Securities Fraud & Unsuitable Investments

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.

Steep Market Selloffs May Uncover Risks in Accounts Such as Adverse Consequences of Margin

January 27, 2014 | Malecki Law Team

It was reported by Bloomberg News on Friday January 24, 2014 that there was a “massive selloff” in emerging markets that led to a decline of approximately 2% to the Dow Jones Industrial Average and S&P 500. It is during such fast and sudden selloffs that underlying problems in public investors’ brokerage accounts are typically uncovered.

At Malecki Law, we have seen an increase in claims arising from margin in investors’ accounts. Overwhelmingly, investors were not informed about the risks of buying securities on margin and were only told that they could make more money by leveraging their accounts to buy more securities. However, without fully understanding the risks of products and services such as margin, public investors cannot make a fully informed decision about whether it is suitable for them.

Margin is essentially a loan from the brokerage firm to the investor. The effect of margin is not similar to that of a typical home mortgage, because the securities or cash in the investor’s brokerage account serves as collateral for the loan and large market drops can cause margin calls, request for more money or collateral or a sell-off of positions. Investors may use margin to increase their purchasing power or “buying power,” as some brokers like to say. However, it is very important that the investor is fully informed of all risks associated with the use of margin, including that they can lose more than they borrow.

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).

Criminal Charges Filed Against SAC Capital Adisors

August 2, 2013 | Malecki Law Team

As has been widely reported, Criminal charges were filed against SAC Capital Advisors LP, with accusations that the hedge-fund firm is guilty of a decade long “scheme” of insider trading. In total, prosecutors charged SAC Capital and its business units with a total of four counts of securities fraud and one count of wire fraud. The charges come after a multiyear investigation by the FBI, prosecutors, and the SEC. The government is also accusing former SAC portfolio manager, Richard Lee, of conspiracy to commit securities fraud. The indictment comes only a short time after SAC agreed to a $616 million settlement of insider-trading charges.

Civilly, prosecutors are looking to have SAC and any of its affiliated corporate entities surrender all of their assets. SAC manages some $14 billion in assets, a majority of which does not come from outside investors.

In a separate civil action, the SEC is seeking a lifetime ban for Steven A. Cohen, who started SAC twenty-one years ago with roughly $20 million of personal funds, from managing client money. Mr. Cohen has not been charged criminally but denies any allegation of wrongdoing. Before the financial crisis of 2008, SAC held over $16 billion in assets and reportedly charged some of the highest fees in the business – 3% annually on the total investment, plus as much as 50% of whatever profits the firm generates.

Maxwell B. Smith Sentenced for Running a New Jersey Ponzi Scheme: Investors Should Look to His Brokerage Firm for Relief

June 12, 2013 | Malecki Law Team

Maxwell B. Smith was sentenced to serve the next seven years in federal prison for operating a $9 million Ponzi scheme. Maxwell sold investments as a fund that made loans to nursing homes. Smith had previously plead guilty to several counts of mail fraud as well as money laundering.

It is believed that Smith was employed as a financial professional at several financial firms in New Jersey, where he provided financial advice to his clients, many of whom may have lost money to his Ponzi scheme, Health Care Financial Partners (“HCFP”), purportedly a fund with hundreds of millions of dollars in assets. Investors even received a prospectus guaranteeing 7.5% to 9% per year, tax free. Investors could buy bonds in amounts ranging from $25,000 to $300,000.

Investors may not know that broker-dealers, like the ones that it is believed registered Mr. Smith, have a duty to supervise their employees. As a result, in situations like these, investors may be entitled to recover against the financial firms that employed the financial advisor for failing to supervise their employee.

Jenice Malecki of Malecki Law Speaks with the Wall Street Journal About “Ending Up In Arbitration”

March 20, 2013 | Malecki Law Team

Securities attorney Jenice Malecki spoke recently with Wealth Management at wsj.com‘s Caitlin Nish about what makes a strong investor claim against a broker and the steps that lead up to brokers having to defend themselves in arbitration.

To watch the video click here.

Investors who have lost money because of bad advice, unsuitable investment recommendations and misconduct by their financial advisor may seek to recover their losses through arbitration.

FINRA Fines Ameriprise and its Clearing Firm $750,000 For Failing to Supervise Jennifer Guelinas

March 19, 2013 | Malecki Law Team

The Financial Industry Regulatory Authority, (FINRA) issued a news release on March 4, 2013 announcing that it had fined Ameriprise Financing Services, Inc. and its affiliated clearing form American Enterprise Investment Services, Inc. $750,000 for failing to have reasonable supervisory systems in place to monitor wire transfer requests. In the News Release, FINRA disclosed that its investigation was related to Ameriprise’s former registered representative Jennifer Guelinas, who apparently converted approximately $790,000 over four years from two of her clients by forging wire requests that paid in to accounts she controlled.

According to the News Release, Ameriprise failed to detect several “red flags,” including that Ms. Guelinas submitted forged wire requests from a customer’s account to an account that appeared to be under her control. FINRA further disclosed that on at least three occasions where Ameriprise initially rejected wire requests, they were then accepted on either the same day or another day after simply being resubmitted by Ms. Guelinas. The News Release stated that Ameriprise also accepted one request after it had begun to investigate Ms. Guelinas, and accepted another wire transfer request that was submitted by Guelinas after she was terminated, though the firm recognized its mistake in time before the money was accessed.

FINRA Rules require that securities firms have and enforce reasonable supervisory procedures in place to monitor each registered representative’s conduct to ensure that they are acting in compliance with securities laws. According to the News Release, Ameriprise did not have adequate reasonable supervisory procedures in place. The FINRA News Release stated that Ameriprise had already paid full restitution to the two customers for losses in their accounts.

Citigroup Reportedly Agrees to Settle Class Action For $730 Million

March 19, 2013 | Malecki Law Team

It has been reported that New York based Citigroup has agreed to pay $730 million to settle claims that it misled investors with respect to nearly 50 bond and preferred stock offerings over a period of more than 24 months between 2006 and 2008. The investors’ claims were said to be based on misleading statements from the bank over Citigroup’s exposure to mortgage backed securities, its loss reserves, and the credit quality of some of its held assets.

Before the settlement can be finalized, it must be approved by the US District Court in Manhattan. If approved, it would be the second largest financial crisis related settlement to date – trailing only Bank of America’s $2.43 billion settlement related to its purchase of Merrill Lynch. According to the Wall Street Journal, Citigroup claimed to have done nothing wrong and stated that it settled to avoid the trouble and costs of extended litigation.

This is just one more of many such settlements that have resulted from the financial crisis, totaling billions of dollars that have been returned to investors. Just last year, it was reported that Citigroup paid $590 million to settle allegations by investors that it misled shareholders about other problems in 2007 and 2008. Wachovia and Bank of America, among others, have also been reported to have recently reached settlements in excess of $500 million with investors.

FINRA Permanently Bars Florida-Based Broker Jeffrey Rubin for Unsuitable Investment Recommendations to NFL Players

March 14, 2013 | Malecki Law Team

The Financial Industry Regulatory Authority (FINRA) issued a news release on March 7, 2013 announcing that it had permanently barred Mr. Jeffrey Brett Rubin from the securities industry as a result of his unsuitable investment recommendations and unapproved securities transactions to 31 NFL Players. In FINRA’s news release and in the underlying Letter of Acceptance, Waiver and Consent (AWC), FINRA detailed that Mr. Rubin was recommended that one of his clients, an NFL player, invest $3.5 million, a majority of his liquid net worth, in to high-risk securities, including a large $2 million investment in an Alabama casino, resulting in losses of approximately $3 million.

Moreover, Mr. Rubin is alleged to have sold this investment away from his firms Lincoln Financial Advisors Corporation and Alterna Capital Corporation, where he was successively licensed as a broker between March 2006 and June 2008. Alterna Capital Corporation terminated or withdrew its FINRA registration on September 24, 2009, according to its FINRA CRD report.

According to reports, Mr. Rubin apparently continued to refer additional NFL players while registered as a broker with Alterna and International Assets Advisory, LLC. In total, FINRA found that over about a three year period, Mr. Rubin referred approximately 30 players, who invested approximately $40 million in the same Alabama casino project. For his referrals, Mr. Rubin was given a 4% ownership stake in the casino project, as well as $500,000 from the project promoter, seemingly placing his interests ahead of his clients.