Greco & Greco's lawyers represent investors to recover losses caused by securities fraud, churning, lack of suitability, negligence, sales of unregistered securities, unauthorized trading, and other misconduct by stock brokers, investment advisors, financial planners and their firms.
Earlier this year, FINRA (the Financial Industry Regulatory Authority) implemented a change to its arbitration system which has been sought by the Claimants’ bar for years. As set out in this notice, customer Claimants in FINRA arbitrations now have the choice to have their disputes with their stock brokers and brokerage firms heard by three public arbitrators for cases over $100,000.00.
Under the previous FINRA Rule, three arbitrator panels were required to include one “non-public” or “industry” arbitrator, i.e. someone currently employed in the securities industry or with present or former ties to the industry. The securities industry requires that customers arbitrate their disputes with their brokerage firms through FINRA, and virtually all new account forms from U.S. brokerage firms contain a mandatory arbitration clause. Greco & Greco regularly represents customers in FINRA arbitrations - if you would like to discuss a potential claim with one of our attorneys, please Contact Us.
The SEC recently launched its webpage for the Office of the Whistleblower, an office created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Click here for the site.) In the words of the SEC Whistleblower Chief Sean McKessy, the goal of the program is to “incentivize you to report possible violations of the US securities laws of which you become aware.” The site contains a FAQ section, links to the SEC Rules regarding whistleblowers, and Form TCR (Tip, Complaint, or Referral) to be used to submit a tip.
If you are a witness to information regarding a possible securities fraud, contact one of Greco & Greco’s attorneys here for a free consultation to discuss your options.
FINRA recently fined Northern Trust Securities Inc. $600,000 for supervisory failures related to sales of Collateralized Mortgage Obligations (CMOs) to customers. As set out in this FINRA release: “from October 2006 through October 2009, Northern Trust failed to monitor customer accounts for potentially unsuitable levels of concentration in CMOs, in large part because it used an exception reporting system that failed to capture or analyze substantial portions of the firm?s business, including all CMO transactions, certain trades of 10,000 equity shares or more, and certain trades of 250 or more of fixed-income bonds.”
The Letter of Acceptance, Waiver, and Consent which can be found on the FINRA website discusses the risks of CMO’s and states that the flaw in the system was first raised in an arbitration filed by an investor who had almost 50% of her total liquid net worth invested in a Countrywide CMO that had lost significant value.
If you have incurred losses from CMOs which were unsuitable for you or were overconcentrated, or if you are the victim of other broker misconduct and you would like to discuss legal options with an attorney, please contact Greco & Greco for a free consultation with one of our lawyers.
Rick Ketchum, the Chairman & CEO of FINRA testified before Congress recently regarding the Dodd-Frank Act, fiduciary standards for brokers and investment advisors, and oversight and regulation of investment advisors. His testimony can be found here.
In its testimony, FINRA agrees with many customer advocates that feel that Broker-Dealers (and their representatives) should be bound by the same fiduciary standard as registered investment advisors when giving personalized investment advice to the public. The testimony further restates the obvious: most customers cannot differentiate between services offered by Broker-Dealers versus Investment Advisors, and further are not aware of any differing standards of care or obligations.
The testimony further addresses the insufficient nature of current examinations of investment advisors by the SEC, and offers an allegedly better alternative: examinations by FINRA. FINRA maintains that investment advisor examinations and oversight by SRO’s (Self Regulatory Organizations) such as itself would help protect investors due to the fact that FINRA is currently overseen by the SEC, and currently examines many Broker-Dealers who also have investment advisory businesses.
Setting aside the adequacy of FINRA oversight, the fact remains that many customers who lose money due to the wrongful conduct of their broker or advisor cannot count on FINRA or the SEC to recover their funds. If you face such a situation, it is advisable to speak to an attorney to discuss your options. Our lawyers at Greco & Greco can be contacted here for a free consultation.
As set out in this Fredericksburg.com article, John Robert Graves, a former FBI agent, was indicted on charges of defrauding Virginia investors out of $1,300,000. According to the indictment filed in U.S. District Court in Richmond (Case 3:11CR246), Mr. Graves used funds obtained from investors to buy personal real estate, to pay personal expenses and credit cards, to pay himself cash, and to pay back prior investors.
Mr. Graves operated Brooke Point Management in Spotsylvania County since 2003 which provided financial planning, insurance sales, estate planning, and investment advice to customers. According to FINRA’s Brokercheck report, Mr. Graves had been a registered securities salesperson since 1998 with various firms including, Harrison Douglas, Community Bankers Securities, Fintegra, Questar Capital Corporation, Pacific West Securities, and H. Beck. The Brokercheck report also discloses multiple pending arbitration claims alleging fraud, negligence, breach of fiduciary duty, and unsuitable investments regarding private placements, limited partnerships and REITs.
If you wish to discuss a potential securities fraud claim with one of our attorneys, please contact us here for a free consultation.
As set out in this Washington Post article, federal prosecutors in Virginia have set up the Virginia Financial and Securities Fraud Task Force. This task force is comprised of members of the FBI, the Postal Inspection Service, the Securities and Exchange Commission, the Commodities Futures Trading Commission and the Virginia State Corporation Commission.
As set out in the story, the task force’s efforts have already resulted in multiple criminal convictions. A criminal conviction, however, does not always recoup losses for investors wronged by financial fraud. If you are the victim of a financial crime in which the salesperson or others involved in the scheme were registered to sell securities through a FINRA brokerage firm, you may be able to seek recovery of your losses through FINRA’s arbitration system.
Tenant in Common (TIC) claims against the brokerage firms that sold them have recently resulted in multiple large FINRA arbitration awards, according to this this Investment News article.
The use of Tenant-in-Common (TIC) real estate investments in conjunction with IRS 1031 exchanges greatly increased after the 2002 issuance of IRS Rev. Proc. 2002-22 which clarified issues related to the uses of TICs in like-kind exchanges.
TICs since that time have been typically sold as securities by securities salespersons registered with FINRA which is a self-regulatory organization overseeing the securities industry. These salespersons (registered representatives) are required to be registered with a Broker-Dealer (brokerage firm) also regulated by FINRA. The sale of TICs by Broker-Dealers and their representatives is very lucrative. Selling commissions can be 7% or higher, and sponsors also would pay additional percentages to Broker-Dealers for “due diligence” expenses and marketing / selling expenses.
The failure of securities salespersons and their firms to perform due diligence on the TIC deals they recommend, and on the sponsors of the TIC deals, can result in disastrous outcomes for their customers. In addition, salespersons must engage in a suitability analysis prior to recommending TIC deals to their customers to ensure that these illiquid investments are suitable for the customer?s financial situation. Federal and State Securities laws also prohibit the misrepresentation or omission of material facts in conjunction with the sale of a security. Many state Acts provide for the recovery of losses, attorneys fees, and interest.
FINRA issued guidance to its members back in 2005 regarding the sale of TICs (NASD [now FINRA] Notice to Members 05-18). The selling firm had duties with regard to obtaining a clear understanding of the customer?s investment goals and financial status for the purposes of making a suitability determination. The firms’ representative also had to take into account the illiquid nature of the TIC interest, the risks from over-concentration, and the ?investment potential of the underlying real estate asset(s).? In regard to overconcentration, FINRA warned: “Concentration of an investor?s assets in a single asset class, however, is not suitable for many investors.”
The high sales fees of TICs, combined with the profits and expenses retained by the sponsors, could raise serious suitability concerns for salespersons recommending them as a tax deferral vehicle. In fact, the Notice 05-18 above further warned: “As fees charged in connection with a TIC exchange increase, the money saved as a consequence of tax deferral will be offset. Accordingly, members should consider the effect of fees on each TIC exchange”
TICs are typically leveraged with a bank loan, and such leverage can unfortunately result in customers’ investments being wiped out should the bank foreclose on the property. If you have lost monies in an illiquid or foreclosed upon TIC, and believe you may have a claim against the salesperson and firm, please contact one of the attorneys at Greco & Greco for a free consultation. Greco & Greco regularly represents investors on a contingency basis.
A review of recent FINRA Arbitration Awards show that TIC investors have had multiple victories in sales practice claims against the FINRA brokerage firms that sold them Tenant in Common (TIC) investments. Claims have included securities fraud, breach of fiduciary duty, negligence, failure to supervise, elder abuse, and misrepresentations and omissions. The following FINRA awards may be found at the FINRA web site:
1. Hardt, et al. v. LPL Financial LLC. No. 11-00347. The arbitration panel in this San Diego, California arbitration awarded $1,367,000.00 in compensatory damages, interest, and costs. Claims against two other Broker-Dealers were dismissed by Claimants. The claims related to investments with Direct Invest LLC which included investments in Heron Cove. LLC and Braintree Park, LLC.
2. Lightfoot, et al. v. Pacific West Securities, et al. No. 11-00230. A Seattle, Washington panel submitted another multi-million dollar award: $1,862,960,65 plus $200,000 in attorneys fees for violations of the Securities Act of Washington. The panel found a violation of the standard of care by Respondents for “the disavowal by Respondents of any obligation to conduct a suitability analysis for the sale of TICs in the circumstances of a Section 1031 - like kind assets exchange for tax deferral purposes.” Multiple TICs were involved: TSG Midwest, Evergreen Springs, Argus TriWest, Passco River Park and Passco Promenade.
3. Griswold v. Burch & Company, Inc., et al. No. 10-02477. In this Alaska case, the panel awarded almost all of the compensatory damages requested ($350,000), plus interest for a claim related to Beamer Place Apartments.
4. Tommerup, et al. v. Waveland Capital Partners LLC, et al. No. 10-04616. This Helena Montana arbitration involved two DBSI TIC investments (Executive Park LLC, and DBSI Arrowhead, LLC 1965, 1705 & 1715
Indian Woods Circle), and a request for $410,000 in damages. The panel awarded $301,875.00 which included interest, and $27,000 of discovery sanctions.
5. Wiborg, et al. v. Pacific West Securities, Inc. No. 10-02818. In another arbitration involving Pacific West (this one in San Francisco), the Panel awarded $300,000 plus $50,000 in punitive damages. In awarding the punitive damages, the panel described the basis for its finding that Respondent “failed to supervise” the broker involved. The Claimant alleged damages from two TICs - DBSI Offices at Brookhollow Tenant-in-Common securities and Garlock & Company Museum Park Garage Tenant-in-Common securities.
As set out in this recent FINRA Press Release, a FINRA hearing officer expelled a member firm (Pinnacle Partners Financial) and its President. The decision stated that Pinnacle operated a “boiler room” that placed thousands of cold calls per week soliciting investments in oil and gas drilling joint ventures. Furthermore, the decision found the investments to be “fraudulent,” and determined that the monies raised were misused to pay back previous offerings and to pay personal expenses. In addition to the expulsion from FINRA, the firm was ordered to offer full rescission to its customers.
As noted in this press release from FINRA, Wells Fargo, Citigroup, Morgan Stanley, and UBS were fined for failing to supervise sales of leveraged and inverse ETFs. FINRA also alleged failures of a reasonable basis to recommend the securities (i.e. suitability).
FINRA found that: “from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers.”
Many inverse and leveraged exchange traded funds, including some by Proshares and Direxion, were designed to seek multiples of the exchange they were designed to track. However, many of these ETFs were designed to reset daily, thereby creating drastic differences in their performance over time compared to the index they were designed to track. We have seen many situations where many of the risks of these funds were not disclosed to customers.
The prospectus for the Proshares leveraged and inverse ETFs from September 2007 makes clear that these investments were an aggressive day-trading tool, not an investment appropriate or suitable for most retail investors. Specifically, the prospectus stated:
p. 7: ‘The Funds do not seek to achieve their stated investment objective over a period of time greater than one day because mathematical compounding prevents the Funds from achieving such results.’
p. 8: ‘The Funds use investment techniques that may be considered aggressive, including the use of futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements and similar instruments.’
p. 9: ‘Certain Funds are ‘leveraged’ funds in the sense that they have investment objectives to match a multiple of the performance of an index on a given day. These Funds are subject to all of the correlation risks described above. In addition, there is a special form of correlation risk that derives from these Funds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than or less than the index performance times the stated multiple in the fund objective, before accounting for fees and fund expenses’
In June of 2009, FINRA issued a Regulatory Notice (09-31) regarding these Non-Traditional ETFs. The Notice states: ‘inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.’
If you suffered losses in your brokerage accounts resulting from your broker’s trading in ETFs, and you would like to discuss your potential claim with an attorney, please contact Greco & Greco.
As set out in this FINRA link, FINRA recently fined AXA Advisors, LLC for its failures to act in relation to the sale by its registered representative of a ponzi scheme. The Letter of Acceptance, Waiver, and Consent documents failures to supervise by AXA including failures to follow up on red flags regarding the ponzi scheme. One red flag was a suspicious excel spreadsheet found in an audit of the broker’s office. The broker also had a checkered regulatory history which made him a “compliance risk.”
Greco & Greco regularly represents investors in “selling away” cases such as these where the broker engages in ponzi schemes or outright steals funds from customers. Customers may attempt to recover their losses in FINRA arbitration by demonstrating firms’ failures to supervise, failure to follow up on red flags, and by arguing the firm is responsible for the acts of its agent under the legal theories of respondeat superior and vicarious liability. Federal and state securities laws also mandate liability of control persons (such as brokerage firms) if certain requirements are met. If you are the victim of a ponzi scheme or broker theft by a FINRA registered broker, please contact one of our attorneys for a free consultation.
As of July 9, 2012, FINRA’s new suitability Rule (Rule 2111) takes effect to replace the old NASD/FINRA Rule 2310. The new Rule can be found here.
The new suitability Rule, and its supplemental material, contains several clarifications which are important for investor protection. First, the Rule clearly states that recommendations of investment strategies as well as transactions fall under the rule. The supplemental material further states that “investment strategy” is to be interpreted broadly, including recommendations to hold securities.
The new Rule also sets out more specifically investor financial information that a registered representative must consider when making recommendations. Specific information includes: “customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.” The Rule also sets out a standard to be applied in regard to the representative’s efforts to discover customer suitability information: “reasonable diligence” is required to discover the customer’s investment profile.
The supplemental material to the Rule further clarifies FINRA standards regarding three kinds of suitability: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Reasonable basis suitability is required due diligence on a security before it can be recommended to customers - this issue can arise in private placement or TIC situations where the security is not on a national exchange. Customer specific suitability is, as described above, recommending a security only if it is suitable for a customer’s specific situation. Quantitative suitability is in essence a ban on churning - representatives cannot recommend (or trade with discretion) if the number of trades is excessive in light of the customer’s financial situation and investment profile. Turnover rates and cost-equity ratios are often used to demonstrate the lack of suitability of churned accounts.
Pursuant to the Dodd-Frank Act, the Securities and Exchange Commission (SEC) was required to conduct a study identify the financial literacy of retail investors in the U.S. The study can be found here.
Not surprisingly, the study showed that retail investors consistently lacked financial literacy of basic investment issues, and lacked critical knowledge about investment fraud. The report states: “... studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation. Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns.”
Despite most individuals’ lack of financial literacy, and the fact that most individuals rely on investment professionals due to their own lack of investment knowledge, a standard defense raised by brokerage firms in FINRA arbitrations is to blame the victim and claim that the investor understood the risks involved in following the broker’s advice. This study refutes the common defense that almost every individual is a “sophisticated investor” capable of understanding the risks involved. If you suffered losses due to the wrongful acts of a broker, advisor, or brokerage firm, please contact one of our attorneys for a free consultation.
Back in March of 2012 we listed five recent FINRA arbitration awards to customers who had suffered losses in TIC investments - the post can be found here. FINRA arbitration panels have issued several additional awards to customers based on claims of securities fraud, negligence, lack of suitability, breach of fiduciary duty, etc. in relation to TIC (Tenant In Common) sales by brokerage firms and brokers:
1.DRG Hendersonville TIC 13 LLC, et al. v. Behrends, Capstone Financial, CapWest Securities, et al.
FINRA arbitration #11-01909, Los Angeles, California. This claim related to two TIC investments: Marriott
Renaissance Meadowlands Hotel and the Arbors on Main Apartments. The Panel issued an award to Claimants for $338,000 plus interest against Capwest and two individuals. Unfortunately, Capwest is no longer licensed with FINRA so the collectibility of the award is questionable.
2.Castro v. Capwest Securities, et al.
, FINRA Arbitration # 10-02633, Los Angeles, California. This is another LA FINRA arbitration against CapWest and invididuals. The TICs involved were Water Song Apartments (CWC Water Song S&H LP), and Cabot Turfway Ridge Acquisition, LLC. The panel awarded $156,250 plus interest to the Claimants against Capwest and the individual Respondents.
3.McLean v. Great Northern Financial Securities, Inc.
, FINRA Arbitration #11-03787, Seattle Washington. Once again, another customer award but against a defunct Brokerage Firm. This case involved a DBSI TIC as well as other private placement investments. The panel awarded $424,553 which included damages, interest, treble damages, and attorneys fees.
Greco & Greco is currently pursuing multiple TIC claims against Broker-Dealers and registered representatives in FINRA Arbitration. To read more about the duties of brokers selling TIC’s, please click here through to our website. If you wish to speak to one of our attorneys about a possible claim, please contact usfor a free consultation.
Greco & Greco is currently pursuing claims on behalf of investors relating to wrongful conduct in life insurance sales, life settlement sales, and variable annuity withdrawals by Neil Winterrowd. Mr. Winterrowd was formerly a FINRA registered representative of Crown Capital Securities LP and J.P. Turner & Company LLC. According to FINRA’s Brokercheck, J.P. Turner discharged Mr. Winterrowd for “Improper handling of customer funds” related to variable annuities. If you believe that you may have been a victim of the above conduct, please contact one of our attorneys for a free consultation.