New York Securities Fraud Lawyers Blog

Biggest Recent FINRA Fines Point to Poor Supervision at Large Broker-Dealers

April 11, 2014 | Malecki Law Team

Apparently the opportunity for bad brokers to engage in wrongful conduct is enabled by big brokerage firms, as recent Financial Industry Regulatory Authority (FINRA) fines indicate that these businesses fail to properly supervise their foot soldiers. The FINRA Rules, including Rule 3010, make clear that broker-dealers are the securities gatekeepers, because they are ultimately responsible for supervision of their brokers. Not all brokers take advantage of their customers, but those who do will certainly feel emboldened to continue their schemes if they know they can print account statements listing fictitious investments, or make misrepresentations to clients over emails they know will never be supervised.

InvestmentNews recent reported regarding the largest recent fines handed out by FINRA. The fines, some mentioned in prior blog posts, point to continued poor supervision at large broker-dealers.

For instance, we recently commented regarding FINRA’s announcement on February 24, 2014 of a $775,000 fine for Berthel Fisher & Company Financial Services, Inc. and its subsidiary for failure to supervise brokers on recommendations and sales of alternative investments such as non-traded real estate investment trusts (REITs) and leveraged and inverse exchange-traded funds (ETFs).

Managed Futures Fund Fees: When Is Enough Enough?

April 4, 2014 | Malecki Law Team

When are money management fees too much? It is hard to imagine that any investor who has sought the guidance of professional financial advisors has not asked himself or herself this question at least once – most likely more. In the case of managed futures, the CFTC is asking that question for investors right now. Following an article in Bloomberg Magazine in the Fall of last year, 2013, the CFTC has launched a probe in to the fees charged by those who manage the more than $300 billion in the managed futures market.

According to the Bloomberg report, investors in 63 managed futures funds paid out 89% of the $11.51 billion in gains from managed futures investors in the form of fees, commissions and expenses from January 1, 2003 to December 31, 2012 – more than $10.2 billion.

Bloomberg quoted Mr. Bart Chilton, a member of the Commodity Futures Trading Commission as saying:

FINRA Files LPL Financial for Failures to Supervise Alternative Investments

March 27, 2014 | Malecki Law Team

LPL Financial LLC has been hit again for supervisory failures stemming from the recommendation of non-traded real estate investment trusts (REITs), as well as other illiquid investments, begging the question whether the fines are large enough to deter future bad conduct. According to a news release dated March 24, 2014, the Financial Industry Regulatory Authority (FINRA) announced that LPL Financial has been fined $950,000 for the firm’s failures in supervision over alternative investments, including non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid pass-through investments.

LPL Financial submitted a Letter of Acceptance, Waiver and Consent No. 2011027170901 (AWC), in which it admitted to “fail[ing] to have a reasonable supervisory system and procedures to identify and determine whether purchases of [alternative investments] caused a customer’s account to be unsuitably concentrated in Alternative Investments in contravention of LPL, prospectus or certain state suitability standards.” LPL also admitted in the AWC that though it had a computer system to assist and supervision, this computer system did not consistently identify alternative investments that fell outside of the firm’s suitability guidelines. Additionally, LPL stated that its written compliance and written supervisory procedures failed to achieve compliance with NASD Rule 2310 and state suitability standards.

NASD Rule 2310 has since been superseded by FINRA Rule 2111. The current rule establishes the industry standard that FINRA members and their employees must have a reasonable basis to believe their recommendations are suitable for their customers. The Rule further dictates that the firm must establish suitability for each customer by considering 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, though this list is not exclusive.

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.

Jenice Malecki Of Malecki Law Heads To Washington To Meet With Congressmen And Senators About Investor Protection

March 13, 2014 | Malecki Law Team

Jenice Malecki of Malecki Law will be in Washington, D.C. tomorrow to meet with Congressmen and Senators along with others from the Public Investors Arbitration Bar Association (PIABA) to advocate for the Investor Choice Act and federal legislation to increase transparency and accountability from our financial regulators.

Ms. Malecki will be meeting with Rep. John Dingell (D-MI), Senator Kirsten Gillibrand (D-NY), Rep. Stephen Lynch (D-MA), Senator Charles Schumer (D-NY), and Rep. Blaine Luetkemeyer (R-MO).

The primary significance of the Investor Choice Act will be the elimination of pre-dispute arbitration agreements that are commonly used in broker-dealer and investment advisor contracts. These agreements force customers who sue their broker, advisor or firm to pursue their claims only in arbitration. By eliminating these agreements, customers who have a dispute with their advisor, broker, or firm will have the option of electing to sue in arbitration or go to court and have their case heard by a jury.

Bitcoin Appears Headed for Regulation

March 6, 2014 | Malecki Law Team

As the old adage goes, one good deed deserves another. And so it is for bitcoin, which the Wall Street Journal reported may receive regulatory oversight in the not-too-distant future. It seems that enough people complained about what appears to have been a hacker-theft that led to the bankruptcy filing by Mt. Gox, until recently one of the major bitcoin exchanges. While the Federal Reserve appear unwilling, the WSJ noted that the Federal Trade Commission recently stated their goal “is to protect consumers, whether they pay by credit card, check, by some sort of virtual currency.” Despite Mt. Gox’s bankruptcy filing, the market for bitcoin continues to be routed through exchanges that up until now have operated with minimal to no oversight and bitcoins continue to be used to purchase services and goods, and likely, as a basis for investment.

The nature of Mt. Gox’s collapse is noteworthy. As reported on Tech Crunch, over the course of approximately one month, a supposed software bug caused Mt. Gox to lose approximately $500 million worth of bitcoin, including 750,000 bitcoin owned by investors and 100,000 bitcoin owned by Mt. Gox itself. Realizing the theft, Mt. Gox ceased investor transfers and shut down at the end of February 2014 and applied for bankruptcy protection from creditors. The WSJ reported on March 5, 2014 that the shutdown may have been caused by Mt. Gox’s bank refusing to process wire transfers after its repeated requests that Mt. Gox close its account.

Mt. Gox’s predicament may be the most publicized, but it certainly is not alone. According to the WSJ article on March 3, 2014, a recent study found that of 40 bitcoin exchanges, 18 have closed in the past three years, generally causing customer accounts to be completely wiped out. The WSJ reported that fraud is sometimes the cause of such closures. In other related bitcoin news, it was reported by the New York Post on March 5, 2014 that Autumn Radke, the CEO of bitcoin exchange firm First Meta, as a result of what may have been suicide.

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.

Credit Suisse Group AG Admits to Providing Brokerage and Investment Advisory Services Without Registering with the SEC

February 24, 2014 | Malecki Law Team

Money makes the world go ’round and apparently also makes Credit Suisse employees work faster or slower, as the case may be. The Wall Street Journal reported on Friday February 21, 2014 that Credit Suisse Group AG (Credit Suisse) agreed to pay $196 million to settle charges brought by the Securities and Exchange Commission that it provided brokerage and investment services to U.S. clients without registering with the SEC. According to the SEC’s Order, Credit Suisse willfully violated the Exchange Act and Investment Advisors Act by failing to register, in violation of Section 15 of the Securities Exchange Act of 1934 and Section 203 of the Investment Advisors Act of 1940. The SEC announced in a news release on Friday that Credit Suisse admitted to the violations.

In the Order, the SEC noted that Credit Suisse apparently knew the services its relationship managers were providing across borders to U.S. clients was improper, and set up a properly registered entity to transfer the U.S. business. However, the Order went on to detail that the transfers took far more time than was initially planned, partly because Credit Suisse did not properly incentivize its employees to timely transfer the accounts. This, in addition to other wrongful conduct led the Commission to conclude that Credit Suisse failed to implement its own policies and procedures to efficiently move the accounts. The Order and the WSJ article both noted that Credit Suisse has subsidiaries that are properly registered to provide both brokerage business and investment advisory business to U.S. clients. Until the bank completed its exit from its cross-border business, it continued to charge brokerage and advisory fees to the U.S. clients it served.

Registration by brokers, dealers and investment advisors with the SEC or state regulators is a bedrock principle of the securities laws and is designed to protect investors. Section 203 of the Investment Advisors Act regulates and requires registration of brokers, dealers and investment advisors, with limited exception. The SEC regularly fines individuals and entities such as Credit Suisse for failing to follow these laws.

All Eyes On The SEC After Recent Losses

February 21, 2014 | Malecki Law Team

In recent weeks, attention has turned to the Securities and Exchange Commission‘s declining success rate when going to trial against alleged wrongdoers. Publications such as the New York Times and Wall Street Journal have run multiple articles recently about this surprising decline. Per the Wall Street Journal, the SEC’s success rate has dropped to 55% since October, as opposed to the more than 75% success rate in the three consecutive years prior.

While the cases at the center of this decline were in the works well before Mary Jo White took the helm at the SEC, many are beginning to speculate how the Commission will react. Ms. White recently touted the then 80% success rate last year, citing it as a potential reason why attorneys counsel their clients to settle rather than face trial. However, this may be on the verge of changing. Emboldened by the newfound success of defendants in defending trials against the Commission, those who may find themselves in the SEC’s crosshairs may begin to opt to go to trial.

Recent cases, such as the insider-trading investigation and trial of billionaire Dallas Mavericks owner, Mark Cuban, have only intensified the public interest in the Commission and the work it does to investigate violations of the securities laws.

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.