FINRA

Published on: December 1, 2011

Investment Fraud: Selling Away

There are many types of selling away schemes, and these schemes can result in significant — and sometimes complete —investor losses. However, with the help of an investment attorney, investor losses can be recovered through securities arbitration.

Investment Fraud: Selling Away

Selling away occurs when a broker or investment adviser sells an investment to a client that is not included in the client’s account or in the investment products that are offered by the firm. These private securities often include investments in private placements, private non-traded REITs, privately-held companies, limited partnerships, real estate and promissory notes. While all of these private securities can be real investments, they are sometimes used as a means for defrauding clients.

If a broker wants to complete a private securities transaction, he or she must provide the firm with written notice that details the transaction, and the transaction must be approved by the firm. If the transaction is not approved by the firm, the broker cannot participate in any way with the transaction. If the broker does not comply with the firm’s order, or does not attempt to gain approval, “selling away” has occurred.

Published on: November 28, 2011

Wells Investment Securities Fined for Misleading Marketing

by InvestorLawyers

On November 22, the Financial Industry Regulatory Authority (FINRA) announced its securities arbitration decision to fine Wells Investment Securities Inc. for using misleading marketing materials. The materials were used in the sale of Wells Timberland REIT Inc., for which Wells was the wholesaler and dealer-manager, and the fine imposed by FINRA was $300,000.

Wells Timberland REIT is a non-traded Real Estate Investment Trust that invested in timber-producing land. Because it was the wholesaler, Wells was responsible for the review, approval and distribution of the marketing materials. According to FINRA’s investigation, Wells distributed 116 sales materials and advertising that contained exaggerated, unwarranted and misleading statements concerning the REIT from May 2007 through September 2009.

One of the misleading statements contained in the offering prospectus was that Wells Timberland intended to qualify as a Real Estate Investment Trust for the Dec. 31, 2006 tax year when, in fact, it did not qualify until the Dec. 31, 2009 tax year. Furthermore, most of the sales literature and advertisements either did not adequately express the significance of the investment’s non-REIT status or suggested that the investment was a REIT when it had not yet qualified. In addition, the FINRA investigation found that the supervisory procedures of the firm did not adequately monitor whether sensitive customer information that was stored on laptops was adequately safeguarded through the use of encryption technology.

Published on: November 21, 2011

Chase Ordered to Pay $1.9 Million to Customers

by InvestorLawyers

On November 15, the Financial Industry Regulatory Authority (FINRA) announced its decision to order Chase Investment Services Corporation to pay more than $1.9 million to customers who incurred losses because of Chase’s recommendation of unsuitable sales of UITs, or unit investment trusts, as well as floating-rate loan funds. In addition, Chase was fined $1.7 million for its actions.

Chase Ordered to Pay $1.9 Million to Customers

According to the FINRA press release, “A UIT is an investment product that consists of a diversified basket of securities, which can include risky, speculative investments such as high-yield/below investment-grade or ‘junk’ bonds. Floating-rate loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade, or ‘junk.’”

The results of FINRA’s investigation concluded that the purchase of UITs and floating-rate loan funds was recommended by Chase brokers to “unsophisticated customers with little or no investment experience and conservative risk tolerances, without having reasonable grounds to believe that those products were suitable for the customers.” This is a clear violation of the suitability standard that brokers adhere to, which states that brokers must make recommendations that are suitable for their clients. In addition to this violation of the suitability standard, Chase did not have adequate supervisory procedures in place to monitor the sales of these investment products.

Published on: November 16, 2011

2010 Saw 51 Percent Rise in Securities Fraud Enforcement Actions

by InvestorLawyers

The North American Securities Administrators Association (NASAA) released its annual report last month on enforcement actions to fight securities fraud. The report compares the data on securities fraud enforcement actions from 2010 to that of 2009. According to the report, the number of actions pursued in 2010 rose 51 percent, a major jump from 2009. In addition, the report notes a 10 percent increase of securities fraud violations, a 9 percent increase in unregistered securities violations and a 24 percent increase in unregistered individual violations.

Other reported statistics include:

7,000 total investigations, 3,475 of which led to enforcement actions

Published on: November 14, 2011

Morgan Stanley Fined $1 Million, Plus Restitution

by InvestorLawyers

According to a recent press release from the Financial Industry Regulatory Authority (FINRA), Morgan Stanley & Co. Inc. and Morgan Stanley Smith Barney LLC, together were fined $1 million in securities arbitration. Furthermore, Morgan Stanley was ordered to pay $371,000 in restitution and interest. The restitution and interest will go to Morgan Stanley customers because of supervision violations and excessive markups and markdowns that were charged on their municipal bond transactions.

Morgan Stanley Fined $1 Million, Plus Restitution

Markups refer to the difference between the lowest current offering price of an investment for the dealer and the actual price the dealer charges the customer. According to the Municipal Securities Rulemaking Board, or MSRB, “MSRB rules require that the price at which a broker-dealer sells a municipal security to a customer be fair and reasonable, taking into consideration all relevant factors.” Though the MSRB does not set numerical guidelines for what constitutes a “reasonable” markup, they do acknowledge that whether the total price paid by the customer can be considered “fair and reasonable” can be affected by the mark-up.

According to FINRA’s investigation, Morgan Stanley’s 5 percent to 13.8 percent markups and markdowns were higher than warranted when considering market conditions, value of services rendered to customers and the cost of executing the transactions. In addition, the supervisory system Morgan Stanley had in place for corporate and municipal bond markups and markdowns was found to be inadequate by FINRA. Inadequacies of the supervisory system included a failure to include markups and markdowns less than 5 percent — regardless of if they were excessive or not — and the firms’ policies and procedures.

Published on: November 9, 2011

FINRA Rights Wrongs to Maintain Integrity

by InvestorLawyers

In August 2008, the Financial Industry Regulatory Authority (FINRA) provided the Securities and Exchange Commission with staff meeting minutes that had been altered, making the documents inaccurate and incomplete. FINRA’s Kansas City office was responsible for the tampering of the documents. FINRA officials know the agency must maintain its integrity in order to be a regulator for broker misconduct., so they have been diligent and cooperative in correcting this error. In response to the misconduct, FINRA rehttp://brandsplat.net/wp-admin/post.php?post=19599&action=editported the matter to the SEC, implemented new leadership in the office responsible, improved their document-handling procedures and cooperated fully with an SEC review.

FINRA Rights Wrongs to Maintain Integrity

Changes intended to improve document-handling procedures were, according to FINRA, “additional online and live ethics training for all employees with an enhanced focus on document handling and integrity.” Furthermore, FINRA will create and release a document integrity podcast for current and future employees; include the subject of document integrity at yearly meetings, gatherings and district office visits; and train employees on past problems with document integrity. FINRA has also mandated that before undergoing an on-site exam, every business will meet with counsel and senior Office of Liaison staff before documents are released to the SEC.

FINRA has been ordered by the SEC to hire an independent consultant. The job of this consultant will be to review FINRA’s current training, policies and procedures, and then determine if they are adequate or require revision. The report will be submitted to and reviewed by the FINRA board. If they find the recommendations unreasonable, the board and the consultant will attempt to find an alternative solution that satisfies the same objectives. If a compromise can be reached, the consultant will amend the report. If a compromise cannot be reached, FINRA must comply with the original recommendation. Once the report is finalized, the board will have 30 days to implement all recommendations.

Published on: November 4, 2011

FINRA Investor Alert: Taking Advantage of 401(k) Matching

by InvestorLawyers

One of the largest concerns of every American, at some point in their lives, is how they will be able to make ends meet when they retire. Why is it, then, that almost 30 percent of Americans aren’t contributing enough to their 401(k) to get their full employer match? FINRA’s new Investor Alert, “Why Leave Money on the Table — Make the Most of Your Employer’s 401(k) Match” deals with this question and encourages greater 401(k) contributions by those not taking full advantage of this match.

FINRA Investor Alert: Taking Advantage of 401(k) Matching

Part of the problem could be age, and the fact that many young employees aren’t yet looking at their retirement seriously. According to a recent study, 43 percent of young workers age 20-29 don’t put enough money into their 401(k) to get their employers’ full match. According to FINRA’s press release on the Investor Alert, “Millions of workers, especially younger and lower-income workers who need it most, are leaving money — free money — on the table.”

Another factor lowering employee 401(k) contribution may be the state of the economy. With less money to go around, it’s often hard to put away for the future. However, hard economic times should be incentive to put away more to protect your retirement. According to FINRA Vice President of Investor Education Gerri Walsh, “Even in tough economic times, all employees still need to prepare for their retirement. Taking full advantage of a company’s 401(k) match is a no-cost way for workers to boost their retirement savings.”

Published on: October 31, 2011

A New Tool for Investors: Securitized Product Tables Launched by FINRA

by InvestorLawyers

On October 18th, the Financial Industry Regulatory Authority (FINRA) announced that, together with Interactive Data Corporation, it has created market activity and pricing-related securitized product tables. These tables will provide market participants, including investors, valuable insight in investing in asset and mortgage-backed securities. The data from the table are the figures that have been reported to the Trade Reporting and Compliance Engine, or TRACE, a reporting and dissemination service that consolidates transaction data for fixed income real-time transactions.

Because the tables will be updated after market close every trading day, they offer an aggregate summary of the U.S. securitized products market by asset class on a daily basis. Included in the United States Structured Trading Activity Report are number of trades, number of unique securities transacted and volume of transactions. This information will allow investors to more ably gauge market sentiment and liquidity. Asset class categories within the tables include volume by trade size, buy or sell information, and average prices. Finally, aggregated price levels and volume of MBS pass-through securities and TBAs, CMBS, ABS, Agency and Non-Agency CMOS and CDOs are shown by the five pricing tables.

“For the first time, securitized products data, including pricing tables and a market activity table — based on actual, consolidated transaction information — will be available to the public,” according to FINRA executive vice president of transparency services Steven Joachim. “Dissemination of these tables is the first step FINRA plans to take toward increased transparency in the securitized product market.”

Published on: October 26, 2011

Federal Appeals Court Decision May Undermine FINRA’s Authority

by InvestorLawyers

According to a ruling by the U.S. Court of Appeals for the Second Circuit, FINRA cannot enforce disciplinary actions by taking its members to court. The court’s decision comes after a long legal battle against Fiero Brothers, a penny stock brokerage firm, and John J. Fiero, the firm’s owner. In 2001, FINRA ordered Fiero and Fiero Brothers to pay a $1 million fine for naked short selling and other fraud statute violations. However, Fiero and Fiero Brothers refused to pay the fine imposed in securities arbitration.

Federal Appeals Court Decision May Undermine FINRA’s Authority

When Fiero and Fiero Brothers failed to pay the fine, FINRA took them to court. New York’s state court eventually ruled in FINRA’s favor, but the case was then taken to federal court by Fiero. Fiero attempted to get a declaratory judgment stating that pursuing the fine in court was not within the power of FINRA. Next, FINRA counter-sued.

FINRA’s 1990 housekeeping rule gives it the right to attempt to get monetary sanctions in court. But the federal appeals court ruling is now saying that the housekeeping rule and the foundational securities laws do not give them the right to use the court system to claim disciplinary fines. This ruling overturns the lower New York state court’s decision. The court also asserted that the housekeeping rule should be more formally examined.

Published on: October 21, 2011

FINRA Supports ‘Joining Forces’ Initiative

by InvestorLawyers

A press release from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation on October 6 announced FINRA’s support of the First Lady and Dr. Jill Biden’s “Joining Forces” initiative.

“Joining Forces is a comprehensive national initiative to mobilize all sectors of society to give our service members and their families the opportunities and support they have earned,” the release notes. “Joining Forces provides ways for all Americans to step up and show their gratitude to our service members and their families.”

The FINRA Investor Education Foundation will expand the Foundation’s Military Financial Education Project, giving 50,000 service members and spouses FICO scores, free of charge. This will double the number of persons currently receiving these scores, which are a vital credit tool. FICO helps drive smarter decisions by delivering superior predictive analytics solutions by predicting consumer behavior through the use of mathematics. A FICO score is the United States’ standard measure of consumer credit risk. In addition to the increased cost-free FICO scores, the foundation will be developing educational videos that will aid the National Guard in helping its service members avoid investment and stockbroker fraud and managing their finances. The videos even train military spouses so that they may act as financial counselors.