broker misconduct

Published on: August 22, 2011

FINRA REVISES SUITABILITY RULE 2111

The Financial Industry Regulatory Authority (FINRA)’s new Rule 2111 will help prevent broker misconduct resulting from a failure to adhere to the suitability standard by adding several factors to determining suitable recommendations. Previously, the only factors brokers were required to consider when offering investments to customers were investment objectives, tax status and financial status. Under the new rule, broker-dealers must take into account age, risk tolerance, time horizon, liquidity needs, other investments and experience, in addition to the factors previously outlined.

When questioned about the definition of the terms “risk tolerance,” “time horizon” and “liquidity needs,” FINRA provided the following guidelines:

Risk Tolerance: “A customer’s ability and willingness to lose some or all of [the] original investment in exchange for greater potential returns.”

Published on: August 9, 2011

SKY CAPITAL FOUNDER MANDELL AND BROKER HARRINGTON FOUND GUILTY

by InvestorLawyers

This July, a jury found Sky Capital founder Ross Mandell and ex-broker Adam Harrington guilty of securities fraud and conspiracy. Allegedly topping $140 million, the stock broker fraud occurred between 1998 and 2006, according to prosecutors. Preet Bharara, Manhattan U.S. attorney, stated that Mandell and Harrington are, “masters of deception who had no qualms about lying to investors, manipulating stock prices, and using dubious trading practices to enrich themselves at the expense of their victims.”

Sky Capital Founder, Mandell, and Broker, Harrington, Found Guilty

In 2005, Forbes Magazine nicknamed Mandell Wall Street’s “bad boy broker” and it’s no wonder, with the bad publicity Sky Capital has received. A Forbes article released in July of 2011 by Walter Pavlo describes “the low bar of becoming a stockbroker” at Sky Capital. McKyle Clyburn, a witness at Mandell’s trial, described how he lied about his name, age and “pretty much everything” when first becoming a stock broker and then found himself a home at Sky Capital — despite his aversion to reading and writing and his drug abuse — making sometimes as much as $750,000 a year. He also stated that using margin trades to burn through a client’s money to earn himself commissions was common at Sky Capital. Clyburn is one of four former Sky Capital employees to plead guilty to criminal charges and then testify to their broker misconduct at Mandell and Harrington’s trial.

The trial lasted five weeks and testimonies like Clyburn’s exhibited the kind of lifestyle that Sky Capital brokers enjoyed at the expense of their clients. According to the Wall Street Journal, evidence introduced by prosecutors also showed that over $162,000 of Sky Capital investors’ money went to “adult entertainment expenses.” Attorneys for both Mandell and Harrington say they will appeal.

Published on: August 7, 2011

SELEWACH SENTENCED TO 8-12 YEARS IN PRISON

by InvestorLawyers

Shane Selewach, a former Ameriprise Financial Services Inc. broker, has been convicted of stealing nearly $335,000 from clients and sentenced to 8-12 years in prison for broker misconduct. Selewach’s misconduct includes six counts of larceny, six counts of securities fraud and conducting business as an unregistered broker dealer.

SELEWACH SENTENCED TO 8-12 YEARS IN PRISON

Selewach was employed with Ameriprise from September 1997 until he was fired in April 2006. In February of 2008, he was permanently barred from acting as a securities broker by the Financial Industry Regulatory Authority. His broker misconduct took place between July 2005 and November 2008, during which time he stole nearly $350,000 from six victims. For the last nine months of this time period, he was barred from being a broker but continued to operate as one regardless. Selewach led investors to believe that he was investing their money in hedge funds, commodities and real estate, but in reality he was using it for personal benefit including travel, mortgage payments and sporting event tickets.

During the trial, Selewach’s defense argued that the monies he received were loans rather than “high-interest-rate investments,” according to the Cape Cod Times. Selewach himself testified to this effect. However, victims of his crimes testified otherwise. One of his victims, Patricia Conti, lost more than $150,000 to Selewach. Conti testified that Selewach did not disclose that his departure from Ameriprise was a result of termination, that he continually pressured her and that he asked her to sign documents which she was unable to read fully because they were largely concealed from view.

Published on: August 3, 2011

FINRA RULING: EX-BROKER WILLIAM BAILEY SUSPENDED FOR TWO YEARS

by InvestorLawyers

William Bailey, a former broker for NEXT Financial Group Inc., was suspended for two years in Financial Industry Regulatory Authority (FINRA) securities arbitration. Bailey’s official cause for suspension, according to FINRA, was “unsuitable and excessive trading of mutual funds and variable annuities.” In addition, Bailey was charged with discretionary trading without prior written approval.

FINRA Ruling, Ex-Broker William Bailey Suspended for Two Years

Bailey’s broker misconduct took place over the span of nearly two years, from January 2006 to December 2007. His misconduct affected seven investors between the ages of 66 and 93. In addition, three customers were convinced by Bailey to hold their variable annuities for only a short time before switching them to new ones. FINRA determined that this was a violation to the broker’s suitability standard because it did not improve their financial situations and was not in keeping with their needs and financial objectives.

During this time period, Bailey recommended 484 “short-term mutual fund switch transactions,” according to FINRA. The average turnover for Bailey’s trades was only 60 days — a practice known as "churning." Sales charges and trading fees for these 484 transactions amounted to $147,000 and Bailey’s commissions for these transactions amounted to more than $120,000. Currently, there is no mention of financial restitution and Bailey did not admit or deny wrongdoing.

Published on: July 31, 2011

JENNIFER KIM SETTLES SEC CLAIM

by InvestorLawyers

Jennifer Kim, an ex-Morgan Stanley trader, will pay $25,000 and is barred from broker-dealer association for three years in her settlement with the SEC regarding its claim that she concealed trades and falsified books. The firm’s risk limits were exceeded by the proprietary trades she concealed, intending to cancel the swap orders almost immediately. This action “tricked” the firm’s monitoring systems, allowing the swaps to go through. At this time, Kim was acting as the risk manager for both her trading account and her supervisor’s proprietary account.

Jennifer Kim Settles SEC Claim

In late September 2009, Larry Feinblum, Jennifer Kim’s immediate supervisor at the Swaps Desk, was told by his supervisor that their net risk position in the Wipro account was too high at $20 million, and should not be increased. Regardless, by October 6 Winpro’s net aggregate risk had reached $50 million. Kim and Feinblum brought the risk position down again, but by November, it had increased once more to $30 million and the two devised a scheme in which they booked swaps that would reduce the net risk position, falsely verified them, and then canceled the swaps, returning the risk to its higher position. In this way, they were able to fool the firm’s risk assessment program into believing the account was within acceptable risk limitations.

On December 16, 2009, the misconduct of Kim and Feinblum was exposed when Feinblum admitted to his supervisor that in only one day he had lost $7 million. Furthermore, on December 17, he admitted that he, along with Kim, had hidden exceeded risk limits. As a result of this confession, Feinblum and Kim were subsequently terminated on January 4, 2010. Feinblum settled for $150,000 on May 31 for related claims.

Published on: July 26, 2011

STL BROKER SENTENCED FOR DEFRAUDING INVESTORS

by InvestorLawyers

While stock broker fraud is always a despicable crime to the victims of the fraud, the case of Joshua Gould's broker misconduct seems infinitely worse for the close relationship between victim and perpetrator, as well as the vulnerable nature of other investors. Gould, a former independent broker for Woodbury Financial Services in University City, defrauded friends, family, and investors, including the elderly, widows, and religious organizations.

Hedging and “Failure to Hedge” Claims

Not even Gould's own mother was safe, and she lost around $500,000 to her son, the bulk of her inheritance. All in all, more than 25 people were swindled out of more than $5 million. Gould spent some of the money on charitable donations to boost his reputation while at the same time spending it on strippers and entertaining them at St. Louis hotel parties. In addition, he paid the rent of at least one stripper. Gould also paid off personal debt, renovated his home, started several businesses, and facilitated a ponzi scheme.

Once the theft was discovered, Gould confessed and, according to his lawyer, has cooperated and attempted to remedy the losses of his victims. During his trial, he expressed remorse for his actions and disdain for himself.

Published on: July 24, 2011

VICTIMS OF NOEL AND KLOSEK INVESTMENT FRAUD FINALLY RECEIVING PARTIAL RESTITUTION

by InvestorLawyers

$1 million is being distributed to victims of an investment scam by federal authorities. Bryan Keith Noel and Alexander Klosek of North Carolina were charged in 2009 with multiple crimes, including conspiracy to commit wire fraud and conspiracy to commit mail fraud. All crimes were connected to Noel’s fraudulent investment business. In March 2010, Noel was found guilty and ordered to pay $11 million in restitution plus serve 25 years in prison. Klosek entered a guilty plea and was ultimately sentenced to pay $10.5 million in restitution and to serve 87 months in prison.

Victims of Noel and Klosek Investment Fraud Finally Receiving Partial Restitution

Official court documents stated that Noel and Klosek’s fraud took place from about January 2003 to around July 2006 and involved over 100 clients, the majority of which were local NC retirees. In this atrocious broker fraud, clients were persuaded to invest large sums with Noel’s business, which were then diverted to another company belonging to Noel, significantly decreasing clients’ investment values. The diversion occurred without his clients’ knowledge or approval. The decrease in investment value was then hidden from clients with falsified quarterly statements and in July 2006, investors were told that their investment had actually grown. Victims of Noel and Klosek’s fraud now believed their assets to be around $16 million when, in fact, they had dwindled to only around $1 million.

According to the NC Securities Division Newsletter, Acting Special Agent in Charge of the Charlotte Division of the FBI, Joseph S. Campbell, said this of the case: “Retirees are often victims of fraud, and to steal their financial security is unconscionable. These men stole millions of dollars from people who don’t have the opportunity to restore the savings they’ve spent their lives building.” Though the $1 million that is now being distributed is only a small portion of the total restitution ordered by the court, it is a start.

Published on: July 20, 2011

INVESTMENT CHURNING: A SLIPPERY SLOPE OF BROKER MISCONDUCT

by InvestorLawyers

The nature of “churning” within an investor’s account is difficult to prove. According to the S.E.C., “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, contact the law office of Christopher J. Gray, P.C. for information and guidance.

Investment Churning: A Slippery Slope of Broker Misconduct

Although churning is clearly prohibited in both the Securities Exchange Act of 1934, Section 10(b) and the Securities Exchange Commission Regulation 10(b)(5), proving it in arbitration can be a challenge. Two critical factors of determining if churning has occurred are time and frequency of transactions. In addition, the broker must be acting willfully and not in the best interests of the investor. Finally, the broker must be in control of the trades that occurred. If the account is a discretionary account or if the broker is recommending most, or all, of the trades to the customer, the broker is said to be in control of the trades.

A case against churning is one in which the entire picture must be taken into account. A stock broker fraud attorney must analyze a large amount of data because of the high number of trades that occur in churning. Furthermore, the attorney must look at the Annualized Turnover Ratio, the Commission/Equity Ratio, the Total Cost/Equity Ratio, the commissions of the broker and factors that affect broker motivation. Above all, the trades must be done for the benefit of the broker, rather than the investor.

Published on: July 18, 2011

JPMORGAN’S $211 MILLION SETTLEMENT CLOSE ON THE HEELS OF $154 MILLION SETTLEMENT

by InvestorLawyers

JPMorgan is in the financial spotlight once again — this time with its second major federal settlement within a month. Whereas last month’s settlement was in connection with broker misconduct that affected investors, the more recent developments involved state governments and government organizations. In its most recent settlement, JPMorgan Chase agreed to pay $211 million for bid-rigging of municipal bond transactions. Thirty-one state governments were affected from 1997-2005 because of at least 93 tainted transactions. The $211 million settlement will be split between the Internal Revenue Service, a group of state attorneys general and the Office of the Controller of the Currency. A settlement also was reached with New York’s Federal Reserve Bank.

JPMorgan’s $211 Million Settlement Close on the Heels of $154 Million Settlement

Secret deals allowed the bank inside information about competitors’ bids and were aided by a minimum of 11 bidding agents. JPMorgan Chase maintains that any illegal actions were concealed from management as a whole and were conducted against the firm’s policies. The illegal conduct was, according to JPMorgan, made by former employees. Furthermore, the division in which these employees used to work has been shut down and the firm has increased their ethics training for staff and implemented an improved compliance program. This settlement will undoubtedly send a message to the financial world of the repercussions of tampering with the fairness of the bond market.

In addition to the most recent settlement, last month JPMorgan settled with the SEC for $154 million, paid in response to allegations that it mislead buyers of complex mortgage investments. In connection with this settlement, James Hertz, a former JPMorgan executive, pleaded guilty to criminal charges. Hertz is one of 18 financial services executives to be brought up on criminal charges, nine of which have pleaded guilty. In this case, The New York Times says “Investors harmed in the JPMorgan transaction, known as Squared CDO 2007-I, will receive all their money back,” a happy ending in financially-turbulent times for many investors.