Securities Fraud Blog

FINRA Ousts Firm and President for Fraud

2012-04-27T19:59:00Z

As set out in this recent FINRA Press Release, a FINRA hearing officer expelled a member firm (Pinnacle Partners Financial) and its President. The decision stated that Pinnacle operated a “boiler room” that placed thousands of cold calls per week soliciting investments in oil and gas drilling joint ventures. Furthermore, the decision found the investments to be “fraudulent,” and determined that the monies raised were misused to pay back previous offerings and to pay personal expenses. In addition to the expulsion from FINRA, the firm was ordered to offer full rescission to its customers.

Multiple Investor Awards in Recent FINRA Arbitrations of TIC Claims

2012-03-16T20:16:00Z

A review of recent FINRA Arbitration Awards show that TIC investors have had multiple victories in sales practice claims against the FINRA brokerage firms that sold them Tenant in Common (TIC) investments. Claims have included securities fraud, breach of fiduciary duty, negligence, failure to supervise, elder abuse, and misrepresentations and omissions. The following FINRA awards may be found at the FINRA web site:

1. Hardt, et al. v. LPL Financial LLC. No. 11-00347. The arbitration panel in this San Diego, California arbitration awarded $1,367,000.00 in compensatory damages, interest, and costs. Claims against two other Broker-Dealers were dismissed by Claimants.

2. Lightfoot, et al. v. Pacific West Securities, et al. No. 11-00230. A Seattle, Washington panel submitted another multi-million dollar award: $1,862,960,65 plus $200,000 in attorneys fees for violations of the Securities Act of Washington. The panel found a violation of the standard of care by Respondents for “the disavowal by Respondents of any obligation to conduct a suitability analysis for the sale of TICs in the circumstances of a Section 1031 - like kind assets exchange for tax deferral purposes.”

3. Griswold v. Burch & Company, Inc., et al. No. 10-02477. In this Alaska case, the panel awarded almost all of the compensatory damages requested ($350,000), plus interest.

4. Tommerup, et al. v. Waveland Capital Partners LLC, et al. No. 10-04616. This Helena Montana arbitration involved two DBSI TIC investments, and a request for $410,000 in damages. The panel awarded $301,875.00 which included interest, and $27,000 of discovery sanctions.

5. Wiborg, et al. v. Pacific West Securities, Inc. No. 10-02818. In another arbitration involving Pacific West (this one in San Francisco), the Panel awarded $300,000 plus $50,000 in punitive damages. In awarding the punitive damages, the panel described the basis for its finding that Respondent “failed to supervise” the broker involved.

TIC CLAIMS ON THE RISE VERSUS BROKERAGE FIRMS

2012-02-21T20:49:00Z

Tenant in Common (TIC) claims against the brokerage firms that sold them have recently resulted in multiple large FINRA arbitration awards, according to this this Investment News article.

The use of Tenant-in-Common (TIC) real estate investments in conjunction with IRS 1031 exchanges greatly increased after the 2002 issuance of IRS Rev. Proc. 2002-22 which clarified issues related to the uses of TICs in like-kind exchanges.

TICs since that time have been typically sold as securities by securities salespersons registered with FINRA which is a self-regulatory organization overseeing the securities industry. These salespersons (registered representatives) are required to be registered with a Broker-Dealer (brokerage firm) also regulated by FINRA. The sale of TICs by Broker-Dealers and their representatives is very lucrative. Selling commissions can be 7% or higher, and sponsors also would pay additional percentages to Broker-Dealers for “due diligence” expenses and marketing / selling expenses.

The failure of securities salespersons and their firms to perform due diligence on the TIC deals they recommend, and on the sponsors of the TIC deals, can result in disastrous outcomes for their customers. In addition, salespersons must engage in a suitability analysis prior to recommending TIC deals to their customers to ensure that these illiquid investments are suitable for the customer’s financial situation. Federal and State Securities laws also prohibit the misrepresentation or omission of material facts in conjunction with the sale of a security. Many state Acts provide for the recovery of losses, attorneys fees, and interest.

FINRA issued guidance to its members back in 2005 regarding the sale of TICs (NASD [now FINRA] Notice to Members 05-18). The selling firm had duties with regard to obtaining a clear understanding of the customer’s investment goals and financial status for the purposes of making a suitability determination. The firms’ representative also had to take into account the illiquid nature of the TIC interest, the risks from over-concentration, and the “investment potential of the underlying real estate asset(s).” In regard to overconcentration, FINRA warned: “Concentration of an investor’s assets in a single asset class, however, is not suitable for many investors.”

The high sales fees of TICs, combined with the profits and expenses retained by the sponsors, could raise serious suitability concerns for salespersons recommending them as a tax deferral vehicle. In fact, the Notice 05-18 above further warned: “As fees charged in connection with a TIC exchange increase, the money saved as a consequence of tax deferral will be offset. Accordingly, members should consider the effect of fees on each TIC exchange”

TICs are typically leveraged with a bank loan, and such leverage can unfortunately result in customers’ investments being wiped out should the bank foreclose on the property. If you have lost monies in an illiquid or foreclosed upon TIC, and believe you may have a claim against the salesperson and firm, please contact one of the attorneys at Greco & Greco for a free consultation. Greco & Greco regularly represents investors on a contingency basis.

Virginia Financial Fraud Task Force

2011-11-02T20:35:00Z

As set out in this Washington Post article, federal prosecutors in Virginia have set up the Virginia Financial and Securities Fraud Task Force. This task force is comprised of members of the FBI, the Postal Inspection Service, the Securities and Exchange Commission, the Commodities Futures Trading Commission and the Virginia State Corporation Commission.

As set out in the story, the task force’s efforts have already resulted in multiple criminal convictions. A criminal conviction, however, does not always recoup losses for investors wronged by financial fraud. If you are the victim of a financial crime in which the salesperson or others involved in the scheme were registered to sell securities through a FINRA brokerage firm, you may be able to seek recovery of your losses through FINRA’s arbitration system. Please contact Greco & Greco for a free consultation with one of our lawyers.

Fredericksburg Virginia Registered Rep Indicted

2011-10-13T18:35:00Z

As set out in this Fredericksburg.com article, John Robert Graves, a former FBI agent, was indicted on charges of defrauding Virginia investors out of $1,300,000. According to the indictment filed in U.S. District Court in Richmond (Case 3:11CR246), Mr. Graves used funds obtained from investors to buy personal real estate, to pay personal expenses and credit cards, to pay himself cash, and to pay back prior investors.

Mr. Graves operated Brooke Point Management in Spotsylvania County since 2003 which provided financial planning, insurance sales, estate planning, and investment advice to customers. According to FINRA’s Brokercheck report, Mr. Graves had been a registered securities salesperson since 1998 with various firms including, Harrison Douglas, Community Bankers Securities, Fintegra, Questar Capital Corporation, Pacific West Securities, and H. Beck. The Brokercheck report also discloses multiple pending arbitration claims alleging fraud, negligence, breach of fiduciary duty, and unsuitable investments regarding private placements, limited partnerships and REITs.

If you wish to discuss a potential securities fraud claim with one of our attorneys, please contact us here for a free consultation.

FINRA testifies regarding fiduciary standard and oversight of investment advisors

2011-09-16T19:34:00Z

Rick Ketchum, the Chairman & CEO of FINRA testified before Congress recently regarding the Dodd-Frank Act, fiduciary standards for brokers and investment advisors, and oversight and regulation of investment advisors. His testimony can be found here.

In its testimony, FINRA agrees with many customer advocates that feel that Broker-Dealers (and their representatives) should be bound by the same fiduciary standard as registered investment advisors when giving personalized investment advice to the public. The testimony further restates the obvious: most customers cannot differentiate between services offered by Broker-Dealers versus Investment Advisors, and further are not aware of any differing standards of care or obligations.

The testimony further addresses the insufficient nature of current examinations of investment advisors by the SEC, and offers an allegedly better alternative: examinations by FINRA. FINRA maintains that investment advisor examinations and oversight by SRO’s (Self Regulatory Organizations) such as itself would help protect investors due to the fact that FINRA is currently overseen by the SEC, and currently examines many Broker-Dealers who also have investment advisory businesses.

Setting aside the adequacy of FINRA oversight, the fact remains that many customers who lose money due to the wrongful conduct of their broker or advisor cannot count on FINRA or the SEC to recover their funds. If you face such a situation, it is advisable to speak to an attorney to discuss your options. Our lawyers at Greco & Greco can be contacted here for a free consultation.

FINRA Fines Northern Trust for CMO Sales

2011-09-09T18:07:00Z

FINRA recently fined Northern Trust Securities Inc. $600,000 for supervisory failures related to sales of Collateralized Mortgage Obligations (CMOs) to customers. As set out in this FINRA release: “from October 2006 through October 2009, Northern Trust failed to monitor customer accounts for potentially unsuitable levels of concentration in CMOs, in large part because it used an exception reporting system that failed to capture or analyze substantial portions of the firm’s business, including all CMO transactions, certain trades of 10,000 equity shares or more, and certain trades of 250 or more of fixed-income bonds.”

The Letter of Acceptance, Waiver, and Consent which can be found on the FINRA website discusses the risks of CMO’s and states that the flaw in the system was first raised in an arbitration filed by an investor who had almost 50% of her total liquid net worth invested in a Countrywide CMO that had lost significant value.

If you have incurred losses from CMOs which were unsuitable for you or were overconcentrated, or if you are the victim of other broker misconduct and you would like to discuss legal options with an attorney, please contact Greco & Greco for a free consultation with one of our lawyers.

New SEC Office of the Whistleblower website

2011-08-19T17:33:00Z

The SEC recently launched its webpage for the Office of the Whistleblower, an office created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Click here for the site.) In the words of the SEC Whistleblower Chief Sean McKessy, the goal of the program is to “incentivize you to report possible violations of the US securities laws of which you become aware.” The site contains a FAQ section, links to the SEC Rules regarding whistleblowers, and Form TCR (Tip, Complaint, or Referral) to be used to submit a tip.

If you are a witness to information regarding a possible securities fraud, contact one of Greco & Greco’s attorneys here for a free consultation to discuss your options.

SEC Adopts Securities Fraud Whistleblower Rules

2011-07-08T19:23:00Z

The SEC recently approved final rules to govern its whistleblower program established pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The program has been established to encourage individuals to alert the SEC to evidence that helps the SEC in bringing securities fraud cases. The Rules were designed under the Act to increase the SEC’s authority to compensate whistleblowers regarding violations of the federal securities laws. The Rules may be found here.

There are several requirements for a whistleblower to be considered for an award of compensation. The whistleblower must voluntarily provide the SEC with original information regarding violations of the federal securities laws, rules, or regulations that leads to the enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than one million dollars. The program also covers “related actions” which includes judicial or administrative actions by the U.S. Attorney General, regulatory authorities, self-regulatory organizations, or criminal prosecution by a state attorney general.

In regard to the “original information” requirement, the Rules contain complex requirements, limitations, and exceptions to information acquired through attorney-client privileged situations, and information obtained as an officer, director, trustee, partner, or compliance/audit employee. In certain circumstances, the Rules require disclosure of the information to the relevant entity within a specified time frame for the whistleblower to be entitled to payment under the Rules.

The amount of the award to the whistleblower will be decided by the SEC, however if the Rules’ requirements are met, the award will be between 10 and 30 percent of the monetary sanction that the SEC and other authorities are able to collect. The SEC will exercise its discretion in determining the exact percentage based on criteria set out in the Rules. Some of the positive and negative criteria to be applied by the SEC in the decision making process include significance of the information, assistance provided by the whistleblower, law enforcement interest, participation in internal compliance systems, culpability, unreasonable reporting delay, and interference with internal compliance systems.

This amount may also be divided by the SEC among multiple whistleblowers. Should the SEC deny payment, the Rules provide for an appeals process as well as an ultimate appeal to the U.S. Court of Appeals for the District of Columbia, or the circuit where the aggrieved person resides.

The SEC has provided specific forms for submission of information and a claim for an award. A whistleblower may remain anonymous when providing the information to the SEC, however to do so the whistleblower must be represented by an attorney with respect to the submission of information and claim for an award.

The Act and Rules also provide protections for the whistleblower from retaliation by the whistleblower’s employer, providing certain requirements are met.

If you wish to discuss a potential SEC whistleblower claim with a lawyer, please contact Greco & Greco here for a free consultation with one of our attorneys.

FINRA Implements All Public Arbitration Panels

2011-06-24T18:10:00Z

Earlier this year, FINRA (the Financial Industry Regulatory Authority) implemented a change to its arbitration system which has been sought by the Claimants’ bar for years. As set out in this notice, customer Claimants in FINRA arbitrations now have the choice to have their disputes with their stock brokers and brokerage firms heard by three public arbitrators for cases over $100,000.00.

Under the previous FINRA Rule, three arbitrator panels were required to include one “non-public” or “industry” arbitrator, i.e. someone currently employed in the securities industry or with present or former ties to the industry. The securities industry requires that customers arbitrate their disputes with their brokerage firms through FINRA, and virtually all new account forms from U.S. brokerage firms contain a mandatory arbitration clause. Greco & Greco regularly represents customers in FINRA arbitrations - if you would like to discuss a potential claim with one of our attorneys, please Contact Us.

SEC Fraud Charges Regarding The Nutmeg Group LLC

2011-06-08T20:05:01Z

As set out in the SEC Complaint which can be found here, the SEC filed civil fraud claims in Illinois against The Nutmeg Group, LLC, Randall Goulding, and others. The SEC alleges in its Complaint that Nutmeg was an investment adviser to 15 funds which invested fund assets in private investments in public equity (PIPE) transactions. As a basis for its fraud claims, the SEC alleges in the Complaint that Nutmeg “improperly commingled investor and fund assets,” “misappropriated over $4 million in fund assets,” “failed to maintain the required books and records,” and “overstated the performances of its Funds to investors.” (paragraphs 2 and 3 of SEC Complaint).

This article from tampabay.com discusses the recruitment of investors for The Nutmeg Group investments by an individual (Harvey Altholtz) from the Sarasota, Florida area. Here is a cease and desist Order from the Colorado Securities Commissioner relating to Altholtz and Wealth Strategy Partners.

Greco & Greco have recently filed a FINRA arbitration on behalf of investors who were sold investments in Nutmeg Group funds by a FINRA registered representative (securities salesperson). All FINRA registered representatives are required to be registered with a FINRA firm (Broker-Dealer). FINRA firms have legal responsibilities to supervise their registered representatives, and further may be found liable for the wrongful actions of their agents. Examples of legal grounds for liability of Broker-Dealers in these situations include:

a) under tort and agency law, principals can be found liable for the acts of their agents even if they are entirely innocent and have received no benefit from the transaction;

b) a broker’s Broker-Dealer can also be found liable as a “control person” of that broker under state and federal securities laws; and

c) claims can be pursued in arbitration based on violations of FINRA rules including Rules related to supervision, suitability, and outside business activities.

If you were sold investments in Nutmeg Group funds by a FINRA registered representative, and you would like to discuss legal options with an attorney, please contact Greco & Greco for a free consultation with one of our lawyers.

Unsuitable ETF trading results in large losses for investors

2011-01-23T16:01:00Z

Greco & Greco’s attorneys have represented a significant number of investors over the past several years who have suffered large amounts of losses in their securities accounts due to the improper and unsuitable trading of ETFs by their brokers. Many inverse and leveraged exchange traded funds, including some by Proshares and Direxion, were designed to seek multiples of the exchange they were designed to track. However, many of these ETFs were designed to reset daily, thereby creating drastic differences in their performance over time compared to the index they were designed to track. We have seen many situations where many of the risks of these funds were not disclosed to customers.

The prospectus for the Proshares leveraged and inverse ETFs from September 2007 makes clear that these investments were an aggressive day-trading tool, not an investment appropriate or suitable for most retail investors. Specifically, the prospectus stated:

• p. 7: “The Funds do not seek to achieve their stated investment objective over a period of time greater than one day because mathematical compounding prevents the Funds from achieving such results.”
• p. 8: “The Funds use investment techniques that may be considered aggressive, including the use of futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements and similar instruments.”
• p. 9: “Certain Funds are “leveraged” funds in the sense that they have investment objectives to match a multiple of the performance of an index on a given day. These Funds are subject to all of the correlation risks described above. In addition, there is a special form of correlation risk that derives from these Funds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than or less than the index performance times the stated multiple in the fund objective, before accounting for fees and fund expenses.”

In June of 2009, FINRA issued a Regulatory Notice (09-31) regarding these Non-Traditional ETFs. The Notice states: “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”

If you suffered losses in your brokerage accounts resulting from your broker’s trading in ETFs, and you would like to discuss your potential claim with an attorney, please contact Greco & Greco.

FEBG / McLeod Receiver Files Initial Report

2010-08-27T19:10:00Z

The Receiver appointed by the US District Court in Florida regarding the case against Kenneth Wayne McLeod and the Federal Employee Benefits Group Bond Fund (FEBG) has filed his initial report to the Court. It can be found here. Although the receiver is in the process of reviewing hundreds of boxes of documents, the initial findings regarding assets are not promising. Reference is made to five pieces of real estate, but the amount of equity, if any, in the properties is unclear. Furthermore, the bank and brokerage accounts found and frozen at this time only account for approximately $90,000. The ponzi scheme allegedly involved over $34,000,000 invested by mostly government employees.

In his report, the Receiver encourages victims to contact their own attorneys to discuss potential claims against third parties. As set out in our previous blog post, Mr. McLeod was a FINRA registered representative of Lincoln Financial Securities Corporation until May, 2010. Prior to Lincoln, Mr. McLeod was FINRA registered with Capital Analysts, Incorporated and Washington Square Securities. FINRA firms have legal responsibilities to supervise their registered representatives, and further may be found liable for the wrongful actions of their agents. If you are a victim of the FEBG bond fund ponzi scheme, and you would like to discuss legal options with an attorney, please contact Greco & Greco for a free consultation with one of our lawyers.

McLeod Ponzi Scheme Preys on Government Employees

2010-07-02T14:00:00Z

The SEC filed an Emergency Complaint on June 24, 2010 against the Estate of Kenneth Wayne McLeod, F&S Asset Management Group, and Federal Employee Benefits Group, alleging that Mr. McLeod engaged in a ponzi scheme. The SEC release and Complaint can be found here. The Complaint alleges that Mr. Mcleod solicited federal government workers across the country to invest in a purported bond fund (the FEBG Bond Fund) which offered “guaranteed, tax-free returns of eight to ten percent annually in the fund.” In reality, the fund did not exist and Mr. McLeod used newly invested funds to pay off old investors, a classic ponzi scheme. Mr. McLeod raised $34 million from current investors.

According to this Florida Times Union article, Mr. McLeod killed himself days after confessing to investigators.

Mr. McLeod was a FINRA registered representative of Lincoln Financial Securities Corporation until May, 2010. Prior to Lincoln, Mr. McLeod was FINRA registered with Capital Analysts, Incorporated and Washington Square Securities. FINRA firms have legal responsibilities to supervise their registered representatives, and further may be found liable for the wrongful actions of their agents. Examples of legal grounds for liability of Broker-Dealers in these situations include:

a) under tort and agency law, principals can be found liable for the acts of their agents even if they are entirely innocent and have received no benefit from the transaction;

b) a broker’s Broker-Dealer can also be found liable as a “control person” of that broker under state and federal securities laws; and

c) claims can be pursued in arbitration based on violations of FINRA rules including Rules related to supervision, suitability, and outside business activities.

If you are a victim of the FEBG bond fund ponzi scheme, and you would like to discuss legal options with an attorney, please contact Greco & Greco for a free consultation with one of our lawyers.

Medical Capital Charged With Fraud by SEC

2010-03-19T19:17:00Z

Medical Capital Holdings is another private placement investment that has been subject to claims of fraud by the SEC. In the Amended Complaint found on the Receivership site the SEC alleges that despite promises in the offering memoranda from Medical Capital not to use investor funds to pay administrative fees, 24% of investor funds were paid out as administrative fees, and the companies engaged in sham intercompany transactions to pay back principal and interest to investors in prior offerings.

Furthermore, as set out in this Orange County Register article, the head of Medical Capital (Sidney Field) had previously had his insurance license revoked by California, had been sued twice by state insurance regulators for racketeering and fraud, and had filed bankruptcy.

Investors who were sold these offerings by their stock brokers and have suffered losses may have claims that they can bring in FINRA arbitrations against their brokerage firms. Firms selling such offerings have due diligence duties prior to approval of their sale, and representatives are required to only make suitable recommendations to their customers. Additionally, representatives may not misrepresent the risk of securities they recommend, and they must disclose material facts related to risk. Greco & Greco is pursuing claims in arbitration on behalf of customers who were sold these products. If you think you may have a claim, please contact us for a free consultation with one of our attorneys.