Investment opportunities come in all shapes and sizes – from traditional 401(k) contributions and Registered Investment Advisor (RIA) firms to hedge funds and venture capital start-ups. Any investment opportunity comes with its own specific set of legal challenges that may jeopardize both novice and seasoned investors alike. Anyone, however, can navigate the uncertain investment landscape and avoid costly legal pitfalls with input from financial professionals and experienced legal counsel.
First, many investors avoid seeking legal advice because they believe that it’s too expensive. While avoiding legal advice might save an investor some cash on the front end, it can ultimately cost more money on the back end. Most investment contracts contain page after page of complex legal language that can make it difficult to identify the exact terms of an investment agreement without industry-specific knowledge. It is critical to unpack and understand any and all spotted areas of concern to avoid misinterpreting terms of agreement.
Second, confirm that the investment opportunity has been properly registered with the U.S. Securities and Exchange Commission (SEC) (if required) and complies with Financial Industry Regulatory Authority (FINRA) rules and regulations. Every year, numerous “accredited” financial investors and illegitimate schemes – yes, the Ponzi type – defraud investors of billions of dollars (see Woodbridge CEO Pleads Guilty to $1.3 Billion Fraud). Although an institution may be credible, certain advisors or unregistered persons may use common persuasion tactics to entice potential investors to make impulse decisions. FINRA describes such tactics as:
The “Phantom Riches” Tactic–dangling the prospect of wealth, enticing you with something you want but can’t have. “These gas wells are guaranteed to produce $6,800 a month in income.”
The “Source Credibility” Tactic–trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience. “Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn’t produce.”
The “Social Consensus” Tactic–leading you to believe that other savvy investors have already invested. “This is how ___ got his start. I know it’s a lot of money, but I’m in–and so is my mom and half her church–and it’s worth every dime.”
The “Reciprocity” Tactic–offering to do a small favor for you in return for a big favor. “I’ll give you a break on my commission if you buy now–half off.”
The “Scarcity” Tactic–creating a false sense of urgency by claiming limited supply. “There are only two units left, so I’d sign today if I were you.”
Third, understand that there is no guaranteed investment return and that any opportunity carries risks and potential downside. Even professionally vetted investment opportunities have the potential to produce disappointing results. This is yet another reason to seek the guidance of knowledgeable legal counsel when considering an investment.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. To speak with an attorney, contact us at (619) 696-9500.
Each year, the Securities and Exchange Commission (SEC) publishes a list of its examination priorities for the coming year. Similar to the 2019 list, the SEC’s list for 2020 includes enhanced focus areas related to investment advisers, investment companies, broker-dealers and municipal advisors. Specifically, the SEC pledges to focus its resources on examining RIAs that have never been examined, including newly formed RIAs as well as those already in operation. The RIA examinations will include those RIAs advising retail investors as well as private funds. Broker-dealer examinations will focus on issues pertaining to the implementation of new regulations, including regulation “Best Interest,” or Reg BI.
Familiar focus areas also included on the 2020 list are continued review for compliance with applicable anti-money laundering (AML) rules and regulations, as well as a focus on information security and financial technology including the use of “robo-advisors.” The SEC also pledges to focus on overseeing the Financial Industry Regulatory Authority (FINRA) and its operations, regulatory efforts and examinations.
Shustak Reynolds & Partners, P.C. California SEC and FINRA lawyers routinely counsel broker-dealers, registered representatives, RIA firms, investment adviser representatives and other financial professionals in SEC and FINRA 8210 investigations and enforcement proceedings, as well as investigations and proceedings before the state securities regulators, including the California Department of Business Oversight. Contact us today for a confidential, complimentary consultation.
Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
A FINRA arbitration panel has denied J.P. Morgan Securities’ request for a permanent injunction preventing its former broker, Eric Weiss, from contacting clients with whom he worked at the firm.
Weiss left J.P. Morgan for Raymond James earlier in 2019. Soon after he resigned, J.P. Morgan sued in Indiana federal court seeking an emergency temporary restraining order (TRO) barring Weiss from contacting clients until FINRA’s arbitration division conducted a full hearing on the dispute. The Court granted the firm’s request, as J.P. Morgan claimed Weiss used “trade secret” customer contact information to illegally solicit clients to join Raymond James and disparaged J.P. Morgan’s name in the process. While Weiss allegedly transitioned to Raymond James approximately 40 clients representing $27 million in assets under management, he likely could have transitioned significantly more clients and assets had J.P. Morgan not prevailed on its application for a TRO. Weiss previously managed in excess of $190 million in client assets at J.P. Morgan.
As is standard protocol in the securities industry, the court only rules on the initial application for emergency relief. Requests for preliminary or permanent injunctions or monetary damages are addressed in a companion FINRA arbitration proceeding, which generally takes place several weeks after the court proceeding. Following an arbitration hearing in December 2019, a panel of FINRA arbitrators denied J.P. Morgan’s request for a permanent injunction, suggesting the Panel did not agree with the Court’s rationale in granting the initial TRO.
Partner George Miller, who routinely counsels financial advisors in transitions and trade secret litigation, was recently quoted in an AdvisorHub article discussing the ruling.
The J.P. Morgan v. Weiss matter represents just the latest example of the risks associated with a financial advisor’s transition and further highlights the importance of working with experienced counsel through the process.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
