FINRA

Published on: January 23, 2012

FINRA Ruling: Citigroup Global Markets Fined $725,000

On January 18, 2012, the Financial Industry Regulatory Authority — the entity which handles securities arbitration on behalf of investors who have been the victims of stock broker fraud — announced its decision to fine Citigroup Global Markets Inc. for failure to disclose conflicts of interest. The conflicts of interest occurred in research reports and research analysts’ public appearances. From January 2007 through March 2010, Citigroup, in some research reports, failed to disclose certain conflicts of interest related to its business relationships. In addition to the failure to make required disclosures in research reports, Citigroup research analysts did not disclose the same potential conflicts in relevant public appearances that mentioned the covered companies.

“Citigroup failed to make required conflict of interest disclosures which prevented investors from being aware of potential biases in its research recommendations,” says FINRA Executive Vice President and Chief of Enforcement Brad Bennett. “Firms need to provide investors with full and accurate information so they will be able to take it into consideration before making an investment decision.”

Conflicts of interest not included in research reports and analysts’ public appearances included the fact that Citigroup and/or Citigroup affiliates co-managed or managed public securities offerings, would make a market in the related securities, received revenue and/or investment banking from the related securities and/or had ownership in covered companies that amounted to 1 percent or more.

Published on: January 20, 2012

Study Explores Connection Between “Overly Optimistic” Disclosures and Investor Claims

by InvestorLawyers

A recent study published in Accounting Review explored whether firms that use “overly optimistic” language in their disclosures are more likely to be sued by investors. While it is unreasonable to expect a firm to deliberately use language that will cost them business, disclosures should always be grounded in reality — and there is a significant difference between “optimistic” and “overly optimistic.” Overly optimistic disclosures that are not grounded in reality are often cited in securities arbitration claims.

Study Explores Connection Between “Overly Optimistic” Disclosures and Investor Claims

The final sample of the study included 165 lawsuits. All the lawsuits were filed between 2003 and 2008. Types of disclosures that could be viewed as “overly optimistic” included SEC filings, earnings announcements, press releases, presentations at conferences and media interviews. Once the researchers controlled for performance-related and other traits, they found that substantially more optimistic language in disclosures was used by firms that had been sued. According to the authors of the study, “These results indicate a strong link between disclosure tone and litigation. The difference in tone between sued and non-sued firms’ disclosures is consistent with plaintiff allegations that managers issued overly optimistic disclosures during the damage period.”

While a significant portion of securities litigation cases cite material misrepresentations as part of the firm or broker misconduct, “a victorious securities lawsuit requires plaintiffs not only to provide evidence of a material misrepresentation but also to prove intent to deceive,” the authors note.

Published on: January 19, 2012

Veolia Environment S.A. Investors May Have Claim

by InvestorLawyers

In the United States District Court for the Southern District Court of New York, a class action has been filed against Veolia Environment S.A. on behalf of its purchasers. The class action is regarding American Depositary Shares (ADSs) for the Class Period of April 27, 2007 through August 4, 2011. Veolia Environment S.A. allegedly violated federal securities laws.

Veolia Environment S.A. Investors may have Claim

According to the complaint, Veolia failed to disclose and/or misrepresented the following facts:
• The company was engaging in improper accounting practices and as a result materially overstated its financial results.
• Veolia could not determine its true financial condition as a result of its inadequate internal controls.
• The company did not record, in a timely manner, an impairment charge for its marine services business in the United States and Southern Europe, environmental services business in Egypt and transport business in Morocco.
• The renewal of some major concession contracts was hampering the company’s revenues.

When the company’s half-year results were announced on August 4, 2011, for the period ending June 30th of that year, Veolia American Depository Shares fell by 22 percent, or $4.66 per share as a result. The shares closed at $16.10 per share. The half-year results showed a consolidated revenue of EUR 16,286.7 million. In addition, defendants reported the operating income for Veolia to be EUR 252.2 million, a significant decline compared to the prior year which had an operating income of EUR 1,100.7 million. The change was due to “non-recurring write-downs amounting to EUR 686M (principally in Italy, Morocco and the United States).” Veolia also stated that it would exit businesses and geographies including for its marine services business in the United States and Southern Europe, environmental services business in Egypt and transport business in Morocco.

Published on: January 6, 2012

FINRA Decision: Credit Suisse Fined $1.75 Million

by InvestorLawyers

On December 27, 2011, the Financial Industry Regulatory Authority (FINRA) announced its securities arbitration decision to fine USA-based Credit Suisse Securities LLC $1.75 million. The fine is a result of Credit Suisse’s failure to properly mark sale orders and supervise short sales. These violations resulted in millions of short sales orders that were conducted “without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders,” according to the FINRA press release.

FINRA Decision: Credit Sussie Fined $1.75 Million

A short sale occurs when a security is sold that is not owned by the seller. Upon delivery, the security is either purchased or borrowed by the short seller to make the delivery. A broker or dealer must have reasonable grounds to believe the security can be available for delivery in order to perform a short sale order, according to Reg SHO. The “locate” requirement effectively reduces potential failures to deliver, protecting the investment. Furthermore, a broker or dealer must mark the sales as long or short. Failure to do so results in broker misconduct that is potentially dangerous for clients.

FINRA Executive Vice President and Chief of Enforcement Brad Bennett stated that “Credit Suisse’s Reg SHO supervisory and compliance monitoring system was seriously flawed. Millions of short sale orders were being entered in its systems without locates for over four years because the firm did not have adequate Reg SHO technology and procedures in place.”

Published on: January 5, 2012

FINRA Decision: Barclays Capital Fined $3 Million

by InvestorLawyers

A major concern in the investment industry is that investors should be, but often are not, provided with sufficient and accurate information on their investments which will allow them to make informed investment decisions. A recent Financial Industry Regulatory Authority (FINRA) securities arbitration case resulted in Barclays Capital Inc. being fined for failure to adequately supervise the issuance of residential subprime mortgage securitizations, plus misrepresentation of delinquency data. Of the case, FINRA Executive Vice President and Chief of Enforcement Brad Bennett stated, “investors were supplied inaccurate information to assess future performance of RMBS investments.”

FINRA Decision: Barclays Capital Fined $3 Million

According to FINRA, “historical performance information for past securitizations that contain mortgage loans similar to those in the RMBS being offered to investors” must be disclosed by issuers of residential subprime mortgage securitizations. This information is vital to investors’ attempts to determine if the failure of mortgage holders to make payments could disrupt future returns. Therefore, without this information, investors cannot make an adequately informed decision about their investment.

According to FINRA’s investigation, the historical delinquency rates of three subprime RMBS, for which Barclays was underwriter and seller, were misrepresented from March 2007 through December 2010.

Published on: January 4, 2012

Potential Loss Recovery for Weyerhaeuser Stockholders

by InvestorLawyers

A recent securities arbitration proceeding regarding Weyerhaeuser stock has investors seeking representation for potential claims. According to the recent claim, which was filed with the Financial Industry Regulatory Authority, a retiree who held a concentrated position in Weyerhaeuser stock sustained $200,000 in damages. The claimant inherited the stock upon the passing of his mother; he then sought investment advice from Merrill Lynch.

Potential Loss Recovery for Weyerhaeuser Stockholders

Allegedly, despite the risk management strategies available to them — such as stop loss orders, exchange funds, a collar and/or protective put options —Merrill Lynch failed to protect some or all of the concentrated Weyerhaeuser stock positions under its advisement. Protective Puts allow the investor to create, at the put’s strike price, a price floor. This allows the investor to participate in the stock’s appreciation, customize the maturity of the put and stripe price, while providing downside protection. A collar, on the other hand, simultaneously Sells a call and purchases a put so that the proceeds and cost of the call and the put offset one another, which allows for hedging without requiring out-of-pocket expenses.

In addition to the company’s failure to utilize risk management strategies, Merrill Lynch failed to explain the risks associated with the holding of a concentrated stock position to clients. Merrill Lynch had a duty to protect the investment but failed to do so. This arbitration claim is still pending, but others who sustained losses as a result of the same mishandling of funds also are encouraged to seek the recovery of their losses through securities arbitration.

Published on: January 2, 2012

A Notice to the Clients of William Tatro

by InvestorLawyers

Investment attorneys are interested in speaking with clients of William Tatro in connection with investment losses they suffered under his advisement. Complaints have been registered against Tatro stating that he recommended to his clients unsuitable, illiquid, high commission investments. These investments had a higher degree of risk than many clients would have accepted, and in some cases resulted in massive losses. Many clients lost a significant amount of their life savings. These recommendations were in violation of Financial Industry Regulatory Authority regulations which state that recommendations must be suitable for the client and in keeping with their investment goals. A broker may not, for example, recommend very risky investments to an individual who can’t afford to sustain the losses, such as a retiree.

A Notice to the Clients of William Tatro

Another type of investment that is usually unsuitable for retirement accounts are annuities investments. Annuities restrict the availability of funds and are high commission investments. Complaints against Tatro allege that he repeatedly sold leveraged inverse Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) to clients for whom the investments were unsuitable. REITs are high-commission variable annuities. FINRA issued a warning which stated that leveraged inverse ETFs are unsuitable for ordinary investors and that these investments should be held for a short time period only. Despite FINRA’s warning, Tatro allegedly recommended these investments and held the investments long-term. Many investors have stated that this was the case for their accounts and that they sustained substantial losses as a result.

In the claim of Mid-Lakes Management Corp. vs. Eagle Steward Wealth Management LLC, one arbitrator stated that, “There was no evidence that Mr. Tatro properly investigated leveraged inverse funds. In fact, it is highly unlikely that Mr. Tatro could have done so, for such research would have demonstrated that holding leveraged inverse funds for a lengthy period of time dramatically increased risk of the claimant.” In resolving the claim, $530,449 in damages was awarded to the claimant.

Published on: December 23, 2011

FINRA Ruling: Wells Fargo Fined, Complaint Filed Against Chen

by InvestorLawyers

December 15, 2011, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Wells Fargo Investments LLC for “unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers.” The fine totals $2 million; in addition, Wells Fargo must pay restitution to customers who had unsuitable reverse convertible transactions and/or did not receive the sales charge discounts on UIT transactions. Furthermore, the stock broker misconduct of Alfred Chi Chen led FINRA to file a complaint against him.

Finra Ruling: Wells Fargo Fined, Complaint Filed Against Chen

UITs offer sales charge discounts on purchases that exceed certain thresholds, often called “breakpoints,” or involve redemption or termination proceeds from another UIT during the initial offering period. Wells Fargo’s insufficient monitoring of the reverse convertible sales caused them to fail to provide breakpoint and rollover and exchange discounts in the sales of UITs to eligible customers from January 2006 to July 2008.

The registered representative, who is no longer with Wells Fargo, Alfred Chi Chen, made unauthorized trades in multiple customer accounts. In some cases, the customer accounts belonged to deceased individuals. FINRA filed a complaint against Chen, in addition to its decision to fine Wells Fargo. According to FINRA’s investigation, Chen’s broker misconduct extended to 21 clients, most of which had limited experience in investments, low risk tolerances and/or were elderly. To these 21 clients, Chen made hundreds of unsuitable recommendations for reverse convertible investments. Repayment of reverse convertibles, which are interest-bearing notes, is tied to the performance of a stock, basket of stocks, or another underlying asset. These investments were unsuitable for many of Chen’s low-risk profile clients because they risk sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible, according to FINRA.

Published on: December 14, 2011

Customers of LPL Financial, Jack Kleck May Have Valid Securities Arbitration Claim

by InvestorLawyers

Stock broker fraud lawyers are investigating potential securities arbitration claims against LPL Financial and Jack Kleck, a former LPL broker. LPL Financial was fined $100,000 in late November for failure to adequately supervise Kleck. LPL was fined by the Oregon Department of Consumer and Business Services.

Customers of LPL Financial and Jack Kleck May Have Valid Securities Arbitration Claim

Kleck, who was LPL Financial’s branch manager in La Grande, “sold investments in high-risk oil and gas partnerships to nearly three dozen Oregon residents, including many elderly people,” according to the State of Oregon. In addition, Kleck’s recommendations were unsuitable for his clientele and were not in keeping with their age and investment objectives. The State of Oregon stated, “Many of Kleck’s clients were in their 70s and 80s, and some were not capable, due to poor health, of making sound investment decisions.” According to Oregon’s decision, LPL violated securities laws including failure to supervise and failure to properly enforce company policies and procedures.

By law, broker-dealers must make “suitable” recommendations to their clients. Under FINRA Rule 2111, brokers are required to consider investment objectives, tax status, financial status, age, risk tolerance, time horizon, liquidity needs, other investments and experience when determining if a recommendation is a suitable investment for a client. For example, broker-dealers handling a customer’s conservative investment portfolio may not recommend high-risk investments that are not in keeping with the customer’s investment objectives. For more on the suitability standard, see the previous blog post, “FINRA Revises Suitability Rule 2111.”

Published on: December 5, 2011

FINRA Ruling: Ten Individuals, Eight Firms Sanctioned

by InvestorLawyers

Investment attorneys have been on the lookout for investors who have been wronged and suffered losses as the result of brokers or firms misrepresenting and/or recommending private placements without a reasonable basis. On November 29, the Financial Industry Regulatory Authority (FINRA) announced that it would sanction ten individuals and eight firms for doing just that. In addition, FINRA ordered a total of more than $3.2 million in restitution.

According to FINRA’s press release, “the broker-dealers did not have adequate supervisory systems in place to identify and understand the inherent risks of these offerings and, as a result, many of the firms failed to conduct adequate due diligence of these offerings. In addition, some of the firms did not have reasonable grounds to believe that the private placements were suitable for any of their customers.”

This is not the first time that firms have been punished for this type of securities fraud — and it won’t be the last. FINRA sanctioned seven individuals and two firms in April 2011 and, as was seen in the earlier blog post, “A Notice to LaeRoc Income Funds Investors,” future securities arbitration against LaeRoc may involve similar misconduct.