Suitability

Published on: February 2, 2012

Citigroup’s Misconduct Comes to Light After Documents are Unsealed and Judge Refuses Request to Overturn FINRA Decision

Documents from the Financial Industry Regulatory Authority (FINRA) proceedings of Citigroup vs. Gerald D. Hosier, Jerry Murdock Jr. and Brush Creek Capital have been unsealed. The $54.4 million award granted in this case was the largest ever given to individuals in securities arbitration proceedings. A decision was made this month on Citigroup’s request to overturn FINRA’s decision.

Citigroup’s Misconduct Comes to Light After Documents are Unsealed and Judge Refuses Request to Overturn FINRA Decision

The details of the FINRA proceedings, which were confidential, have been unsealed following Citigroup’s request that the award be tossed out by a United States district court. The documents viewed by FINRA arbitrators show, according to the New York Times, that Citigroup rated the investments of the claimants at a 5 rating for risk on a scale of 1 to 5, with 5 being the highest risk rating. Investors went on to lose 80 percent of their investments, which is no surprise considering the risk rating.

The investments in question were municipal arbitrage portfolios, or ASTA/MAT. They were sold by Citigroup Global Markets through MAT Finance LLC. Internal emails show that the investments began their decline in value in early 2008, following which Sally Krawcheck requested the risk rating of the MAT. Despite the fact that documents showed a risk rating of 5, she was told the risk rating was “3-5.” In addition, Citigroup did not disclose the investments’ 5 rating to investors. Furthermore, according to The Times, the portfolio manager was instructed not to discuss information the internal guidelines — which differed from the investors’ prospectus — in a conference call that involved the brokers of clients that had sustained losses.

Published on: January 30, 2012

Investment Attorneys Seeking Defrauded Investors Following Two Securities Arbitration Cases Against Merrill Lynch

by InvestorLawyers

Investment attorneys are investigating potential claims on behalf of investors against Merrill Lynch and the Phil Scott Team. Over the last seven months, the Financial Industry Regulatory Authority has awarded defrauded investors, in two separate securities arbitration proceedings, around $2 million. The $2 million awarded includes compensatory damages, attorney’s fees, forum fees, costs and interest. The first case, decided in June 2011, resulted in an award to claimants of around $880,000. The second case, decided in January 2012, resulted in an award to claimants of about $1.2 million.

Investment Attorneys Seeking Defrauded Investors Following Two Securities Arbitration Cases Against Merrill Lynch

According to claimant allegations, Phil Scott (a/k/a Walter Schlaepfer) recommended they place their assets in portfolios which were invested in 100 percent equities, an unsuitable recommendation. The portfolios recommended were the Merrill Lynch Phil Scott Team Portfolios. In addition, one claimant had pledged nearly two-thirds of the portfolio to three different Merrill Lynch loans, increasing the risks associated with the portfolio and leading to a forced liquidation of securities as a result of the declining market value on the account.

Two claimants, Douglas and Kristin Mirabelli, claimed Scott’s broker misconduct included breach of fiduciary duty and misrepresentation. The Mirabellis’ case, decided this month, was the case in which $1.2 million was awarded by the FINRA Arbitration Panel. According to one of the Mirabellis’ attorneys, Scott should have diversified the claimants’ money rather than placing it into the Merrill Lynch Phil Scott Team Income Portfolios.

Published on: January 27, 2012

FINRA Awards Claimants More Than $9 Million

by InvestorLawyers

Securities Arbitration recently concluded in a private placement suit between CapWest and 30 claimants. The initial filing with the Financial Industry Regulatory Authority (FINRA) took place in December 2009 and was amended in February 2010 and June 2010. Claimants asserted breach of contract, breach of fiduciary duty, negligence and failure to treat claimants in an equitable and just manner. The allegations of the claimants arose in connection with their investments in Medical Capital Corporation, DBSI, Inc. and Provident Royalties LLC.

FINRA Awards Claimants More Than $9 Million

Including the investments issued by the three companies, tens of millions of dollars in private placements were sold by CapWest. CapWest’s closing in September 2011 was prompted by these private placements. The onset of the “Great Recession” marked the point at which the private placement securities became toxic and many investors holding them suffered substantial losses, they argue.

The claimants have demanded the following amounts in compensatory damages, respective to each company, plus interest, costs and attorney’s fees: $6,055,763, $7,465,763 and $8,300,763. A comment on the decision stated that, “On September 23, 2011, the Panel conducted a hearing to consider Claimants’ motion for sanctions and to preclude. Respondent did not appear. The Panel determined that an attempt was made by the conference operator to contact Mr. H Thomas Fehn, counsel for Respondent, that Mr. Fehn had been notified by FINRA of the date and time of the hearing, and that the operator was unable to reach Mr. Fehn at the phone number provided.” The Securities Arbitration Panel ultimately found CapWest liable and ordered it to pay $7,925,763.00 in compensatory damages, $1,188,863 in attorneys’ fees, and $5,840 in costs. In addition, CapWest was ordered to pay 8 percent per annum interest on the sums awarded.

Published on: January 12, 2012

Investment Attorneys Seeking Victims of Self-Directed IRA Fraud

by InvestorLawyers

Stock fraud lawyers are seeking clients that have been the victim of stock broker fraud through the use of self-directed IRAs. Self-directed IRAs are held by a custodian or trustee and allow for investment in a broader set of assets than traditional IRAs. The custodial processes associated with self-directed IRAs gives investors a sense of security and protection. However, this is often not the case. Because self-directed IRAs’ owners are able to hold unregistered securities, due diligence is often neglected by custodians. As a result, these investments are often a vehicle of stock broker fraud.

Investment Attorneys Seeking Victims of Self-Directed IRA Fraud

The most common IRA custodians are broker-dealers and banks. In traditional IRAs, holdings are limited to mutual funds, CDs, firm-approved stocks and bonds. However, custodians for self-directed IRAs may invest in promissory notes, tax lien certificates, real estate and private placement securities. Investments that tie up retirement funds for a time period that is too long, fail to diversify in order to reduce possible loss or contain a risk for loss that is too high are in breach of advisers’ fiduciary duty and brokers’ suitability standard. In addition, early withdrawals come with a penalty that encourages money remains tied up in them longer.

Another significant danger of self-directed IRAs, and a reason they become a target for fraud promoters, is that they often do not require the custodian or trustee of the IRA to perform audits or keep accurate records.

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: 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 11, 2011

TICs Dangerous for Many Investors

by InvestorLawyers

TICs, or tenancies-in-common, are complicated deals which allow real estate sellers to avoid capital gains tax by rolling their proceeds into other properties. TICs are also known as 1031 exchanges and, according to Jason Zweig, author of “In Real Estate, Simple Wins,” in a recent article in The Wall Street Journal, “were tailor-made for a real estate bubble.” From 2004 to 2008, $13 billion was spent by investors on TICs. These investments were untraded, privately-placed securities and stakes in each TIC could be sold to as many as 35 investors. Each investor would receive a stake in the potential sale and rental income of the property, which could be residential, retail or commercial.

TICs Dangerous for Many Investors

The positive side of TICs is that investors are able to avoid capital gains taxes, receive a regular income from the investment and, in the event of the investor’s death, the asset can be bequeathed to heirs. However, while TICs are suitable for some specialized clients, they are not appropriate for many investors. Regardless, these investments have been sold — with some disastrous results — as such.

“When there’s a simple way and a complicated way to solve a problem, the middleman will almost always make more money off the complicated solution — but you might not,” Zweig notes.

Published on: November 3, 2011

What is a “Rogue Trader?”

by InvestorLawyers

The term “rogue trader” has been used in recent news and often accompanies reports of catastrophic losses. According to the San Francisco Chronicle, “a rogue trader is a trader who takes unauthorized investing risks to attempt massive gains, but makes reckless choices in the process.” Therefore, action taken against a rogue trader by a stock fraud lawyer can involve accusations of unauthorized trading and/or unsuitable investments. In addition, rogue traders can face criminal charges for breach of trust, collusion and fraud if caught.

What is a “Rogue Trader?”

The actions made by rogue traders are unethical in that they act outside of the authorization of their supervisors or companies and/or do not trade within the limits that have been set for them. Company rules and government regulations are often of no concern to a rogue trader — at least not until they are caught.

The bane of a rogue trader’s existence is a sudden and major loss that results from their risky behavior. Though this is detrimental to the trader, it is also a major concern for the company they work for, as well as their clients. Another danger to the success of a rogue trader is the attention of regulatory authorities and the reporting of their behavior by a co-worker. This is one reason why regulations within companies that encourage employee reporting are critical. Rogue traders can do extensive damage to the company they work for, as well as the company’s executives and share price.