On November 30, 2011, the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued a Regulatory Risk Alert outlining effective policies and procedures for broker-dealer branch inspections and broker supervision. The alert serves as a reminder of existing Securities Exchange Act and FINRA rules requiring broker-dealers to conduct branch office inspections with vigilance. The Risk Alert identifies practices that are characteristic of effective supervisory procedures and branch office supervisory systems, including but not limited to:
– Using risk analysis to identify whether branches should be supervised more frequently than FINRA’s required three-year cycle;
– Using surveillance reports and employing current technology to help identify risk;
– Conducting unnanounced branch inspections;
– Using examiners with sufficient expertise to understand the business being conducted at the branch;
– Providing branch office managers with the firm’s internal inspection findings and requiring them to take and document corrective action.
The joint guidance offered by the SEC and FINRA in this Risk Alert is particularly relevant to many customer investment disputes. Our firm consistently represents institutional and retail investors who have been victims of firms’ broker supervision deficiencies, which often result inunsuitable investment recommendations. If you think you may have a similar claim, feel free to contact our managing partner, Erwin J. Shustak, at (619) 696-9500 or visit our website atwww.shufirm.com and inquire about our free initial consultations.
It’s one of the oldest tricks in the book, and new clients routinely contact our firm after falling victim to it. A member of your community organization, a friend from work or perhaps even your child’s soccer coach recommends a new, “guaranteed” investment promising unbelievable double digit returns. The investment is such a sure thing, they tell you, that your town’s police chief, the principal of your child’s school and even the mayor have invested significant sums of money and are already realizing incredible returns–returns you will miss out on if you don’t invest right now. So you decide to invest a substantial portion of your savings or retirement funds to take advantage of this once-in-a-lifetime opportunity only to realize, months or even years later, that the returns you were guaranteed will never be realized and your entire investment has been lost. By then, the friend or community member you trusted has absconded with your hard earned money, and you are, like thousands of others have been, the latest victim of affinity fraud.
According to the Securities and Exchange Commission (“SEC”), affinity fraud refers to investment scams that prey upon members of specific, identifiable groups, such as religious or ethnic communities, the elderly and other professional and community groups. Scammers often enlist respected community members to participate in their fraud–almost always unknowingly–and use them to convince new investors to join the scheme by touting the significant gains they’ve realized in only a few short weeks or months. Sooner or later, when the wheels inevitably fall off the wagon, the scheme collapses and most investors are left financially devastated, twisting in the wind with little more than the falsified agreements and statements the fraudsters gave them.
The SEC has issued a list of tips to avoid affinity fraud, including the following:
(1) Check out everything concerning the investment. No matter how trustworthy the person offering the investment may seem, investigate the investment thoroughly; check his or her background; and verify the veracity of everything you are told about the investment. Consider eliciting the help of experienced counsel in your due diligence efforts.
(2) Be wary of investments promising spectacular profits or “guaranteed” returns. These are “classic signs” of fraud, according to the SEC. Remember what your parents told you–if it seems to good to be true, it probably is.
(3) Insist that everything be put in writing. Fraudsters and scammers like to avoid writing down their false promises and representations, perhaps as an attempt to escape civil liability or criminal prosecution down the line. Insist that everything be reduced to a writing, and keep in mind that legitimate private investments often involve hundreds of pages of documents and disclosures.
(4) Don’t be pressured or rushed into making a decision. Pariticularly when your life savings are on the line, take the time to learn about the investment and confirm it is legitimate and suitable for your needs before proceeding. An ounce of prevention is worth a pound of cure in this regard–and perhaps also your life savings.
(5) Finally, be wary of unsolicited e-mails advertising a once-in-a-lifetime investment. If the investment really was so desirable, the scammers would not need to email hundreds of thousands of would-be investors to participate.
Even when abiding by all of these rules, many investors still fall victim to fraud. After uncovering a fraud, it may be important to act quickly to increase your chances of recovery. If you believe you are a victim of affinity fraud or another type of securities fraud, contact our firm’s managing partner, Erwin Shustak, at (619) 696-9500 or shustak@shufirm.com. Our firmhas handled many affinity fraud claims on behalf of investors from fraudulent ponzi schemes to real estate scams and other fraudulent or unsuitable investment schemes.
The Financial Industry Regulatory Authority (FINRA), the self-regulated organization responsible for overseeing brokers and broker-dealers, has sanctioned eight firms and ten individuals for recommending private placement investments without a reasonable basis to customers. Among the firms sanctioned are: NEXT Financial Group; Investors Capital Corporation; Garden State Securities; Capital Financial Services; National Securities Corporation; Equity Services; Securities America; and Newbridge Securities Corporation. FINRA sanctioned the firms and individuals a total of $3.2 million in restitution. FINRA asserts the firms and certain principals failed to conduct the requisite due diligence and did not have adequate supervisory systems in place to identify and understand the inherent risks of the private placement offerings. This sanction marks the latest in a series of inquiries by FINRA into improperly recommended private placements. If you think you have been recommended an unsuitable private placement investment by any of these or any other firms, you may contact our managing partner, Erwin Shustak, at (619) 696-9500 or shustak@shufirm.com. Our firm currently is handling a number of claims on behalf of investors involving unsuitable private placements. We offer a free initial consultation and have decades of experience with a wide range of investment claims, including Medical Capital notes sold by Securities America and other private placements and due diligence issues.
In a recent court decision, New York Federal Judge Jed Rakoff denied a motion to approve a settlement between Citigroup and the SEC arising out of charges that Citi misled investors about collateralized debt obligations. Judge Rakoff rejected the highly publicized settlement, consisting, in part, of a $285 million payment by Citi without any admission or denial of wrongdoing, on grounds he had insufficient facts on which to approve the agreement. The judge stated, “[i]n any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.” The judge, appearing bent on procuring more facts about Citi’s conduct and whether it complied with the obligations imposed by the SEC, has set a trial date of July 16, 2012. Our firm regularly handles cases involving investor fraud and misrepresentation. Please contact us at (619) 696-9500 or visit our website at www.shufirm.com if you would like a free consultation about a current or pending investment with a broker-dealer.
We see more and more private placements being sold to unsuspecting investors, most of whom have little or no idea of the risks inherent in these investments. With very few exceptions, a private placement is a high risk investment; typically highly illiquid and not suitable for most investors. The first question, of course, is what is a private placement? Private Placements are securities sold in a private, versus a public offering, to a limited number of investors. These are securities, typically shares of stock, convertible or preferred stock, promissory notes or bonds. These private placements have not gone through the scrutiny which usually accompanies a normal, public offering of a security and no governmental agency, including the SEC, FINRA or any State securities department, has reviewed, passed upon or approved the investment. Private placements are sold on the basis of an exemption from, not in compliance with the various federal and state securities laws. They are illiquid in that there is no public marketplace for selling them like buying and selling shares of Apple or any other publicly traded company. Once purchased, the investor usually is “stuck” holding the private placement. In the past few years, there have been major frauds, amounting to billions of dollars, of unsuitable private placements which have failed, including DBSI, Provident Royalties and Medical Capital Financial. The commission structure for a broker selling a customer a private placement is very high, often as much as 10% or more of the total amount paid. Studies have shown that brokerage firms which sell private placements often do little due diligence on the actual investment and systemically, the due diligence made on these investments is sloppy, at best. On the risk pyramid, private placements are at the very top of the pyramid, representing the highest level of risk. Private placements never should constitute more than approximately 5% of an investors portfolio and they typically are unsuitable at any percentage for most investors, particularly seniors and conservative investors. If you are considering purchasing a private placement, or if you have been induced into buying one or more and feel the investment is unsuitable for you, contact our firm’s managing partner, Erwin Shustak, an experienced securities fraud attorney, at 888.748.8748, or shustak@shufirm.com, for a no obligation consultation. Visit our web site at www.shufirm.com for more information.
Registered representatives, investment advisers and others employed in the securities industry are required to disclose certain prior criminal convictions, including some “expunged” convictions, to the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC) in connection with their employment. These disclosure obligations differ depending on the nature of the underlying crime and type of expungement relief obtained.
Not all convictions must be disclosed, however, and some expunged convictions may be totally purged from a representative’s CRD record. While other convictions must be disclosed and cannot be completely removed even if expunged, with the assistance of experienced FINRA expungement counsel, registered representatives often can amend their CRD records to accurately report the nature of the conviction and lessen the potentially negative impact of the disclosure.
Registered representatives are required to register their securities licenses with FINRA and the states in which they do business using Form U4, which requires disclosure of all felonies and certain misdemeanors which the person has been convicted of, pled guilty or no contest to or been charged with in the past. All misdemeanors involving investments or an investment-related business; fraud; false statements or omissions; wrongful taking of property; bribery; perjury; forgery; counterfeiting; extortion; or a conspiracy to commit any of these offenses must be reported on Form U4. Most information disclosed on Form U4, including prior convictions, becomes publicly available through FINRA’s BrokerCheck website within a matter of days. Form ADV, which is similar to Form U4 and used by investment advisers to register with the SEC and the states in which they do business, carries similar disclosure requirements.
Disclosure obligations required in connection with Forms U4 or ADV may change when a broker or adviser obtains expungement relief under the California Penal Code depending on the nature of the underlying conviction and the type of post-conviction relief obtained.
The most common type of post-conviction relief available is a dismissal pursuant to Penal Code section 1203.4 or a closely related statute, 1203.4a. These statutes set forth the rules governing expungement of misdemeanors and some felonies and generally result in a full dismissal of all charges against an individual.
Most relevant to the securities industry, convictions expunged pursuant to 1203.4a generally need not be reported, though the individual circumstances of each case must be considered. Convictions expunged under 1203.4, conversely, typically must be disclosed on Form U4 or Form ADV. Even where a conviction must be disclosed or cannot be removed from a registered person’s CRD record, however, brokers and advisers often can work with an experienced FINRA expungement attorney to have their disclosure language modified to accurately and truthfully describe the nature and severity of the underlying crime and clearly reflect the expunged status of the conviction.
The regulators are constantly refining their disclosure rules to strike a fair balance between investor protection and the privacy interests of registered representatives and investment advisers. There is no doubt some convictions must–and should–be disclosed to protect and inform the public. But in light of seemingly ever-increasing disclosure requirements, registered persons and advisers may find themselves haunted by prior convictions which occurred decades ago and have no bearing on their ability to honestly and diligently serve their clients. These individuals may be entitled to amend their disclosures or purge them altogether not only to ensure their disclosures are complete, accurate and truthful, but also to lessen the potentially derogatory impact of the disclosure on their reputation and business.
Up-front, forgivable notes have been used by brokerage firms for many years as a way to entice high producing brokers to join- and, hopefully, remain- at the firm recruiting the talent. Virtually all firms use these notes as a recruiting tool, and almost all are structured the same way although sometimes with different names. Upfront, forgivable notes are routinely are used by Morgan Stanley Smith Barney; UBS; Banc of America Securities; Merrill Lynch; Ameriprise; Wells Fargo; Wachovia Securities and a host of other brokerage firms, large and small.
Although every case is different and some firms use different formulas, depending on the size of the portable book of business the prospective broker controls, the most common formula used by firms in computing how much of an up-front loan to make to the broker is one times the broker’s “trailing twelve”. The “trailing twelve” is the most recent twelve months’ worth of gross production generated by the broker at his or her current firm. The recruiting firm generally asks the broker to provide a print out of his or her “trailing twelve” to verify the amount of that gross production.
Once the recruiting firm has the details of the broker’s “trailing twelve” of gross production, the up-front, forgivable note is structured. The idea behind the forgivable note is simple. The brokerage firm picks an amount to be given, upfront, to the broker upon joining the new firm and the broker signs an enforceable, promissory note agreeing to repay that loan over a negotiated number of years, typically anywhere from 5 to 7 years which is the current standard in the industry.
If you are considering changing firms and have been offered an up-front, forgivable note, or if you already signed one and are considering a transition from one firm to the other, contact our managing partner, Erwin Shustak, at 619.696.9500, to discuss your options. More information about up-front, forgivable notes can be found at our web site, www.shufirm.com.
Unsuitable investments continue to be sold to unsuspecting clients of major brokerage firms. On November 15, 2011 FINRA, ordered JP Morgan Chase to reimburse clients $1.9 million for losses those investors sustained when JP Morgan sold them high risk, unsuitable unit investment trusts (“UIT’s”) and illiquid floating-rate loan funds. According to FINRA, these high risk, illiquid investments were sold primarily to conservative investments. In addition to the restitution, FINRA also fined the firm $1.7 million. According to a statement issued by FINRA, the JP Morgan representatives who sold the unsuitable investments did not have the training, experience or supervision necessary to determine whether these investments were suitable for the clients. This is just one example, of many, where a major brokerage firm is fined for selling unsuitable investments and securities to unsuspecting clients. If any investor has been the victim of having been sold an unsuitable investment security-whether unit investment trusts or illiquid floating loan funds- whether sold by JP Morgan Chase, or any other brokerage firm, contact our managing partner, Erwin Shustak, at 619.696.9500 and visit our web site at www.shufirm.com
