In mid October of 2014, the Securities and Exchange Commission (SEC) reported that it filed a record 755 enforcement actions during the fiscal year ending September 2014. According to a press release issued by the agency, those actions included several first-ever cases, such as actions involving “the market access rule, the ‘pay-to-play’ rule for investment advisers, an emergency action to half a municipal bond offering, and an action for whistleblower retaliation.” SEC Chairwoman Mary Jo White has reiterated that the SEC will continue to expand its enforcement efforts in the coming years. That means more SEC enforcement actions, and SEC subpoenas, are on their way.
The SEC’s Division of Enforcement investigates and, in some cases, brings civil charges against individuals and entities for violations of the Federal securities laws. The Division does not prosecute criminal actions but works closely with law enforcement authorities, including the Department of Justice and U.S. Attorneys’ Office, and may refer matters to them under certain circumstances. It is critical to associate with experienced counsel at the outset of the investigation or immediately upon receiving a SEC subpoena. While SEC investigations and enforcement actions often are targeted at investment advisers, brokerage firms, publicly traded companies or others with close ties to the securities industry, individual investors and other members of the public may be pulled into investigations and enforcement proceedings through the use of SEC subpoenas and requests for testimony.
The first time an individual or entity may learn they are the subject of an SEC investigation or enforcement action often is upon receiving a subpoena from the SEC. Our New York, San Francisco, Irvine and San Diego SEC subpoena and enforcement defense attorneys have extensive experience in representing individuals and entities in SEC, FINRA and other regulatory investigations and enforcement proceedings. Contact us today for a confidential analysis of your situation.
The Financial Industry Regulatory Authority (FINRA) recently announced a new proposed rule that would prohibit member firms and registered representatives from conditioning settlement on, or otherwise compensating customers for, an agreement not to oppose expungement requests. According to FINRA, the proposed rule will help preserve the integrity of the Central Registration Depository (CRD) system–the database containing, amongst other information, a firm/broker’s compliance and disciplinary history. Much of the information reported on the CRD is publicly available through FINRA’s BrokerCheck website.
The scenario typically arises when a firm or broker agrees to settle an arbitration claim filed through FINRA’s Arbitration Division. Under existing FINRA rules, firms generally must report these claims on the CRD system using Form U4. Once this type of disclosure has been made, however, it generally cannot be removed or changed absent an “expungement” order from a FINRA Arbitration Panel. To grant expungement relief, an arbitration panel must conclude that a claim was factually impossible or clearly erroneous; that the individual was not involved in the alleged misconduct; or that the claim or allegation was false.
For many years, firms and brokers have conditioned settlement on a customer’s agreement “not to oppose” expungement proceedings. In effect, firms ask arbitration claimants to agree their claims were “factually impossible” or “false” as a condition of settlement. The practice enabled firms/registered reps to settle with customers while maintaining clean compliance records, even where they may have been some actual wrongdoing by the firm/advisor. In fact, based on a study released last October by the Public Investors Arbitration Bar Association (PIABA), over 90% of FINRA arbitration claims that settled between 2007 and 2011 also resulted in expungement.
FINRA’s proposed rule seeks to drastically limit the availability of expungement to firms/registered reps when settling claims. It remains to be seen whether the proposed rule will cause firms/advisors to litigate claims they otherwise may have settled. Before taking effect, the proposed rule must be submitted to the SEC for review, comment and approval, a process which can take several months.
If you are a customer who has a prospective claim against a FINRA firm or its representative, or are a FINRA registered representative seeking to obtain expungement relief, please contact our managing partner to discuss your situation.
The FBI recently indicted Michael Stewart of Phoenix, Arizona, and John Packard, of Long Beach, California, for allegedly operating a massive real estate ponzi scheme fraud through their companies, Pacific Property Assets (PPA) and Apartments America, LLC (AA). According to the SEC, which previously brought civil fraud charges against the alleged fraudsters, Stewart and Packard swindled investors out of more than $110 million by misrepresenting their companies’ financial condition to prospective investors in the period leading up to and following the 2007 real estate collapse.
While PPA and AA generally were not profitable, Stewart and Packard were able to take advantage of favorable market conditions to refinance and cash out the equity in various apartment buildings they owned through PPA and AA. When the real estate market crashed, however, PPA filed for bankruptcy, indicating that it owed more than $90 million to investors. Those investors received nothing in connection with the bankruptcy proceeding.
The FBI has accused Stewart and Packard of criminal fraud and of operating a Ponzi scheme, whereby purported returns to existing investors are paid from funds contributed by new investors. If you have been the victim of a Ponzi Scheme, or are involved in a Ponzi scheme “claw-back” case, please contact our firm to discuss the specifics of your case.
The FBI recently announced a 12-count federal indictment against Anthony Barreiro and Ernest Ray Parker, a/k/a Ray Parker Gaylord, two art dealers who reside in San Francisco and Dallas. The indictment alleges that Barreiro and Parker operated a Ponzi scheme fraud through several phony businesses, including ARTLoan Financial LLC, ARTLoan Financial Services Inc. and ARTLoan Financial Service LLC (collectively “ARTLoan”), and convinced investors to invest approximately $3.4 million in their scheme.
According to the indictment, Barreiro and Parker told investors that ARTLoan was actively engaged in the business of lending money to prospective purchasers of high-value art. They then promised investors they would receive regular interest payments and told them their investment would be safe as ARTLoan would retain a security interest in the subject artwork. According to the indictment, however, ARTLoan never entered into any debt financing agreements with prospective art purchasers, and the money obtained from investors to fund those agreements either was embezzled or paid out as “interest payments” to appease current investors and lure additional potential investors.
Barreiro and Parker are accused of operating a classic Ponzi scheme, whereby purported returns to existing investors are paid from funds contributed by new investors. If you have been the victim of a Ponzi Scheme, or are involved in a Ponzi scheme “claw-back” case, please contact our firm to discuss the specifics of your case.
The FBI recently announced that it has arrested Luis Alonso Serna, a pastor based in the San Fernando valley area of Los Angeles, in connection with a federal indictment alleging he ran a Ponzi scheme which bilked upwards of 70 investors out of more than $4 million.
Serna is the pastor of Zion Living Word Christian Center (formerly Amistad Christiana), a predominantly spanish-speaking church located in the San Fernando Valley. According to the indictment, Serna told parishoners and other prospective investors that he was a successful foreign currency investor and promised returns of up to 20%. According to prosecutors, Serna and those working with him even convinced some investors to take mortgages on their homes to invest.
Serna is accused of operating a classic Ponzi scheme. According to the SEC, a Ponzi scheme “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” Ponzi scheme fraudsters typically use money from new investors to make payments to individuals who invested earlier in the scheme.
If you have been the victim of a Ponzi Scheme, or are involved in a Ponzi scheme “claw-back” case, please contact our firm to discuss the specifics of your case.
A new technology glitch is impacting Morgan Stanley Wealth Management’s ability to re-balance its clients’ brokerage accounts. According to an anonymous source at the firm, the glitch was so significant that the firm’s wealth management division called a “crisis management” meeting late last week.
Morgan Stanley began rolling out its new “3D” technology platform in the spring of 2012. Since its debut, the system was widely criticized by brokers as being plagued by bugs, design flaws and technical glitches. According to some of the firm’s advisors, the system since has had a multitude of serious problems, including frequent system outages, incorrect client account balances, changes to account numbers, margin issues, slow processing of trades and other problems and delays.
Morgan Stanley Wealth Management (formerly Morgan Stanley Smith Barney) is the product of a 2009 joint venture between Morgan Stanley’s wealth management division and Citigroup’s Smith Barney division. For more than two years after the joint venture, legacy Smith Barney advisors used Smith Barney’s technology platforms, while legacy Morgan Stanley advisors used Morgan Stanley’s platform. The disappointing “3D”#8221; system was a new from the ground up system intended to seamlessly integrate both technology platforms. Problems with the system in past months have caused some of Morgan Stanley’s highest-producing advisors to leave the firm and bring claims for damages.
In April 2012, Congress enacted the “Jumpstart Our Business Startups Act”-or JOBS Act-as part of the federal government’s ongoing efforts to stimulate the economy. The Act was intended to spur small business growth by loosening decades-old rules prohibiting the solicitation and sale of private placement investments to the general public. Through the new “crowdfunding exemption” to the registration requirements of the Securities Act of 1933, Title III of the JOBS Act gives startup companies the go ahead to raise up to $1 million in investment capital per 12 month period from everyday (e.g., non-accredited) investors.
While there is no question crowdfunding will allow businesses easier access to startup capital, crowdfunding investors will not have the benefit of reviewing all the financial and other company information they otherwise would have in a traditional investment scenario. And given the fact securities crowdfunding-which the SEC considers amongst the riskiest investments available-will take place almost exclusively through the internet, investors may be more vulnerable to fraud or other misconduct.
The regulation of crowdfunding under the JOBS Act is a new and fluid area of the law. In fact, the Securities and Exchange Commission (SEC) only released its proposed crowdfunding regulations in late October of this year. Until those regulations are formally adopted-which is expected to take place shortly after the SEC’s comment period expires in January 2014-crowdfunding in the securities context will remain illegal. When crowdfunding becomes legal, however, investors should have a clear understanding of the rules and limitations governing crowdfunding before considering these inherently risky investments.
On Friday, the Financial Industry Regulatory Authority (FINRA), Wall Street’s largest self-regulatory agency, announced it would consider whether broker-dealer firms should be required to carry insurance to help ensure payment of arbitration awards issued through FINRA’s dispute resolution forum. Virtually all broker-dealers require their customers and employees to arbitrate any legal claims–e.g., claims involving securities fraud, unsuitabile investments, breach of fiduciary duty etc.–through FINRA’s arbitration division.
According to FINRA, however, more than 940 member firms reported that they held net capital of less than $50,000.00 as of July 1, 2013. As a result, a single adverse arbitration award could wipe out a smaller broker-dealer, leaving arbitration claimants with no financial recourse. In fact, 11% of the arbitration awards issued through FINRA’s arbitration forum in 2011–awards totaling roughly $50 million–were never paid.
Most independent broker-dealer firms already require their registered representatives to carry insurance. Imposing a similar requirement on firms themselves would help to reduce the number of unpaid arbitration awards and provide some assurance to investors working with smaller broker-dealers.
In April 2012, as part of a broad change to the securities regulations, President Obama signed into law the “Jumpstart Our Business Startups Act”, or “JOBS Act”. Part of the government’s broader stimulus package, the Act was intended to encourage small business growth by loosening decades-old rules prohibiting the solicitation and sale of private placement investments to the general public. Once barred from soliciting investments from everyday investors, start-up companies now can raise up to $1 million in capital per 12 month period through the “crowdfunding exemption”.
Crowdfunding is the process of raising capital through a series of small investments from a large number of people, typically through the internet and social media. Title III of the JOBS Act specifically exempts crowdfunding activities from the Securities and Exchange Commission’s (SEC) stringent registration and disclosure requirements and allows start-up companies to solicit investments from the general public. Previous restrictions only allowed “private placement” investments to be offered to wealthy and sophisticated accredited investors, or investors who met certain income and net worth thresholds. Private placements are riskier, non-traditional investments (e.g., investments in start-up companies and hedge funds) that are not required to be registered with the SEC.
Given the new relaxed disclosure rules, crowdfunding investors will not have access to financial and other information about the company they otherwise would have in a traditional investment scenario. They also may be more vulnerable to fraud or misrepresentations in connection with the investment. Unlike other private placement investments, however, an investment under the crowdfunding exemption cannot exceed $100,000.
While there is no question crowdfunding is on the rise and will allow small start-up companies easier access to capital, not everyone supports the new trend. According to Luis Aguilar, the sole SEC commissioner who objected to the rule change, “general solicitation will make fraud easier by allowing fraudsters to cast a wider net for victims.” A large group of investors who lose less money also may be less likely to pursue claims against a start-up company or its intermediary.
Before considering a crowdfunding investment in a start-up company, investors should do their due diligence; learn as much about the start-up company as possible and understand the inherently risky nature of the investment. If you have been the victim of misrepresentations or fraud in connection with a private placement or crowdfunding investment, you may contact our firm’s managing partner, Erwin Shustak, at (619) 696-9500.
The Securities and Exchange Commission has filed a formal complaint against Kevin G. White of Plano, Texas, and two entities through which the SEC alleges he operated a significant Foreign Exchange (Forex) trading scheme, KGW Capital Management, LLC and Revelation Forex Fund, L.P. According to the SEC’s complaint, White solicited and raised in excess of $7.1 million from more than 20 investors in the United States through a series of false and misleading representations.
According to the SEC, to convince investors to invest in his fund, White promised compound annual returns in excess of 36% and claimed the fund had achieved total returns of more than 393% since January 2009. Thus, according to White’s marketing materials, an initial investment of $250,000 in January 2009 would have grown to more than $960,000 by April 2013.
Despite these promises of large gains, in reality the SEC alleges the fund incurred trading losses of $550,000, plus unrealized losses of more than $1.4 million, since it began Forex trading in 2011. The SEC also claims White lied about his education and prior “Wall Street” experience and used more than $1.7 million of investor money to pay for his own personal expenses and expensive trips. White is not registered with the SEC, the U.S. Commodity Futures Trading Commission, the Financial Industry Regulatory Authority or any state securities regulator according to the SEC.
Shustak Reynolds & Partners, P.C. handles a wide range of securities and FINRA related issues and has substantial expertise and experience in the securities and brokerage business. If you believe you have been the victim of fraudulent or negligent misrepresentations in connection with the sale of securities, please contact our firm’s managing partner, Erwin Shustak, at 619.696.9500 or shustak@shufirm.com.
