Massachusetts Secretary of the Commonwealth William Galvin has settled with five broker-dealers, Ameriprise Financial Services, the broker-dealer arm of Ameriprise Financial Inc ; Commonwealth Financial Network; Royal Alliance Associates; Securities America and Lincoln Financial Advisers Corp., concerning their improper sales of REITS to Massachusetts clients. See the settlement orders here.
Massachusetts Regulator Reaches $9.5 Million REIT Settlement Against Ameriprise Financial Services, Commonwealth Financial Network, Royal Alliance Associates,Securities America and Lincoln Financial Advisers Corp.
LPL Financial LLC Hammered With $7.5 Million FINRA Fine for EMail Deficiencies & Misstatments to FINRA
Yesterday, FINRA issued a press release announcing that LPL Financial LLC (“LPL”) was hit with a $7.5 million fine “for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails” and for making material misstatements to FINRA during its investigation of the firm’s email failures.
According to the release, examples of LPL’s failures include the following:
- Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
- LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
- For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
- LPL failed to archive emails sent to customers through third-party email-based advertising platforms.
As a result of LPL’s numerous deficiencies in retaining and surveilling emails, the firm “failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.” (Emphasis added). FINRA further stated:
In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.
Not This Year: SEC Commissioner Says No Time to Address Mandatory Pre-Dispute Arbitration in Broker Client Agreements
The Investment News is reporting that Securities and Exchange Commissioner Elise Walter told an audience at a FINRA conference that the SEC will not be addressing the issue of mandatory pre-dispute arbitration agreements in the near future stating:
It’s not going to happen in the next few months or this year because there is so much we have left to do under Dodd-Frank and the JOBS Act – and we have to deal with money market funds and a few other things that by virtue of market interest really are ahead of all of this.
(Emphasis added). Section 921 of the Dodd-Frank Act provided the SEC the discretionary rulemaking authority to restrict mandatory pre-dispute arbitration. However, there has been no action to date despite recent pressure from lawmakers.
Securities lawyers have filed a lawsuit against The Cash Store Financial Services (CSFS) in United States District Court for the Southern District of New York, Case No. 13-CV-3385. The complaint concerns CSFS purchases that the plaintiff made on the NYSE and alleges in pertinent part as follows:
[O]n December 10, 2012, that it had overstated its assets by $44 million and would be issuing restatements (the “Restatements”) of its previously issued interim financial statements for the three and six months ended March 31, 2012, and the nine months ending June 30, 2012 …
In its press release, Cash Store admitted that the consumer loans (the “Loans”) and “intangible assets” it had purchased for $116 million in January 2012 (the “Loan Transaction”) from certain third party lenders (the “Third Party Lenders”) were worth nearly $37 million less than the Company had previously represented. Cash Store also acknowledged that it had previously overstated the fair value of its internally generated loans by an additional $7 million.
But the Company had still not disclosed all the material facts regarding the Loans and the Loan Transaction. Over the next several months, Cash Store continued to trickle out more details regarding the fraudulent misrepresentations and actionable omissions that had led to its Restatements.
On January 4, 2013, more than three weeks after the Restatement Release, Cash Store finally acknowledged that the two biggest beneficiaries of the $37 million cash giveaway to the Third Party Lenders were entities owned and/or managed by family members of certain undisclosed Company officers and directors.
Furthermore, the Company finally acknowledged that the Company’s inquiry into the accounting for the Loan Transaction was prompted by a whistleblower complaint to Cash Store’s Audit Committee (the “Whistleblower Allegations”), which in turn had resulted in the formation of a Special Committee of the Board to conduct an investigation.
On February 1, 2013, Cash Store buried in its Form 20-F filed with the SEC the stunning admission that the biggest recipient ($45.5 million) of the enormous overpayment to the Third Party Lenders was an entity owned and managed by the father and brother of … the son-in-law of Cash Store’s Chairman and CEO….
Cash Store’s piecemeal admission, after a year of making no related party disclosures whatsoever, that the Loan Transaction included a $37 million “Premium” paid to relatives of the Company’s officers and directors demonstrates a knowing and deliberate effort by Defendants to violate the federal securities laws by fraudulently misrepresenting and concealing the true facts of this unlawful transaction from the investing public.
On December 10, 2012, the market price of CSFS shares fell19%. See the complaint here.
In addition to the class action lawsuit against UniTek concerning the restatement of UniTek’s financials and purported “fraudulent activities that resulted in improper revenue recognition,“ the Company is now facing pressure from one of its business partners. In a press release from last week, UniTek disclosed in relevant part that:
[I]ts subsidiary, DirectSat USA, LLC, has received a letter from DIRECTV, LLC providing 180-day notice of the termination of its master services agreement with DirectSat, effective November 8, 2013. Shortly following receipt of the notice, DirectSat entered into an agreement with DIRECTV providing that the 180-day notice of termination will be automatically withdrawn upon the Company’s refinancing, by July 31, 2013, of its debt on terms that satisfy certain financial requirements, the continued work on completion of its financial statements and the satisfaction of other conditions.
DIRECTV has informed the Company that it intends to continue working with the Company as UniTek addresses the issues it currently faces related to the previously disclosed accounting matters.
SEC and FINRA Issue Investor Alert Concerning Purchase of Risky Pension or Settlement Income Streams from Brokers
The Securities and Exchange Commission (SEC) and FINRA have issued an investor alerts concerning the sale and purchase of pension or settlement income streams. According to the SEC’s Press Release, investors should beware of special risks and issues concerning these products:
- Products can be expensive with commissions of seven percent or higher.
- Pension and structured settlement income-stream products may or may not be securities and may not be registered with the SEC. Accordingly, there will be more limited information concerning the product.
- These products are illiquid.
- Your “rights” to the income stream you purchased could face legal challenges. For example, it may not be legal to purchase someone’s pension or structured settlement.
See the SEC’s Bulletin here.
Reuters is reporting that the brokerage firm of Charles Schwab Corp. is backing down on its requirement that account holders waiver class action lawsuits. Reuters reports
Charles Schwab Corp has temporarily reversed its requirement that clients waive their right to bring class-action lawsuits, adding a new twist in a battle closely watched by the securities industry and plaintiffs’ attorneys.
“Effective immediately, Schwab is modifying its account agreements to eliminate the existing class-action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future,” the San Francisco-based brokerage company said in a statement that was posted on its website on Wednesday.
Schwab still believes that arbitration is the best forum for clients to resolve disputes with the firm, but said it was backing off the litigation ban in deference to clients who are uncertain about their rights as it fights to defend its original ban.
Schwab’s attempt to curtail consumer rights has drawn broad attention in recent months and has been cited as a principal reason by lawmakers to entirely abolish the mandatory pre-dispute arbitration provisions in customer account agreements. Section 921 of Dodd-Frank Act provided the SEC with the discretionary rulemaking authority to restrict mandatory pre-dispute arbitration. However, the SEC has taken no action on this issue to date.
Florida Supreme Court Says Statute of Limitations Applies In Arbitration – Raymond James v. Phillips
Yesterday, the Florida Supreme Court issued the much awaited decision in Raymond James Financial Services, Inc. v. Phillips, Case No. SC 11-2513 (May 16, 2013). In this case, the Florida Supreme Court considered whether Florida’s statute of limitations (SOL) that is applicable to a “civil action or proceeding” applies to arbitration proceedings. The Supreme Court agreed with the brokerage firm holding that
[T]he Legislature intended to subject arbitration proceedings to the statute of limitations. An arbitration proceeding is an “action” broadly defined in section 95.011 to encompass any “civil action or proceeding,” including arbitration proceedings.
Although this ruling provides additional ammunition for defense attorneys at the final hearing, this ruling does not provide a basis for dismissal of a Statement of Claim based on a statute of limitations. FINRA Rule 12504 (which became effective in 2009) provides that “motions to dismiss a claim prior to the conclusion of a party’s case in chief are discouraged in arbitration.” FINRA’s Notice to Members on this issue further states:
Under the rules, the panel cannot act upon a motion to dismiss a party or claim, unless the panel determines that: (1) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; (2) the moving party was not associated with the account(s), security(ies) or conduct at issue; or (3) the claim does not meet the criteria of the eligibility rule.
See NTM 09-07 (Motion to Dismiss and Eligibility Rules). Since there is no separate grounds for dismissal based on a state statute of limitations defense, brokers and their firms are not entitled to summary adjudication on the SOL affirmative defense and will still have to proceed to the final hearing.