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: , , , , , , ,

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: , , , , , , , , ,

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: , , , , , ,

What is a Stock Broker’s CRD and FINRA’s BrokerCheck?

May 5, 2012 By

Stock brokers are required to report an array of information to allow investors and customers to make informed decisions as to whether to hire a broker.  This information includes a broker’s current and prior registrations and employment history, business enterprises outside of the securities industry, current licensing and registrations of the broker, and most important a list of customer disputes and regulatory or disciplinary history.  Likewise, reports are also maintained for brokerage firms which show a firms ownership and history, its licenses and registrations, a description of its business, and arbitration awards and regulatory and disciplinary history.  Excessive customer disputes or a disciplinary history are red flags that should cause you to ask more questions.

FINRA and state regulators share and maintain this information in a national database called the Central Registration Depository or “CRD” as it is commonly referred to.  The public can request CRD reports from these agencies.  Also, FINRA maintains an online version which provides some of this information at FINRA BrokerCheck®.

Reviewing a brokers CRD is a great way to start investigate your investment professional before hiring him or her.  Also, it is a good place to check out if there have been any new developments or issues that your broker has concealed from you.

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

BROKER DEALER ENTERS INTO AWC CONCERNING EMAIL RETENTION

May 25, 2010 By

On May 11, 2010, Piper Jaffray & Co. (the “Firm”) submitted a Letter of Acceptance, Waiver and Consent (AWC) for violation relating to the Firm’s retention of emails. The Firm was fined $700,000 for its failure to retain 4.3 million emails from November 2002 to December 2008. FINRA noted among other things that “Piper Jaffray failed to disclose that it was not making complete production of its emails due to intermittent problems with its systems – potentially preventing production of crucial evidence of improper conduct by the firm and its employees.”

In a press release, FINRA further stated:

“FINRA discovered Piper Jaffray’s continuing email retention deficiencies when its investigators requested all emails sent or received by a former firm employee suspected of misconduct. The firm provided a CD-ROM purportedly containing all of the employee’s emails, on both his firm and Bloomberg email accounts. When reviewing the CD-ROM’s contents, however, FINRA discovered that one particular email was not produced that investigators had already obtained in hard copy form – an email whose contents sparked an internal investigation that led to the employee’s termination, and formed the basis for a FINRA enforcement action against the employee. Only after further inquiries about that missing email did the firm finally inform FINRA of the intermittent email retention and retrieval issues it had been experiencing firmwide since the November 2002 action.”

Filed Under: Brokers, Compliance, FINRA Arbitration Tagged With: , , , , , ,

JUDGE RAKOFF DISMISSES CASE AGAINST FINRA OVER MERGER OF NASD AND NYSE

March 3, 2010 By

On March 1, 2010, District Judge Rakoff issued an opinion in two federal cases concerning alleged misrepresentations in the solicitation of NASD shareholder votes necessary for the consolidation of the NASD and NYSE and formation of FINRA. In both cases, the defendants filed motions to dismiss arguing, among other things, that they were entitled to absolute immunity. In his opinion, Judge Rakoff agreed with the defendants stating:

Pursuant to the Securities Exchange Act of 1934 , 15 U. S .C. §§ 78a-7800 , the United States Securities and Exchange Commission is authorized to delegate certain regulatory functions to SROs, which are therefore considered ‘quasi-governmental’ bodies…. As a result , SROs and their offi cers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions.

Judge Rakoff concluded that “[i]t is patent that the consolidation that transferred NASD’s and NYSE’s regulatory powers to the resulting FINRA is, on its face, an exercise of the SROs’ delegated regulatory functions and thus entitled to absolute immunity.”

Standard Investment Chartered v. NASD, No. 07 Civ. 2014 (JSR) and Benchmark Financial Services, No. 08 Civ. 11193 (JSR) (S.D.N.Y. Mar. 1, 2010).

Filed Under: Brokers, FINRA Arbitration, Mergers & Acquisitions, SEC Tagged With: , , , , , , , , , , , , , , , , , , , , , ,

STATE STREET BANK AND TRUST SETTLES WITH SEC OVER MORTGAGE-BACKED SECURITIES

February 5, 2010 By

On February 4, 2010, State Street Bank and Trust Company entered into a settlement with the Securities and Exchange Commission without admitting or denying the findings of the SEC in the settlement Order. During the subprime mortgage crisis the SEC found that State Street engaged in a course of business that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under its management.

As a result of State Street’s conduct, investors in State Street’s funds lost hundreds of millions of dollars during the subprime market meltdown in mid-2007.

State Street offered investments in certain collective trust funds to institutional investors, including pension funds, employee retirement plans, and charities. These funds included two substantially identical funds – referred to together as the Limited Duration Bond Fund (the “Fund”) – made available to different categories of investors. Other actively-managed bond funds and a commodity futures index fund managed by State Street (“the related funds”) also invested in the Fund. State Street established the Fund in 2002 and marketed the Fund by saying it utilized an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the Fund was almost entirely invested in or exposed to subprime residential mortgage-backed securities (“subprime investments”). Nonetheless, State Street continued to describe the Fund to prospective and current investors as having better sector diversification than a typical money market fund, while failing to disclose the extent of its exposure to subprime investments.

When the subprime market collapsed in mid-2007, many investors in the Fund and the related funds were unaware that the Fund had such significant exposure to subprime investments. In fact, the Fund’s offering materials, such as quarterly fact sheets, presentations to current and prospective investors, and responses to investors’ requests for proposal, contained misleading statements and/or omitted material information about the Fund’s exposure to subprime investments and use of leverage. As a result, many investors either had no idea that the Fund held subprime investments and used leverage, or believed that the Fund had very modest exposure to subprime investments and used little or no leverage.

See the SEC Press Release here.

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