broker misconduct

Published on: January 30, 2012

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

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 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 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: December 29, 2011

Have You Been a Victim of Fraud Because of Celebrity Trust?

by InvestorLawyers

One troublesome form of stock broker misconduct involves the use of celebrity status in order to gain the trust and secure the business of investors. One major problem with this type of scam is that many investors don’t want to admit that they made an investment decision based on the celebrity status of the spokesperson. However, investment attorneys encourage victims of fraud — regardless of their motivations for investing — to seek reimbursement of their losses through securities arbitration.

Have you been a Victim of Fraud Because of Celebrity Trust?

While fraud cases that use the celebrity status of an individual to gain investor trust are nothing new, the most recent incident used the fame of a former Olympic sprinter and NFL wide receiver Willie Gault. Gault managed a California-based medical device company called Heart Tronics. Between 2006 and 2008, the company announced fake sales orders for heart-monitoring devices valued at millions of dollars.

The Securities and Exchange Commission filed a complaint on December 20, 2011, in the United States District Court in California. In addition, the SEC sued Mitchell Stein, who hired promoters to use the Internet to tout the company’s stock and controlled most of Heart Tronics’ business activities. Also named in the complaint were J. Rowland Perkins, Gault’s co-chief executive officer and founder of Creative Artists Agency LLC, and Martin Carter, Stein’s chauffer and handyman.

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 12, 2011

Investment Fraud: Unregistered Securities

by InvestorLawyers

A common form of investment fraud is the selling of unregistered securities. In many cases, investors can recover their losses in securities arbitration. In short, unregistered securities are securities that have not been registered with the Securities and Exchange Commission (SEC). Before a stock, bond or note can be sold to the public, it must be registered with the SEC. In fact, it must be registered before it can even be offered to the public. Any security is considered to be unregistered if it does not have an effective registration statement.

Investment Fraud: Unregistered Securities

While the offering of unregistered securities is a violation of Section 5 of the Securities Act of 1933, there are some exceptions. So when is it legal and when is it illegal? According to Section 5(c) of the Securities Act of 1933, “It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8.”

Seems fairly cut and dry, so when is it legal? Exemptions to the restriction of the sale of unregistered securities include:

Published on: December 1, 2011

Investment Fraud: Selling Away

by InvestorLawyers

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 30, 2011

Investment Fraud: Unauthorized Trading

by InvestorLawyers

Unauthorized trading, a form of broker misconduct that occurs when a broker makes a trade without the investor’s consent, can be a valid claim for securities arbitration. However, there is more than one way for unauthorized trading to be committed. In one way, the broker may believe that the transaction is suitable for their client but can’t or doesn’t contact the investor before making the trade. However, in other circumstances, the broker may make the trade and then try to convince the investor to consent to the trade — even though it’s after the fact, which the broker does not disclose. This second scenario is especially tricky because if the client then consents to the trade, the unauthorized trading may go unnoticed unless the client is careful to check the dates of transactions on their monthly statements.

Investment Fraud: Unauthorized Trading

The following suggestions will help you prevent unauthorized trading and determine if you have been a victim of unauthorized trading:

1. Take notes! This can be especially helpful in determining if you have been a victim of the second method of unauthorized trading described above. It is important to keep careful notes of all conversations between you and your broker. Notes should include dates, times, what was discussed and what your instructions were to your broker. These notes can be compared with monthly statements to determine if your broker conducted trades that were either unapproved or conducted before your approval was given. Remember, unauthorized trading is still fraud, even if you later consented to the trade, and should not go unchecked.

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 7, 2011

Investor Education: How Stockbrokers Buy and Sell Stock

by InvestorLawyers

Investor education is an important part of avoiding broker misconduct, so it is critical that investors have a general idea of how trades work. The following is a short summary of what occurs when a stockbroker executes a buy or sell order.

Investor Education: How Stockbrokers Buy and Sell Stock

Brokers usually have a choice of markets in which they can execute a trade. If the stock is listed on an exchange, the order may be directed — by the broker — to the same exchange, a different exchange or a “market maker.” A market maker is a firm which remains ready to pay publicly-quoted prices for a stock listed on an exchange and sometimes offers “payment for order flow,” a term that refers to a payment made from the market maker to a broker in exchange for having the order routed to it. OTC stocks can be sent to an “OTC market maker.” Brokers can also use internalization, in which the order is sent to another division of the firm and is then filled from the inventory of the firm. Finally, the broker may use an ECN, or electronic communications network, in which orders are automatically matched at specified prices.

The broker may choose any of the above methods for executing a buy or sell order so long as the method falls within the limits of “best execution.” Best execution refers to the broker’s duty to seek the method that is both reasonably available and most favorable to the customer. “Price improvement” is an important part of determining which method is determined to be the best execution. When an order has an opportunity to be executed at a price that is better than the current quote, this is an opportunity for price improvement. It is important to note, however, that price improvement is an opportunity, not a guarantee.