stock broker fraud

Published on: October 14, 2011

FINRA Decision: Merrill Lynch Fined $1 Million

On October 4, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Merrill Lynch a total of $1 million. In an investigation conducted under the supervision of FINRA’s Enforcement Chief Counsel, Susan Light, investigators Brian Vincent and Richard Chin found that Merrill Lynch did not have an adequate supervisory system that would monitor employee accounts and allow them to identify potential broker misconduct.

FINRA Decision: Merrill Lynch Fined $1 Million

Merrill Lynch’s supervisory system, as it was functioning before FINRA’s decision, captured employee-opened accounts automatically and a social security number was used by the system as the primary tax identification number. However, if the same SSN was not used as the primary account identification number, the system would not record the account in its database. Under this system, it was the responsibility of the employees to manually enter these accounts into the supervisory system. Therefore, if the employee failed to enter his or her account, the account was not properly monitored.

Because of the discrepancies in Merrill Lynch’s supervisory practices, there was an instance of stock broker fraud committed in San Antonio, Texas, in which an employee’s account was used. In December 2009, Bruce Hammonds was barred from the securities industry for convincing 11 individuals to invest in a Ponzi scheme. The scheme lasted 10 months, during which Merrill Lynch’s failure to supervise the account it had approved allowed him to collect investments totaling over $1 million from the 11 investors. In addition to the Ponzi scheme, the lacking supervisory system failed to properly monitor 40,000 employee/employee-interested accounts between January 2006 and June 2010.

Published on: October 12, 2011

The Risks of Self-directed IRAs

by InvestorLawyers

The North American Securities Administrators Association Inc. and the Securities and Exchange Commission issued an investor alert on September 23, which warned of the risks of self-directed IRAs. According to InvestmentNews.com, this scrutiny by regulators will likely influence the implementation of tougher restrictions on self-directed IRAs by small- to mid-sized broker-dealers.

THE RISKS OF SELF-DIRECTED IRAs

According to Brad Borncamp, a certified public accountant, “IRAs have a specific purpose: long-term investment for retirement. It’s really easy to mess up these transactions, and there’s more than meets the eye.” Self-directed individual retirement accounts allow their owners to invest in more unusual investment vehicles such as raw real estate, limited partnerships, private placements and life settlements. This is in contrast to traditional IRAs, which are usually limited to mutual funds, stocks and bonds. According to NASAA, about 2 percent of the total IRAs, or $94 billion, is estimated to be self-directed.

Because self-directed IRAs’ owners are able to hold unregistered securities, due diligence is often neglected by custodians. In addition, early withdrawals come with a penalty that encourages money to remain tied up in them longer, making these investments a frequent vehicle for stock broker fraud. Although up until now, smaller broker-dealer firms have resisted giving up the higher profit margins associated with self-directed IRAs, they will soon be following in the footsteps of their larger counterparts because of recent developments.

Published on: October 10, 2011

Research Center on the Prevention of Financial Fraud Launched by FINRA, Stanford University

by InvestorLawyers

Together, the FINRA Investor Education Foundation and Stanford University’s Center on Longevity have launched the Research Center on the Prevention of Financial Fraud. The new research center will supplement work by the government, research groups and law enforcement to better understand how fraud causes Americans to lose money.

RESEARCH CENTER ON THE PREVENTION OF FINANCIAL FRAUD LAUNCHED BY STANFORD

Stanford’s Center on Longevity is involved in this project because the elderly are widely victimized for fraud and are indisputably targeted by scammers. However, early findings have discovered that the conventional idea of elderly falling victim to fraud because of weakness is not necessarily the truth. Rather, the elderly are likely targeted because they often have more money. In addition, they are more exposed to the market, exploring new investment opportunities in much the same way that younger generations explore the job market or romantic relationships. More exposure to the market means a greater risk of being the target of stock broker fraud.

According to Laura Carstensen, psychology professor and founding director for the center, an overwhelming number of fraud victims are more than 50 years old.

Published on: October 6, 2011

Not All Scams Can Be Identified As Being ‘Too Good To Be True

by InvestorLawyers

The investment community has often heard those now-familiar words: “If it seems too good to be true, it probably is” when warning against stock broker fraud. Not only is this phrase only partially true, it’s dangerous. Investors who only watch out for the investments that are “too good to be true” are still vulnerable to the ones that aren’t. Many investment scams don’t offer the high returns without risk. In fact, Pat Huddleson, a former enforcer for the Securities and Exchange Commission, stated that he’d witnessed scams that promised much smaller returns, such as 5 percent.

NOT ALL SCAMS ARE “TOO GOOD TO BE TRUE”

According to Huddleson, “If it sounds too good to be true, you’re probably talking to an amateur scam artist. That is, only a rookie or somebody who’s really dumb will promise you the moon, because that scares people away.” In fact, the clever scam artists will not promise you so much that you will think it’s a scam. A 5 percent return isn’t enough in itself to raise a red flag. Huddleson goes on to say that “they really are students of human behavior in a way that would make a Ph.D. in psychology proud. They’re really good at observing you. In the middle of a pitch they can change the way they’re approaching the thing. If they see a facial expression, even, that you’re not buying the thing they just said, they’ll change course.” Despicable as it may be, scamming is a skill and some are very talented at it.

Some ways Huddleson suggests for investors to protect themselves are to get a C.R.D. from the state securities commissioner, and to recognize your own human limitations and vulnerability to scammers. He cites Bernie Madoff’s victims as proof that even the “most sophisticated people in the world” can be victim to fraud. Put plainly, those who believe they are invulnerable to fraud create their own vulnerability.

Published on: October 3, 2011

Understanding Quant Trading and how Mathematicians are Affecting the Markets

by InvestorLawyers

Over the years, computers have somewhat reduced the necessity of brokers. But until recently, dealers maintained their status as the rulers of the market world. However, with quant trading, broker status is being threatened, as well — and its effect on the market has earned a closer look. Mathematicians, who have long been key players in financial risk management, have now expanded the use of their skills to making money in addition to avoiding losing it.

UNDERSTANDING QUANT TRADING AND HOW MATHMETICIANS ARE AFFECTING THE MARKETS

The new role of mathematicians in the stock market includes tracking patterns in trading, predicting market movements with formulae and finally using algorithms that trade automatically according to triggers derived from that information. HFT, or High Frequency Trading, is a term becoming common and refers to these quantitative trading programs.

Quant trading can be fully automated or overseen by an individual. In addition, while some quant trading occurs in seconds, it can also take the traditional days, weeks or months. One of the most impressive characteristics of quant trading is its ability to switch strategies in less than a second.

Published on: September 29, 2011

Causes, Concerns and Consequences of Market Volatility

by InvestorLawyers

The words “market volatility” seem to be used now more than ever. One recent report from The New York Times said, “Market Swings Are Becoming New Standard,” a scary sentiment for investors.

CAUSES, CONCERNS, AND CONSEQUENCES OF MARKET VOLATILITY

One possible explanation for the increased volatility is the use of computerized high frequency automated trading, which accounts for 60 percent of the volume of trades. In addition, it takes much less time today to send and receive information as it did in the past. As a result, information that affects the market spreads at an increased rate, increasing the volatility of the market. In addition, exchange-traded funds that utilize derivatives and leverage or track broad indices are likely contributors to increased volatility.

However, bad economic times can also account for some of the market volatility. With the bank failures of 2008, the Euro crisis anxiety and the general undermining of confidence in the market lately, it’s no wonder we’re experiencing so many ups and downs. Still, experts believe the volatility that results from these factors will eventually be remedied as economic standing improves.

Published on: September 1, 2011

NJ ADVISER SENTENCED TO PRISON

by InvestorLawyers

Carlo Chiaese, an investment adviser, has been sentenced to 58 months in prison and must pay restitution totaling $2.5 million for broker misconduct including failure to invest and falsified documentation. Rather than investing his client’s money, Chiaese used the money to pay for his extravagant lifestyle. Purchases included leases on a Land Rover, an Audi Q7 and a Porsche 911 Carrera totaling $40,000; country club fees; $16,000 in rugs; $25,000 in shopping trips to high-end department stores; and $800,000 which was transferred directly to his wife and in-laws.

NJ adviser sentenced to prison

Chiaese’s broker fraud began in 2008 and lasted roughly two years. To earn the trust of new clients, he flaunted the investment experience he earned at Merrill Lynch, Citibank and other firms. After earning his clients’ trust, he raised $2.4 million by promising to invest conservatively and traditionally. Not only did he fail to invest conservatively and traditionally, he did not invest the money at all. The majority of the money, $1.7 million, came from a union pension fund belonging to Local 333, United Marine Division, International Longshoreman’s Association. The bilked fund contained the pensions of 850 individuals. Of the total $2.4 million stolen, Chiaese spent $1.4 million on personal expenses. In addition, he used $280,000 to repay other investors.

Chiaese, 38, pleaded guilty to securities fraud and could have faced 20 years in prison and $5 million in fines. In addition to the final sentence, 58 months in prison and $2.5 million in restitution, Chiaese will submit to three years of supervised release once his prison sentence is served. Chiaese was sentenced by U.S. District Judge William Martini and was released on a $750,000 bond. However, provisions of his bail required that Chiaese must avoid working in finance and participate in a drug treatment program.

Published on: August 31, 2011

RESOURCES FOR INVESTOR PROTECTION

by InvestorLawyers

Though investors who have already been “burned” by stock broker fraud or broker misconduct may have a perfectly understandable fear of getting back into the securities game, there are ways investors can help protect themselves in the future. One of the most significant protective measures an investor can take is to look into the background and credentials of a potential stock broker or investment adviser before working with them.

Resources for investor protection

Any time a business hires a new employee, they run a background check — so why wouldn’t an investor do the same when hiring a stock broker or financial adviser? According to a Financial Industry Regulatory Authority (FINRA) survey, only 15 percent of investors perform a background check when hiring an adviser. In addition, just because they’re registered when you hire them doesn’t mean you’re finished. Investors should check broker registration yearly.

To find out if your broker has had any arbitrations, criminal records, investment-related investigation, bankruptcy or disciplinary actions, utilize FINRA’s BrokerCheck. Other information available through BrokerCheck includes employment history, licenses held and where the broker is registered. While not every stock broker or brokerage firm can be found in BrokerCheck, the database is extensive, including around 1.3 million brokers and 17,000 firms.

Published on: August 17, 2011

THE SEC’S “OFFICE OF THE WISTLEBLOWER” OPENS

by InvestorLawyers

The SEC’s new whistleblower office, which officially opened August 12, hopes to have a significant effect on corporate and stock broker fraud.

The SEC’S “office of the whistleblower” opens” OPENS

Under this new program, cash awards will be issued to corporate employees who report fraud to the SEC in order to expose corporate crime. Individuals who report fraud under this program could receive up to 30 percent of the amount that is collected from the guilty party. To qualify, the tipster must volunteer new information that leads to a successful collection of at least $1 million in fines.

“Through their knowledge of the circumstances and individuals involved, whistleblowers can help the commission identify possible fraud and other violations much earlier than might otherwise have been possible," SEC officials say. "That allows the commission to minimize the harm to investors, better preserve the integrity of the United States’ capital markets, and more swiftly hold accountable those responsible for unlawful conduct.”

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.