May 20, 2012

SEC v. Morgan Keegan: Misstatements by Brokers Concerning ARS Must Be Considered in Materiality Inquiry

May 19, 2012 By

The Eleventh Circuit Court of Appeals recently issued a decision in the SEC v. Morgan Keegan overturning the trial court in a civil enforcement action concerning auction rate securities.

The SEC’s lawyers alleged that Morgan Keegan’s brokers misrepresented that auction rate securities (“ARS”) were safe cash-equivalents with no liquidity risk and continued to recommend ARS as short-term, liquid investments despite numerous auction failures and significant trouble in the ARS market in late 2007 and early 2008.

The trial judge granted summary judgment in Morgan Keegan’s favor holding that the undisputed facts failed to show a “material” misrepresentation or omission, as required for liability under the Securities Exchange Act of 1934, the Securities Act of 1933, and Rule 10b-5. In particular, the trial court found that oral misrepresentations of four brokers were insufficient to establish material misstatements to the public.

In reversing the trial court, the Eleventh Circuit held that the “misstatement or omission by an individual broker to an individual investor” must be considered in the analysis of the “total mix” of information available to the hypothetical reasonable investor in a materiality inquiry. Accordingly, the SEC “may establish a securities violation with respect to each of those four investors irrespective of ‘an institutional effort to mislead’ customers and irrespective of whether any additional brokers attempted to mislead Morgan Keegan’s other customers.” Further, the Eleventh Circuit noted that “in securities cases, whether written disclosures should trump oral misrepresentations is highly fact-specific and therefore is not amenable to bright-line rules.”

Securities and Exchange Commission v. Morgan Keegan & Company, Inc., Case No. 09-cv-01965 (11th Cir. May 2, 2012).

Filed Under: Brokers, Exchange Act, SEC, Securites Fraud, Securities Act Tagged With: , , , , , , , , , , , , , , ,

What Does It Cost to File A Complaint / Statement of Claim Against a Broker in FINRA Arbitration

May 18, 2012 By

A customer seeking to recover investment losses caused by his stock broker’s misconduct must pay a filing fee to file his or her statement of claim and initiate the FINRA arbitration.  The FINRA filing fee can be higher than filing fees in state or federal court.  For example, the filing fee for a complaint in federal court in the Southern District of Florida is $350 (not including costs for serving the complaint).   The amount of FINRA filing fee depends upon the amount in dispute and can range from $50 to $1,800.

Amount of Claim                Filing Fee
$.01 to $1,000                           $50
$1,000.01 to $2,500                $75
$2,500.01 to $5,000                $175
$5,000.01 to $10,000              $325
$10,000.01 to $25,000            $425
$25,000.01 to $50,000            $600
$50,000.01 to $100,000          $975
$100,000.01 to $500,000       $1,425
$500,000.01 to $1 million       $1,575
Over $ 1 million                          $1,800
Non-Monetary/Not Specified $1,250

* The Amount of Claim does not include interest and expenses.  Also, in the arbitration award, the panel may order a party to reimburse another party for all or part of any filing fee paid.

(Source: FINRA Rule 12900)

Filed Under: Brokers, FINRA Arbitration, Securites Fraud Tagged With: , , , , , , , , ,

Former Merrill Lynch Broker-Lawyer Suspended by FINRA for Practicing Law

May 17, 2012 By

In April, a former registered representative (a licensed attorney) at Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill” or “ML”) entered into an AWC with FINRA consenting to a 30 day suspension.  The former Merrill broker who was a licensed attorney had  drafted a will for an individual who was not a customer of the firm. The broker was paid $200, and this activity was made outside the scope of his employment with Merrill.  Merrill had denied the broker’s request to practice law outside the scope of his employment. Merrill’s written procedures prohibited representatives from practicing law unless an exception is granted.

FINRA Rule 3270 provides:

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

Emphasis added.

Filed Under: Brokers, Disciplinary Actions, FINRA Tagged With: , , , , , , , , , , ,

What are the Hallmarks or Red Flags of Investment Frauds and Scams

May 15, 2012 By

The sophistication of investment frauds and scams can fall into a broad range.  In the most basic scam, a rogue stock broker could simply request money from a client to pay for emergency medical care coupled with a promise to pay back the money.  Other frauds can include elaborate schemes where documents are forged and a cast of characters including bankers, accountants and even securities lawyers work together to perpetrate a fraud.  Nonetheless, there are certain hallmarks or red flags that investors should be aware of:

First, any promise that an investment is guaranteed or that and investor can not lose is a red flag – any legitimate investment has risk!

Second,  consistent and increasing returns over the life span of the investment can be suspicious because of the ebb and flow of the business cycle.   Even the Apple stock has not gone up in a straight line.

Third, the investment involves an illiquid and unregistered investment products such a oil and gas ventures, promissory notes or real estate ventures.

Fourth, missing offering documents .

Fifth, a complicated investment strategy you can’t understand.

Sixth, unauthorized activity in your brokerage account.

Seventh, pressure to act quickly.

Eighth, free lunch seminars at expensive restaurants can be used to lure investors for “education” about investing strategies.  However, nothing comes for free.  The ultimate goal in many instances is to solicit new clients and sell exotic investment products.

 

Filed Under: Brokers, Due Diligence, FINRA Tagged With: , , , , , , ,

SEC’s Operation Shell-Expel Suspends Dormant Shell Companies

May 15, 2012 By

The SEC announced that it has suspended trading in the securities of 379 dormant companies.  The purpose of this initiative dubbed Operation Shell-Expel was to crackdown against fraud involving shell companies that are dormant.  Such dormant shells have the risk of being used in reverse mergers and pump an dump schemes.  See a list of the companies here.

Filed Under: SEC Tagged With: , , , ,

What are Reverse Mergers or Reverse Takeovers

May 15, 2012 By

Instead of undergoing an initial public offering, some private companies seeking to improve liquidity and access capital markets by merging with existing public companies in what are called “reverse mergers” or “reverse takeovers.”  In a reverse merger, an existing public “shell company,” which is a public reporting company with few or no operations, acquires a private company.  Shareholders of the private company exchange their shares for a large majority of the shares of the public company.  Although the public shell company survives the merger, the private company’s shareholders gain control of the shell and typically install their own managers and board of directors.

The SEC states that “investors should proceed with caution when considering whether to invest in reverse merger companies. Many companies either fail or struggle to remain viable following a reverse merger. Also, as with other kinds of investments, there have been instances of fraud and other abuses involving reverse merger companies.”

Filed Under: SEC, Securites Fraud Tagged With: , , , , , ,

FINRA Sanctions Citigroup, Morgan Stanley, UBS and Wells Fargo over Unsuitable Severaged and Inverse ETFs

May 12, 2012 By

FINRA has announced that three of the country’s largest brokerage firm: Citigroup Global Markets, Inc (“Citigroup”); Morgan Stanley & Co., LLC (“Morgan Stanley”); UBS Financial Services (“UBS”); and Wells Fargo Advisors, LLC (“Wells Fargo”) were sanctioned for sales of leveraged and inverse exchange-traded funds (“ETFs”) without reasonable supervision and without a reasonable basis for recommending these ETFs. The firms were fined more than $7.3 million. FINRA’s press release stated that:

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. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

Inverse and leveraged ETFs have been under scrutiny for several years. Many investors purchased inverse ETFs believing that these products would protect them by market downturns. However, the design of the products did not protect investors from the protracted and volatile downturns in the 2008 market collapse. In 2009, FINRA issued a regulatory notice stating that “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.”

Filed Under: Brokers, Due Diligence, ETF, FINRA, Suitability Tagged With: , , , , , , , , ,

Third Point Demands to Inspect Books and Records of Yahoo!

May 8, 2012 By

On May 7, 2012, Third Point LLC (“Third Point”) made a written demand for the inspection of the books and records of Yahoo! pursuant to Section 220(b) of the Delaware General Corporation Law. Third Point stated that the purpose of the request was:

1. To investigate wrongdoing or possible mismanagement by Yahoo!’s management and/or any member(s) or committee(s) of its Board of Directors (the “Board”) n connection with the hiring of Scott Thompson as the Chief Executive Officer of the Company and his appointment to the Board;

2. To investigate wrongdoing or possible mismanagement by Yahoo!’s management and/or any member(s) or committee(s) of its Board in connection with the appointment of Peter Liguori, John Hayes, Thomas McInerney, Maynard Webb, Jr. and Fred Amoroso to the Yahoo! board rather than the nominees proposed by Third Point;

3. To investigate wrongdoing or possible mismanagement by Yahoo!’s management and/or any member(s) or committee(s) of its Board in connection with the statements by Yahoo! on the afternoon of May 3 that the false filings about Mr. Thompson’s educational background were “inadvertent.”

4. To determine whether Scott Thompson, Patti Hart, Peter Liguori, John Hayes, Maynard Webb, Jr., Fred Amoroso, and Thomas McInerney are suitable to serve as directors of Yahoo!;

5. To facilitate communications with other stockholders concerning the matters identified in paragraphs 1 through 4 above, in connection with a proxy contest to replace the current board of directors with nominees proposed by Third Point.

Filed Under: Derivative Suits, Hedge Fund Tagged With: , , , , , ,

What are Broker-Dealer FOCUS Reports and Why Net Capital is Important

May 8, 2012 By

Brokerage firms required to follow rules intended to minimize the chances of financial failure and protect customer assets if they do fail. Rule 15c3-1 promulgated under the Securities Exchange Act of 1934 requires firms to maintain certain levels of their own liquid assets (the “Net Capital Rule). The minimum net capital a firm must have depends on its size and business.

Under SEC Rule 17a-5, broker-dealers are required to file with FINRA reports concerning their financial and operational status using SEC Form X-17A-5, also known as a Financial and Operational Combined Uniform Single Report or “FOCUS” Report.

FOCUS reports include:
(a) Statement of Financial Condition.
… (b) Statement of Income (Loss).
… (c) Statement of Changes in Financial Condition.
… (e) Statement of Changes in Stockholders’ Equity or Partners’ or Sole Proprietors’ Capital.
… (d) Statement of Changes in Liabilities Subordinated to Claims of Creditors.
… (e) Computation of Net Capital.

The information in FOCUS reports can be critical in determining whether a firm can satisfy an arbitration award.

Filed Under: Brokers, Exchange Act, FINRA, SEC Tagged With: , , , , , ,

SEC Settles Charges Against UBS (Puerto Rico) for Misleading Investors

May 5, 2012 By

The SEC charged UBS Financial Services Inc. of Puerto Rico with making misrepresentations and omissions of material facts to numerous retail customers in Puerto Rico regarding the secondary market liquidity and pricing of UBS PR-affiliated, non-exchange-traded closed-end funds.  Pursuant to the settlement, UBS Puerto Rico agreed to pay $26.6 million.  See the settlement here.

Filed Under: SEC, Securites Fraud, Settlement Tagged With: , , , , , , ,
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