securities arbitration

Published on: November 21, 2011

Chase Ordered to Pay $1.9 Million to Customers

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 17, 2011

A Notice to LaeRoc Income Funds Investors

by InvestorLawyers

LaeRoc Funds, a real estate investment firm that, according to its website, has managed assets totaling more than $650 million over the last 23 years, is currently attempting to raise another $12 million to $15 million to pay off debt for its LaeRoc 2005-2006 Income Fund. The fund’s debt totals at least $49 million. This “cash call” could be a negative sign for individuals invested in the fund. In addition, an article in Investment News states that, “The fund’s leaders have said that they will foreclose on one of its holdings, the Country Club Plaza shopping center in Sacramento, Calif., by the end of the year if they can’t raise enough money.”

A Notice to LaeRoc Income Funds Investors

The due diligence and sales practices of FINRA-registered brokerage firms who solicited this fund, along with the LaeRoc 2002 Investment Fund, are currently being investigated. In total, the two LaeRoc Funds purchased eight properties, costing a total of more than $180 million, and still owe mortgage debt totaling $105 million.

According to investors of the fund, the investment was represented as fixed income and conservative. If it can be proven that the investments were misrepresented, or the full extent of the risks associated with them were not disclosed, investors who believed the investment to be conservative may have a claim for a securities arbitration case. FINRA Rules state that firms must perform a “reasonable” investigation of the securities recommended as private placements, like the LaeRock Fund. Private placements — offerings made under Regulation D of the Securities Act of 1933 — are not exempt from the federal securities law’s antifraud provisions, even though exemptions are provided by Regulation D from registration requirements of Section 5 of the act.

Published on: November 14, 2011

Morgan Stanley Fined $1 Million, Plus Restitution

by InvestorLawyers

According to a recent press release from the Financial Industry Regulatory Authority (FINRA), Morgan Stanley & Co. Inc. and Morgan Stanley Smith Barney LLC, together were fined $1 million in securities arbitration. Furthermore, Morgan Stanley was ordered to pay $371,000 in restitution and interest. The restitution and interest will go to Morgan Stanley customers because of supervision violations and excessive markups and markdowns that were charged on their municipal bond transactions.

Morgan Stanley Fined $1 Million, Plus Restitution

Markups refer to the difference between the lowest current offering price of an investment for the dealer and the actual price the dealer charges the customer. According to the Municipal Securities Rulemaking Board, or MSRB, “MSRB rules require that the price at which a broker-dealer sells a municipal security to a customer be fair and reasonable, taking into consideration all relevant factors.” Though the MSRB does not set numerical guidelines for what constitutes a “reasonable” markup, they do acknowledge that whether the total price paid by the customer can be considered “fair and reasonable” can be affected by the mark-up.

According to FINRA’s investigation, Morgan Stanley’s 5 percent to 13.8 percent markups and markdowns were higher than warranted when considering market conditions, value of services rendered to customers and the cost of executing the transactions. In addition, the supervisory system Morgan Stanley had in place for corporate and municipal bond markups and markdowns was found to be inadequate by FINRA. Inadequacies of the supervisory system included a failure to include markups and markdowns less than 5 percent — regardless of if they were excessive or not — and the firms’ policies and procedures.

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: October 28, 2011

FINRA Decision: UBS Securities Fined $12 Million

by InvestorLawyers

On October 21, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine UBS Securities $12 million in securities arbitration. The fine is for charges of Regulation SHO violation and failure to supervise. UBS Securities did not properly supervise short sales and the result was millions of mismarked short sale orders, some of which were “placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered,” according to the FINRA press release.

FINRA Decision: UBS Securities Fined $12 Million

Short sales occur when a security is sold by a seller that does not own it. When delivery is due, it is either purchased or borrowed by the short seller so that the delivery can be made. Regulation SHO requires that there are reasonable grounds for the broker-dealer to believe it could be borrowed and available for delivery. Regulation SHO reduces potential failures to deliver and states that broker-dealers must mark the trades as long or short. FINRA’s findings indicated that the supervisory system used by UBS was significantly flawed. Furthermore the flaws “resulted in a systemic supervisory failure that contributed to serious Reg SEO failures across its equities trading business,” according to FINRA documents.

FINRA’s investigation found that UBS Securities mismarked millions of sale trading orders, placed millions of short sale orders without locates and had significant aggregation unit deficiencies. Because of UBS’ supervisory failures, it wasn’t until after FINRA’s investigation and the resulting review of its systems and monitoring that many of its violations were corrected. According to FINRA, it wasn’t until at least 2009 that UBS’ supervisory framework was able to achieve compliance with certain securities laws, rules and regulations.

Published on: October 26, 2011

Federal Appeals Court Decision May Undermine FINRA’s Authority

by InvestorLawyers

According to a ruling by the U.S. Court of Appeals for the Second Circuit, FINRA cannot enforce disciplinary actions by taking its members to court. The court’s decision comes after a long legal battle against Fiero Brothers, a penny stock brokerage firm, and John J. Fiero, the firm’s owner. In 2001, FINRA ordered Fiero and Fiero Brothers to pay a $1 million fine for naked short selling and other fraud statute violations. However, Fiero and Fiero Brothers refused to pay the fine imposed in securities arbitration.

Federal Appeals Court Decision May Undermine FINRA’s Authority

When Fiero and Fiero Brothers failed to pay the fine, FINRA took them to court. New York’s state court eventually ruled in FINRA’s favor, but the case was then taken to federal court by Fiero. Fiero attempted to get a declaratory judgment stating that pursuing the fine in court was not within the power of FINRA. Next, FINRA counter-sued.

FINRA’s 1990 housekeeping rule gives it the right to attempt to get monetary sanctions in court. But the federal appeals court ruling is now saying that the housekeeping rule and the foundational securities laws do not give them the right to use the court system to claim disciplinary fines. This ruling overturns the lower New York state court’s decision. The court also asserted that the housekeeping rule should be more formally examined.

Published on: October 20, 2011

Lehman Brothers, UBS and Wall Street Greed

by InvestorLawyers

Both Lehman Brothers and UBS have had more than their fair share of bad press over the last three years, but are they cut from the same cloth? A recent article in Forbes makes the argument that they are. September marked the three-year anniversary of Lehman Brothers’ bankruptcy and the arrest of a UBS trader in London for fraud. When the world financial markets were shattered by the collapse of Lehman in 2008, many investors were left with annihilated life savings and retirement accounts.

Lehman Brothers, UBS and Wall Street Greed

Though it may appear that the most recent UBS incident and Lehman Brothers’ collapse are different events, according to Forbes’ article, “The players may be different but the rules are the same.” The “Delta One” trading desk used by the UBS trader and ETFs he was trading have a similar concept to the Lehman Brothers Principled Protected Notes sold by Lehman and UBS and both were excessively risky. Furthermore, UBS and Lehman worked cooperatively to dump the PPNs on investors, causing them significant losses.

Since the fiasco began, claimants been victorious in almost all securities arbitration cases against UBS and recovered their losses that resulted from the Lehman Structured Product Notes. However, criminal charges have not been brought against any Lehman executives, a measure of justice that is yet to be realized. According to an article in The New York Times, this is a case in which “brokers selling complex securities that they once contended were safe and sound have saddled individual investors with billions in losses since the credit bubble burst. Remember auction-rate securities? Those were peddled to investors as just as good as cash — until they no longer were after that market seized up in 2008.”

Published on: October 13, 2011

FINRA Investor Alert: Public Non-traded REITs

by InvestorLawyers

On October 4, the Financial Industry Regulatory Authority (FINRA) — the agency which handles securities arbitration — released a new Investor Alert titled “Public Non-traded REITs — Perform a Careful Review Before Investing.” The purpose of this alert is to aid investors in understanding the risks, benefits, fees and features of non-traded REITs, or real estate investment trusts.

FINRA Investor Alert: Public Non-Traded REITs

According to FINRA’s press release on the alert, “While investors may find non-traded REITs appealing due to the potential opportunity for capital appreciation and the allure of a robust distribution, investors should also realize that the periodic distributions that help make non-traded REITs so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal.” The press release goes on to say that non-traded REITs usually carry a very limited redemption of shares, as well as high fees and an eroded total return.

REITs purchase a portfolio of properties by pooling the capital of many investors. REITs can involve a variety of properties including hotels, office buildings, apartments and timber-producing land. The alert concentrates on REITs that do not trade on a national securities exchange, as opposed to those that do.

Published on: October 7, 2011

FINRA Ruling: Raymond James & Associates, Raymond James Financial Services to Pay Restitution, Fines

by InvestorLawyers

In a press release issued on September 29, 2011, the Financial Industry Regulation Authority (FINRA) announced its securities arbitration ruling against Raymond James Financial Services Inc. (RJFS) and Raymond James & Associates Inc. (RJA). The firms were charged with “unfair and unreasonable commissions on securities transactions.” RJFS and RJA were ordered to pay $1.69 million in restitution as well as a total of $425,000 in total fines. Of those fines, RJFS will pay $200,000 and RJA will pay $225,000.

Title of the Post Goes Here

FINRA’s findings showed that RJFS and RJA used automated commission schedules from January 1, 2006 until October 31, 2010 for equity transactions. These automated commission schedules affected more than 15,500 customers and 27,000 transactions. In total, nearly $1.69 million was charged in excessive commissions. In most cases, the excessive commissions were charged on low-priced securities. According to FINRA’s press release, “The firms’ supervisory systems were inadequate because the firms established inflated schedules and rates without proper consideration of the factors necessary to determine the fairness of the commissions, including the type of security and the size of the transaction.”

In addition to the restitution and fees, the firms must conform to the requirements of the Fair Prices and Commissions Rule by revising their automated commission schedules. Once the automated commission schedules have been revised, the firms must calculate and repay any additional overcharges that occurred from November 1, 2010, until the date the schedules were corrected.

Published on: September 30, 2011

Sentencing Passed on Stock-Tip Scam Mastermind

by InvestorLawyers

Kenneth Marsh was sentenced September 20 to 8 years in prison for his role in a “boiler-room” fraud. Marsh was the last of eighteen defendants to receive sentencing for a phony stock-tip scheme that resulted in the theft of $20 million from more than 5,000 investors.

SENTENCING PASSED ON STOCK-TIP SCAM MASTERMIND

Between 2005 and 2010, Marsh, 44, acted as owner and CEO of Gryphon Holdings, which was operating as Gryphon Financial during that time. Gryphon Financial was an investment advisory services company on Staten Island. Using high-pressure tactics, Marsh and his colleagues convinced their victims to pay anywhere from $99 to $250,000 for tips and falsified investment newsletters. According to Judge Jack Weinstein, Marsh used the money he stole to support his extravagant lifestyle which consisted of expensive real estate, cocaine and a Porsche.

In addition to the high-pressure sales tactics, Marsh solicited money from retail investors by using fake names. “Michael Warren” and “Ken Maseka” were, according to Marsh’s scam, previous employees of Lehman Brothers and Goldman Sachs, and were self-made billionaires. Neither Warren nor Maseka actually existed. Marsh was, at one time, a stock broker but he had been barred by FINRA in securities arbitration.