Problems at Broker Dealers

Broker Keith M. Rogers Indicted on Securities Fraud Charges in Alabama

June 24, 2015 | Malecki Law Team

It was recently reported that Keith M. Rogers, formerly employed by GLS & Associates, Inc., a FINRA broker-dealer, has been indicted and held on $2 million bond on securities fraud charges, where it was reported that he took investors’ money to pay for personal expenses and repay other investors, a classic Ponzi scheme scenario. Previously, it was reported that Mr. Rogers was ordered by the Alabama Securities Commission to cease and desist from dealing in securities in the State of Alabama. In September 2014, Mr. Rogers apparently consented to a bar from the securities industry was barred from the securities industry by the Financial Industry Regulatory Authority (FINRA) for failing to cooperate in FINRA’s investigation into Mr. Roger’s alleged diversion of customer funds away from GLS brokerage accounts. According to the Administrative Order filed by the Alabama Securities Commission Mr. Rogers facilitated transactions in a company called R&P Development LLC from 2009 through 2013, when he was registered by GLS & Associates, Inc. and Warren Averett Asset Management.

FINRA specifies strict rules on a broker’s ability to solicit business to businesses that are not run by their employing broker-dealer. Malecki Law attorneys have seen instances where employing broker-dealers fail to properly supervise a broker’s activities. According to FINRA Rules, Broker-dealers like GLS & Associates Inc. have an important non-delegable duty to supervise the conduct of their financial advisors and employees. The firm may be held liable for customer losses if the firm failed to properly supervise their employees. If a broker violates FINRA Rules or securities laws, both the broker and the broker’s employing firm may be held liable for the customer’s losses.

Malecki Law has previously represented many investors successfully in FINRA arbitration proceedings involving outside business activities and firms’ failures to supervise their registered representatives and financial advisors. If you believe you have suffered losses as a result of questionable actions taken in your securities account, please contact us immediately for a confidential consultation.

New York based Arjent, LLC Executive Robert DePalo Indicted by Manhattan District Attorney

May 22, 2015 | Malecki Law Team

Foreign investors continue to be targets of investment fraud. Bloomberg Business has reported that broker-dealer Arjent LLC Chief Executive Officer Robert DePalo has been indicted by a New York Grand Jury on charges related to misappropriation of $6.5 million from U.K. investors for personal expenses, including his mortgage and luxury cars. In addition to the action brought by the New York Manhattan District Attorney, the Securities and Exchange Commission has announced that it also brought its own parallel action in Manhattan federal court.

According to the article, Mr. DePalo is alleged to have misappropriated millions from foreign investors in a holding company called Pangaea Trading Partners LLC. Mr. DePalo is alleged to have engaged in high-pressure sales tactics and stating falsehoods about the company’s assets and how it would invest the money received. The Bloomberg article reported that according to the SEC, the Mr. DePalo transferred the money directly into bank accounts controlled by himself and his partner Joshua Gladtke. The SEC is reported to also have alleged that Mr. DePalo sought to cover up the fraud from regulators.

Lately, the attorneys at Malecki Law have noticed an uptick in schemes, including high-pressure sales tactics, targeting foreign investors. These tactics may include little-known securities investments, repeated calls and emails to the targeted investors and misrepresentations made concerning the viability of the company that issued the underlying securities.

Broker Dealer Financial Services Corp. Fined By FINRA Over Nontraditional ETF Sales and Improper Supervision

May 21, 2015 | Malecki Law Team

Broker Dealer Financial Services Corp. (BDFS) based out of West Des Moines, Iowa just learned the hard way that nontraditional Exchange Traded Funds (ETFs) are risky, speculative investments and are not appropriate for all investors.

The Financial Industry Regulatory Authority (FINRA) recently fined BDFS $75,000 for 1. failing to properly supervise the sale of leveraged ETFs to its customers, 2. not properly training its sales force about the appropriate use of leveraged ETFs in customer accounts, and 3. not adequately supervising nontraditional ETF activity in customer accounts.

According the Letter of Acceptance, Waiver, and Consent, from March of 2009 to April of 2012, BDFS “recommended nontraditional ETFs to more than 200 customers” without “a reasonable basis for believing that the nontraditional ETF transactions it recommended were suitable for any investor.” BDFS’s ETF related misconduct was said to have violated NASD Rules 2310 and 3010 along with FINRA Rules 2010 and 2111.

Malecki Law Announces Investigation of Former PrimeSolution Securities, Inc. Brokers Jeffrey Gainer, Jerry Cicolani, Jr. and Kelly Hood

May 11, 2015 | Malecki Law Team

This oil and gas investment was a bust, but not because of the current market conditions. According to Securities and Exchange Commission (SEC) court filings, brokers Jeffrey Gainer, Jerry Cicolani, Jr. and Kelly Hood were terminated from their employer PrimeSolutions Securities, Inc., a Cleveland, Ohio broker-dealer, as a result of marketing and recommending investments in KGTA Petroleum, Ltd. In its complaint filed in the United States District Court for the Northern District of Ohio, the SEC described KGTA Petroleum, Ltd. as a scam and Ponzi scheme. As reported recently by Crain’s Cleveland Business, the FBI announced on April 15, 2015 that Mr. Cicolani had been charged criminally as a result of selling unregistered KGTA Petroleum, Ltd. securities.

Brokers Gainer and Cicolani allegedly engaged in three separate fraudulent acts by recommending the KGTA investments without properly registering the securities, engaging in “selling away” activities by selling the KGTA investments not through their employer, PrimeSolutions Securities, Inc., and failing to disclose to their public investor customers the very large fees they earned as a result of the recommendations and placements. According to the SEC complaint, Brokers Gainer and Cicolani earned approximately $6 million in fees, or around 29% of all funds raised in the fraudulent KGTA investments.

The SEC detailed in its complaint that the investments KGTA Petroleum, Ltd. held by customers were often in the form of “promissory notes” or “agreements,” but really represented a typical Ponzi scheme, with interest and other payments made to old investors from the funds of new investors. The SEC complaint alleged that the scheme affected at least 57 customers.

JP Morgan Investigated By SEC and Other Authorities Over Sale of Proprietary Products

May 8, 2015 | Malecki Law Team

Is it okay for a broker-dealer to use bonuses and other incentives to encourage its financial advisors to steer customers into “in house” and proprietary funds that may not be right for them just to generate more fees for the firm? Or does this practice improperly (and illegally) incentivize the financial advisor to betray his customer’s trust for his and his firm’s benefit – thereby compromising the integrity of the relationship?

The SEC is asking just those types of questions about the practices of JP Morgan, according to recent reports. Per InvestmentNews, the SEC and other regulators have subpoenaed and otherwise inquired of JP Morgan about the firm’s sales practices. Specifically, the reports indicate that the focus seems to be on conflicts of interest related to the sales of mutual funds and other proprietary products to customers. The SEC is reportedly looking into whether JP Morgan breached duties to its customers and/or applicable laws by unfairly and/or illegally marketing its in house investment products.

The sale of in-house proprietary products can be a very lucrative business for large “wire houses” as they are known in the industry. Wire houses include such familiar names as JP Morgan, Merrill Lynch, Citigroup, Wells Fargo, etc. By performing all of the structuring, issuing, lending and selling for their proprietary funds internally, a wire house is able to capture all of the associated fees, commissions and charges. Therefore, it is important that regulators review the sales of such in house products, to make sure they are being sold fairly and legally to customers.

FINRA Alleges Substantial Fraud Claims Against Avenir Financial Group

May 6, 2015 | Malecki Law Team

Senior-aged investors continue to dominate securities related news coming out of the Financial Industry Regulatory Authority (FINRA). Though Avenir Financial Group, a New York-based broker-dealer, has only been a FINRA member for three years, the regulator has alleged substantial fraud claims against the firm, the firm’s Chief Executive Officer and Chief Compliance Officer Michael Clemens and several registered representatives.

In a New Release dated April 27, 2015, FINRA alleged that Avenir and registered representative Karim Ibrahim (a/k/a Chris Allen) defrauded a 92 year old customer of the firm by selling equity interests in the firm based on misleading and fraudulent terms. FINRA alleged that Mr. Ibrahim was aware that the firm was financially struggling, yet offered 5% of the company for $250,000, a valuation that was materially misleading because other investors had previously been offered lower prices and there was no basis for the change in the prices. FINRA alleged that Mr. Clemens aided and abetted the fraud by instructing Mr. Ibrahim regarding the proposed sale to the senior-aged customer.

In the related FINRA Complaint, FINRA detailed that Avenir “inexplicably” increased the equity share offerings. For example, the Complaint stated that a one percent share increased from an initial offer of $2,600 to a third offering costing $50,000. During this time, Avenir was allegedly suspended from operating a securities business when its net capital decreased below regulatory thresholds, and the firm faced an approximate $200,000 margin call that would have closed the firm had it not been for the investor who purchased the third offering.

LPL Financial Settles Supervisory Failure Charges with FINRA for $11.7 Million

May 6, 2015 | Malecki Law Team

LPL Financial agreed to pay more than $11 million to settle charges in connection with a Financial Industry Regulatory Authority (FINRA) investigation into the firm, as recently reported in the Wall Street Journal. According to the Letter of Acceptance Waiver and Consent filed with FINRA, LPL Financial was alleged to have supervisory failures, related to non-traditional products such as exchange traded funds (ETFs), variable annuities, and non-traded real estate investment trusts (REITs).

LPL allegedly failed to deliver over 14 million trade confirmations in addition to failing to properly monitor and report trades. Of the amount collected, $1.7 million is reportedly restitution for customers, while LPL Financial was fined an additional $10 million.

Vigilant supervision over the sale of non-traditional investments is especially important because public customers are typically unfamiliar with the products being sold to them. In addition, many non-traditional products have higher commissions (meaning a bigger incentive for a broker to sell such products) than their more traditional counterparts.

FINRA Orders RBC Capital Markets, LLC to Pay $1.4 Million for Failing to Supervise Unsuitable Sales of Reverse Convertible Securities

April 27, 2015 | Malecki Law Team

In what appears to be another example of broker-dealers continuing to ensure that the wrong speculative securities are sold to the wrong investors, the Financial Industry Regulatory Authority (FINRA) announced in a News Release on April 23, 2015 that RBC Capital Markets, LLC was fined approximately $1 million and ordered to pay restitution of approximately $400,000 for the firm’s failure to supervise the unsuitable sale of reverse convertible securities to public investors. According to FINRA Letter of Acceptance, Waiver and Consent No. 2010022918701 (AWC), a reverse convertible securities are “a complex structured product” that are interest-bearing notes in which principal repayment is linked to the performance of an underlying asset like a stock, a basket of stocks, or an index like the S&P 500.

In the News Release, FINRA’s Chief of Enforcement is quoted as stating: “[s]ecurities firms must ensure that their brokers understand the inherent risks associated with the complex products they are selling, and be able to determine if they are suitable for investors before recommending them to retail customers. When the firm establishes suitability guidelines, it must police the transactions to ensure they appropriately meet their own criteria.”

According to the AWC, RBC had faulty policies and procedures in place that did not appropriately supervise the recommendation of reverse convertibles to public investors. RBC’s failure to supervise the recommendation of reverse convertibles also occurred because the policies and procedures in place were not effectively enforced, according to the AWC. The AWC detailed that RBC failed to detect that more than a quarter of transactions in reverse convertibles “were unsuitable” and were inappropriately recommended to public investors with lower than necessary income, net assets, net worth and/or investment experience, or risk tolerances.

FINRA Fines H. Beck, Inc. for Insufficient Supervision

April 24, 2015 | Malecki Law Team

Just this past month, H. Beck, Inc. of Bethesda, Maryland submitted a Letter of Acceptance Waiver and Consent (“AWC”) to settle alleged FINRA Rule violations concerning the failures in the firm’s supervisory system and written supervisory procedures. H. Beck is said to have more than 800 registered representatives based out of over 460 registered branch offices.

Specifically, it was alleged in the AWC that the firm failed to maintain a supervisory system reasonably designed to ensure that customers received certain sales charge discounts. H.Beck was also alleged to have insufficient supervisory procedures governing the use of consolidated reports with customers, leading to inaccurate information being sent to customers.

According to the AWC, H. Beck failed to “identify and apply sales charge discounts to customers with eligible purchases of UITs.” A UIT, or uniform investment trust, is a type of investment company that offers undivided interests in a portfolio of securities. These interests are frequently called “units.”

FINRA Censures EDI Financial, Inc. related to the Solicitation and Sale of Private Placements

April 23, 2015 | Malecki Law Team

EDI Financial, Inc. in Irving, Texas has been censured and fined $100,000 by the Financial Industry Regulatory Authority, according to a recent report issued by FINRA. According to the report, EDI Financial entered into a Letter of Acceptance Waiver and Consent (“AWC”) with FINRA consenting to the fine and censure along with the entry of findings that it failed to “adopt and implement supervisory systems and procedures necessary to achieve compliance with the firm’s suitability obligations.” According to FINRA, the failures of the firm’s supervisory system related to the solicitation and sale of private placements, specifically customer suitability.

Firms and their registered representatives have an obligation to ensure that all investments recommended to their customers are suitable (in other words, appropriate) for the customer. Firms have an obligation to consider things such as the customer’s risk tolerance, age, income, and investment objective, among others.

Notwithstanding this obligation, it was alleged that “despite the risk and illiquidity of private placements” EDI failed to have appropriate supervisory procedures in place with respect to the proportion of a customer’s assets that could be put in the private placement. This is known in the industry as “concentration.”