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Articles Tagged with broker misconduct

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Money MazeBased upon recent secondary market pricing, investors in certain publicly registered, non-traded business development companies (“BDCs”), may have suffered losses on their illiquid investments.  In the wake of the 2008 financial crisis, many retail investors have been steered into so-called non-conventional investments (“NCIs”), including non-traded REITs and BDCs, often premised upon a sales pitch or marketing presentation from a financial advisor touting the investment’s lack of correlation to stock market volatility and enhanced income via hefty distributions.  Unfortunately, in some instances, investors were solicited to invest in such NCIs without first being fully informed of the risk components embedded in these products.

In January 2017, FINRA issued the following guidance with respect to investments in non-traded NCIs:

“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.”

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financial charts and stockbrokerOn May 1, 2018, FINRA Department of Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Laidlaw & Company (UK) LTD. (“Laidlaw”) (BD# 119037).  Without admitting or denying any wrongdoing — Laidlaw consented to a public censure by FINRA, the imposition of a $25,000 fine, as well as agreeing to furnish FINRA with a written certification that Laidlaw’s “[s]ystems, policies and procedures with respect to each of the areas and activities cited in this AWC are reasonably designed to achieve compliance with applicable securities laws, regulations and rules.”

In connection with its investigation surrounding the matter, FINRA Enforcement alleged that “From April 2013 through December 2015… Laidlaw failed to establish and maintain a supervisory system and written supervisory procedures (“WSPs”) reasonably designed to ensure that” Laidlaw registered “representatives’ recommendations of leveraged and inverse exchange traded funds (“Non-Traditional ETFs”) complied with applicable securities laws and NASD and FINRA Rules.”

Non-Traditional ETFs are extremely complicated and risky financial products.  Non-Traditional ETFs are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day).  Therefore, because of their design, Non-Traditional ETFs are not intended to be held for more than a single trading session, as enunciated by FINRA through previous regulatory guidance:

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stock market chartFormer financial advisor Scott William Palmer (CRD# 817586), who was most recently affiliated with Janney Montgomery Scott LLC (“Janney”) (BD# 463), has voluntarily consented to a bar from the securities industry pursuant to a Letter of Acceptance, Waiver & Consent (“AWC”) accepted by FINRA Enforcement on April 10, 2018.  Without admitting or denying any wrongdoing, the Hackensack, NJ-based former broker consented to the industry bar following his June 13, 2017 termination from employment by Janney.

Mr. Palmer’s career in the securities industry dates back to 1973, and included stints at now defunct Darby & Co., Dean Witter, Citigroup, and — most recently, Janney — from 2007-2017.  In June 2017, Janney permitted Mr. Palmer to resign; according to publicly available information and as disclosed on Mr. Palmer’s Form U-5, his discharge from employment was due to Janney’s “Loss of confidence related to complaint disclosure history.”

FINRA records indicate that Mr. Palmer has been subject to twelve customer disputes, including one case in which relief was denied, and another case that settled in July 2016 for $75,000 alleging that Mr. Palmer had made unsuitable investments in the customer’s account.  According to FINRA BrokerCheck, of the ten customer complaints pending arbitration, a number of them allege that Mr. Palmer purportedly recommended unsuitable investments in certain energy stocks, and further, overconcentrated certain customers in energy sector investments.

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financial charts and stockbrokerOn March 27, 2018, the Securities and Exchange Commission (“SEC”) announced formal charges against Wedbush Securities Inc. (“Wedbush”, CRD# 877) with respect to allegations that the broker-dealer failed to supervise its employee, Ms. Timary Delorme (f/k/a Timary Koller) (“Delorme”).  Based on its investigation, the SEC alleged Wedbush ignored numerous red flags indicating that Ms. Delorme — who has been affiliated with Wedbush as a registered representative since 1981 — was purportedly involved in a manipulative penny stock trading scheme with Izak Zirk Englebrecht, a/k/a Zirk De Maison “(“Englebrecht”).

As alleged by the SEC, Mr. Englebrecht engaged in manipulative trading, commonly referred to as “pump and dumps”, through the use of various thinly traded microcap penny stocks.  According to the SEC’s allegations, Ms. Delorme purchased stocks at Englebrecht’s behest in certain customer accounts, and in turn received undisclosed material benefits.  Moreover, the SEC’s findings suggest that Wedbush ignored numerous red flags associated with Ms. Delorme’s alleged involvement in the scheme, including a customer email outlining her involvement, as well as several FINRA arbitrations regarding her penny stock trading activity.

In response to the red flags, Wedbush purportedly conducted two investigations into Ms. Delorme’s conduct.  The SEC has characterized Wedbush’s investigation as “flawed and insufficient”, and that ultimately the brokerage firm failed to take appropriate action to address the alleged misconduct.  The SEC’s order instituting administrative proceedings against Wedbush charges that the broker-dealer failed to reasonably supervise its broker, Ms. Delorme.  The matter will come before an administrative law judge, who will hear the case and prepare an initial decision — there have not yet been any findings of misconduct.

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Money MazeFormer financial advisor Thomas Alan Meier (CRD# 1146044), who was most recently affiliated with Morgan Stanley (CRD# 149777), has voluntarily consented to a bar from the securities industry pursuant to a Letter of Acceptance, Waiver & Consent (“AWC”) accepted by FINRA Enforcement on March 19, 2018.  Without admitting or denying any wrongdoing, the Miami, FL based broker consented to the industry bar following FINRA’s investigation and findings concerning allegations of, inter alia, unauthorized trading, unsuitable investments, and overconcentration in energy sector investments.

Mr. Meier’s career in the securities industry dates back to the early 1980’s, including stints at Merrill Lynch, now defunct Thomson McKinnon, Prudential Securities, Citigroup — and most recently, Morgan Stanley — from June 2009 – April 2016.  According to a previously filed Form U5 notice, Mr. Meier resigned from Morgan Stanley in 2016 while “under internal review.”

Pursuant to the AWC, FINRA Enforcement alleged that between July 2012 and March 2016, Mr. Meier made nearly 1,300 stock trades in six customer accounts without permission, yielding Mr. Meier commissions of about $265,000.  Further, FINRA has alleged that these trades cost customers approximately $818,000, as well as more than $2 million in unrealized paper losses.

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money whirlpoolFinancial advisor Mark Kaplan (CRD# 1978048), who was most recently affiliated with Vanderbilt Securities, LLC (CRD# 5953, hereinafter “Vanderbilt”), has voluntarily consented to a bar from the securities industry pursuant to a Letter of Acceptance, Waiver & Consent (“AWC”) signed off on by FINRA Enforcement on March 7, 2018.  Without admitting or denying any wrongdoing, Mr. Kaplan consented to the industry bar following FINRA’s investigation and findings concerning allegations of unsuitable and excessive trading in an elderly retail investor’s brokerage account.

According to FINRA records, beginning in 1989, Mr. Kaplan began working as a registered representative for Lehman Brothers.  Subsequently, he worked at CIBC Oppenheimer Corp., Morgan Stanley DW Inc., Citigroup, and Morgan Stanley.  During the course of his nearly thirty-year career, he has been involved in seven customer disputes, each of which concluded with a settlement.

With regard to the AWC, FINRA Enforcement alleged that “Between March 2011 and March 2015 [Mr. Kaplan] engaged in churning and unsuitable excessive trading in the brokerage account of a senior investor” and thus “[v]iolated FINRA Rules 2020, and 2111, NASD Rule 2310… and FINRA Rule 2010.”  FINRA’s findings centered on Mr. Kaplan’s customer, identified in the AWC by the initials ‘BP’, as “[a] 93-year-old retired clothing salesman” who opened several accounts at Vanderbilt with Mr. Kaplan during March 2011.

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Wastebasket Filled with Crumpled Dollar BillsAs recently reported, Brandon Curt Stimpson (CRD# 4299623) has been discharged from employment with broker-dealer Allegis Investment Services, LLC (CRD# 168577, hereinafter referred to as “Allegis”).  According to FINRA BrokerCheck, Mr. Simpson’s affiliation with Allegis was terminated on or about December 13, 2017, in connection with allegations that he “[f]ailed to follow firm policies and code of ethics.”

While BrokerCheck does not provide any further information as to Mr. Stimpson’s purported misconduct, a recently reported FINRA customer award appears to shed some light on the issue.  Specifically, on or about March 6, 2018, a panel of FINRA arbitrators issued an award against Allegis and Mr. Stimpson in the amount of $404,182 (the “Award”).  The Award consists of $287,350 in compensatory damages, $53,730 in pre-judgment interest, reimbursement of $20,000 in fees and costs (including expert witness fees), as well as attorneys’ fees in the amount of $60,000 pursuant to Utah case law and statute.

This Award — which holds Allegis and Respondent Brandon Stimpson jointly and severally liable — was rendered following nine hearing sessions in February 2018.  The causes of action raised by Claimant included unsuitability, unauthorized trading, failure to supervise and breach of fiduciary duty, in connection with “[t]he buying and selling of unspecified put options tied to the performance of the Russell 2000 Index.”  According to Claimant’s attorney, Mr. Stimpson allegedly invested more than 25% of Claimant’s portfolio in index options.

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stock market chartAs recently disclosed by the Financial Industry Regulatory Authority (“FINRA”), former Morgan Stanley (CRD# 149777) financial advisor, Kevin Scott Woolf (CRD# 6145312), has voluntarily consented to an industry bar.  Pursuant to a Letter of Acceptance, Waiver and Consent (“AWC”), accepted by FINRA on or about January 26, 2018, Mr. Woolf has consented to sanctions stemming from FINRA Enforcement’s allegations that “[h]e failed to provide documents and information and to appear and provide… on-the-record testimony during the course of an investigation that he engaged in multiple undisclosed outside business activities, including the development of a hotel, and participated in an undisclosed private securities offering for that development project that was marketed to customers of his member firm.”

According to BrokerCheck, Mr. Woolf was affiliated with Morgan Stanley as a registered representative from 2013 – 2016, during which time he worked out of the wirehouse’s Winter Haven, FL branch office.  According to the allegations set forth in the AWC, it would appear that Mr. Woolf was permitted to voluntarily resign from Morgan Stanley on or about June 2016, based upon the brokerage firm’s internal review of Mr. Woolf’s “potential outside business activity related to a securities offering for a real estate investment.”

Based upon applicable securities laws and industry rules and regulations, a stockbroker or financial advisor is prohibited from engaging in conduct that amounts to “selling away,” or selling securities to his or her customers without prior notice to or approval from the broker’s firm.  A registered representative who engages in such activity does so in violation of NASD Rule 3040, in addition to FINRA Rule 3280.  As stated by the SEC, NASD Rule 3040 is designed to protect “investors from the hazards of unmonitored sales and protects the firm from loss and litigation.”

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Money MazeReal estate investment firm MacKenzie Realty Capital (“MacKenzie”) is offering to purchase shares of The Parking REIT, Inc. (f/k/a MVP REIT II, Inc., hereinafter “The Parking REIT”) for $12.17 per share.  The pricing of MacKenzie’s unsolicited tender offer suggests that investors who wish participate in order to generate liquidity will lose money on their investments based on their initial purchase price.

As recently reported, The Parking REIT has merged with MVP REIT, Inc. (“MVP REIT I”), and as a result of the merger, the newly formed entity holds a real estate investment portfolio consisting of 44 parking facilities across 15 states, with an estimated aggregate asset value of $280 million.

The Parking REIT is a publicly registered non-traded real estate investment trust (“REIT”).  Unlike exchange traded REITs, non-traded REITs are particularly complex and risky investment vehicles that — as their name implies — do not trade on a national securities exchange.  Unfortunately, retail investors are often uninformed by their broker or money manager of the illiquid nature of non-traded REITs.  Investors may be unaware that their options to sell shares  are limited and often disadvantageous as to pricing and timing, and generally include direct redemption with the issuer, potential sale of shares through a fragmented and illiquid secondary market, or in limited instances — a tender offer by a third-party.

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Wastebasket Filled with Crumpled Dollar BillsInvestors in the LJM Preservation and Growth Fund suffered substantial losses in early February, 2018 as volatility in broad stock market indices spiked.  LJM Preservation and Growth Fund (“LJM P&G Fund” or the “Fund”) (LJMAX, LJMCX, LJMIX) is a mutual fund advised by LJM Funds Management, Ltd., (“LJM”).  LJM is headquartered in Chicago, IL, and was founded in 2012, as an affiliate of LJM Partners, an investment management firm that has been managing alternative investment strategies since 1998.

Since its inception in 2013, the LJM P&G Fund has employed an investment strategy that “seeks capital appreciation and capital preservation with low correlation to the broader U.S. equity market.  The Fund attempts to profit, primarily, from the volatility premium – the spread between implied volatility (investors’ forecast of market volatility reflected in options pricing) and realized (actual) volatility.  The Fund aims to capture this premium by writing (selling) call and put options on S&P 500 Index futures.”

A put option is a contract that allows the purchaser of the underlying contract to sell a security at a specified price (the strike price).  This allows the purchaser to hedge a position or a portfolio, by essentially creating a price floor, where a drop in a security price below a certain level will nevertheless deliver a profit on the option contract.  Conversely — when an investor, or institutional fund manager, sells a put option — the seller is betting that the price will stay higher than the option price.  And in instances when the seller of the option contract does not own the underlying security, then the seller is engaged in naked option writing.  This is an inherently risky strategy fraught with risk; in fact, some market pundits have referred to selling naked puts as “picking up nickels in front of a steamroller.”

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