file an arbitration claim with FINRA, Malecki Law’s FINRA arbitration attorneys can help discuss the merits of your claims and frame them in what is known as a “Statement of Claim,” like a complaint pleading in court.

Once a Statement of Claim arbitration has been filed with FINRA, the party or parties you are suing, also known as the “respondent(s),” have 45 days to file a response, which is called the “Statement of Answer.” The Answer will typically include relevant facts, supporting documents, and defenses from the perspective of the broker or firm you are suing. One can anticipate that in the Answer the respondent(s) will try to discredit your claims. Malecki Law is skilled and very familiar with debunking these typical defenses, as well responding to any creative new tricks. After reading the Answer, you have the opportunity to amend your Statement of Claim if you feel something should be changed from your originally filed claim.

Can FINRA Arbitration Claims Be Brought Against a Bank and Its Employees?

June 29, 2020 | Malecki Law Team

Many clients are asking whether FINRA arbitration claims can be brought against a bank and/or its employees for losses sustained in their investment accounts. The answer is yes. There are more than 5,000 commercial banks in the United States. Along with traditional banking services, many of these banks also provide in house “financial advisors.” In order to charge their customers more, these bank branch financial advisors encourage bank customers to invest their savings with them. Now more than ever, bank customers are being pressured into using these services, and their life savings are being invested rather than saved. This can lead to losses in customer accounts, where customers would have been better off keeping their funds in a savings account. Malecki Law’s FINRA arbitration attorneys have handled many cases involving claims where customers lost money investing with a commercial bank financial advisor.

Up until Congress repealed the Glass Steagall act in 1999, commercial banks, banks that take in cash deposits and make loans, could not offer investment services. The Glass Steagall Act separated commercial banks and investments banks and prohibited commercial banks from providing any investment service to its customers. Once the act was repealed, in order to make greater profit, banks took advantage and began offering these services. Although banks often incentivize their customers to use these services, such as offering lower fees or free checking, the bank’s investment services, however, are not free.

Investing funds with a bank is no safer than investing funds through an online or traditional brokerage firm. Customers ordinarily use banks for savings, checking, CDs, and, sometimes, securing a mortgage or other type of loan. These types of accounts are a bank’s specialty and are FDIC insured, meaning that these are vehicles designed to prevent the loss of money in customer accounts. Contrarily, investments are not a bank’s specialty and investing with a bank’s financial advisor, similar to making an investment in an online or traditional brokerage account, comes with risk, often incurring higher fees than an online or traditional brokerage account. Moreover, not only do the investment products offered at banks charge higher fees, but the quality and diversity of investment products is limited, which increases risk to the customer’s investments.

The Wolves are Still on Wall Street: What is Going on at Paulson Investment Company LLC?

February 7, 2020 | Malecki Law Team

Last week, the Financial Industry Regulatory Authority (FINRA) censured and assessed a fine of $50,000 against a national investment firm, Paulson Investment Company LLC, in connection with its sale and solicitation of private placement offerings to investors, in violation of Rule 506 of Regulation D and Section 5 of the Securities Act of 1933. Among other things, Regulation D (more commonly known as Reg D) provides a legal “safe harbor” for investment firms to sell and market private placements, which are restricted securities (i.e., not traded on a public market and therefore carry more risk), to no more than 35 non-accredited investors, provided the firm has a pre-existing relationship with that investor. The law is intended to prevent advertising and marketing to non-accredited investors – a legal term for those who do not have the requisite financial means to bear risk or who are unsophisticated and cannot appreciate the risks of purchasing an investment that is typically illiquid and cannot readily be traded on a national exchange. In violation of Reg D, as well as FINRA Rule 2010 (requiring all member firms to conduct their business with high standards of commercial honor), FINRA found that Paulson solicited 11 individuals and sold six separate private placement offerings, totaling approximately $4.5 million, prior to having a pre-existing and substantive relationship with these investors.

Perhaps this barely registers as a newsworthy event; brokerage firms are censured and fined all the time by regulators, and for much more than $50,000. Paulson is considered a small to medium-sized firm and it is registered in 53 states and territories. The firm has been licensed as a member brokerage firm with FINRA since 1971 and has carried its registration as an investment advisory firm with the Securities and Exchange Commission (SEC) since 1983. However, there are other recent developments at Paulson, particularly at its 40 Wall Street office in New York City, which should give pause to any investor or prospective retiree.

While Paulson derives more than 50% of its revenue from underwriting activities, it also engages in general brokerage activities by buying and selling investments for retail investors. Among the brokers or registered employees at its Wall Street address, there are currently seven individuals with at least 3 or more public disclosures in the Central Registration Depository (CRD) known as BrokerCheck, a national database that tracks the background and disciplinary history of stockbrokers and other financial professional concerning customer complaints, regulatory or criminal events, and other financial disclosures (such as personal bankruptcy or tax liens). This is significant, because, according to FINRA, most brokers have a clean history, with approximately 4% having been subject to at least one customer complaint, but only less than 0.41% with 3 or more BrokerCheck complaints. Paulson’s Wall Street office alone employs seven such individuals with 3 or more disclosures. But this is only scratching the surface.