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VSR Financial Services, Inc. was recently part of a $3.74 million settlement in Texas state court because a former VSR advisor, Charles Chapman, allegedly recommended high risk, illiquid alternative investments during the credit crisis.

Chapman allegedly recommended that his client, Mr. Gordon McLendon, Jr. invest in Diversified Business Services & Investments Inc. (DBSI). However, DBSI declared bankruptcy in 2008 and it was eventually uncovered that it was a Ponzi scheme. As a consequence, Chapman’s client sued VSR alleging that they “failed to conduct proper due diligence associated with VSR before recommending and causing plaintiffs to make investments with VSR, including the DBSI investment.”

Other investments recommended by Chapman were:

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Michael Zukowski for recommending unsuitable investments in inverse and inverse-leveraged Exchange Traded Funds to his clients.

On December 23, 2010 RBC Capital Markets, LLC filed a Termination Notice (U5) stating that Zukowski had failed to meet firm expectations. Later, on August l8, 2011, RBC filed a an amended disclosure to include an Administrative Complaint filed by the Massachusetts Securities Division (MSD) which stated that: “The Massachusetts Securities Division alleged Michael Zukowski made unsuitable recommendations to brokerage and advisory clients regarding the purchase and sale of leveraged, inverse and inverse-leveraged exchange traded funds.” As a consequence, during November 2012 Zukowski entered into a Consent Order with the MSD concerning the allegations of unsuitable recommendations. Zukowski agreed to sanctions including a Cease and Desist as well as a five-year bar to act as a “broker-dealer agent, investment adviser, investment adviser representative and issuer-agent” in Massachusetts. Finally, on November 16, 2012, RBC filed another amended Form U5 and disclosed a written complaint by two clients indicating that the “Clients allege material omissions and unsuitable advice regarding non-traditional ETFs, in period from February to December 2009.”

FINRA found that during October 2007 until September 2009, Zukowski recommended approximately 975 purchase and sell transactions involving Non-Traditional ETFs to about 30 customers without any due diligence. In general, FINRA has explained before that Non-Traditional ETFs are highly speculative products containing substantial and unusual risks including the risks associated with the daily reset and leverage components. Given Zukowski’s lack of due diligence, FINRA found that his recommended transactions lacked a reasonable basis and were therefore unsuitable.

The Financial Industry Regulatory Authority (FINRA) alleged that Feltl & Company, a firm based in Minneapolis, did not properly oversee its penny stock business between January 2008 and February 2012. While Feltl did not admit to any wrongdoing, the firm will pay $1 million to settle its claims. FINRA explained that Feltl did not meet risk-disclosure standards and record keeping requirements. In other words, Feltl failed to tell customers about the suitability and risks associated with certain penny stocks and did not send customers account statements that reflected the market value of the same.

FINRA also alleged that the firm did not keep the correct records for transactions for securities that temporarily did not meet the definition of a penny stock. Furthermore, Feltl & Company did not keep track of penny-stock transactions in securities that did not make a market.

According to the Wall Street Journal, Feltl made a market in 17 penny stocks and earned approx. $2.1 million from around 2,450 solicited customer transactions during the four years in question. FINRA was unclear as to how much money the firm made from the transactions they had no record of but that stated that revenue from all transaction in that vein are substantial.

FINRA has filed charges against five stockbrokers formerly employed by Newport Coast Securities Inc., as well as the firm itself and two supervisors, alleging that the firm excessively traded customer accounts for the purpose of generating commissions- a type of violation known as “churning.”

Newport Coast Securities, based in New York, as well as two former supervisors at the firm, Marc Arena and Roman Luckey, were also named in the FINRA complaint.  According to FINRA, from 2008 through 2013, brokers Douglas Leone, Andre LaBarbera, David Levy, Antonio Costanzo and Donald Bartelt churned the accounts of 24 customers, utilizing margin to trade risky securities and charging excessive commissions, causing the customers losses in the sum of over $1 million.  Brokers also allegedly completed new account forms for clients that misstated the customers’ net worth, investment experience and objectives.  FINRA also alleges that Levy, of West Palm Beach, Fla., and Costanzo, based in Chesapeake, Va., attempted to discourage several customers from speaking with FINRA investigators.

According to the Securities and Exchange Commission, “churning refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives.” In short, churning is a form of broker misconduct in which the broker performs excessive trading to generate personal profit. If an investor feels they may be a victim of churning, he should check his monthly statements for numerous stock trades and then contact a stock broker fraud attorney. If you believe you are a victim of churning, you may contact the law office of Christopher J. Gray, P.C. to explore the possibility of asserting a claim in FINRA arbitration. 

The Financial Industry Regulatory Authority (known as “FINRA”) has reportedly received dozens of filings for arbitration from investors on the island who say they were harmed by negligence and unsuitable advice from UBS Financial Services of Puerto Rico. The increase in claims coincides with the commonwealth preparing for a new issue of general obligation bonds and the main rating agencies labeled Puerto Rico bond funds as “junk bonds”. 

The market for Puerto Rico debt became increasingly volatile last year amid concerns over the island’s economy, as the government enacted various reforms but was ultimately unable to protect the commonwealth’s investment grade credit ratings. Although there has not yet been a spike in forced selling of municipal bonds issued by the Puerto Rico government by funds with investment-grade mandates, some analysts believe that the downgrade of Puerto Rico debt to “junk” status by ratings agencies will eventually cause some municipal bonds issued by Puerto Rico to lose value. If the value of Puerto Rico bonds drops, certain closed-end funds heavily marketed by UBS Puerto Rico to island residents will also likely lose value.  Some of the closed-end funds that may be affected by the Puerto Rico credit downgrades are the following:

• Puerto Rico AAA Portfolio Based Funds I and II

Stifel Nicolaus & Co., a brokerage firm, and its subsidiary, Century Securities Inc., must pay fines and restitution of over one million dollars to settle Financial Industry Regulatory Authority  (“FINRA”) charges concerning alleged unsuitable sales of leveraged exchange-traded funds (“ETFs”) to customers.  FINRA alleged that Stifel and a subsidiary sold leveraged and inverse ETFs to some 65 customers for whom the investments were unsuitable between 2009 and 2013. The regulator said that the firms didn’t have adequate training or written procedures in place to make sure that financial advisers had a “reasonable basis” for recommending the ETFs
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“The complexity of leveraged and inverse exchange-traded products makes it essential for
securities firms and their representatives to understand these products before recommending
them to their customers,” Brad Bennett, A FINRA enforcement official, reportedly stated.  “Firms must also conduct reasonable due diligence on these and othercomplex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors.”

Stifel reportedly  sold a total of about $641 million in nontraditional ETFs to retail investors from 2009 to 2013, according to FINRA.

Leveraged ETFs have been known to significantly diverge from their intended performance of tracking underlying benchmarks such as stock indices or commodities, especially under volatile market conditions.  Further, such investments are seldom appropriate for conservative investors due to their inherent risk and price volatility.

According to recently-filed court papers, to settled Securities and Exchange Commission (“SEC”) charges, hedge fund manager Philip Falcone of Harbinger Capital and certain Harbinger entities admitted to factual allegations by the SEC, agreed to pay disgorgement of over $6 million and fines of over $10 million, and agreed to a ban on Mr. Falcone’s association with any broker-dealer for at least five years.

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

• Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.