August 18, 2014

LPL Financial Fraught with Allegations of Supervisory Failures

Advisor Independence Achilles Heel for Gigantic Investment Organization

LPL Financial is one of the nation’s largest broker/dealer investment firms, yet it is not an investment firm in the traditional sense. Whereas most investment firms offer specific investment vehicles, LPL Financial’s business model differs from many other companies in the investment industry. Formed in 1989 as the result of a merger of two brokerage firms, Linsco and Private Ledger, LPL Financial is actually an aggregation of investment advisors which exceeds 13,000 employees. As a result, LPL Financial has the responsibility to adequately supervise those advisors to ensure that they are not only following the best investment practices to benefit their clients, but that they are also following those practices which are mandated by state laws, federal laws, and the rules set forth by regulatory agencies.

When you consider the number of regulatory actions against LPL Financial in recent years, it becomes clear that upholding these supervisory obligations seems to be an ongoing issue for the company. This is not surprising when you consider that many of the advisors which it licenses are in small or individual offices located across the United States. Just this year alone, the Financial Industry Regulatory Authority (FINRA) fined LPL Financial with nearly $3 million in penalties as a result of the company’s faulty “three-tiered supervisory system”. This system was supposed to ensure accuracy in the processing and reviewing of their alternative investments, and that its representatives and supervisory personnel were adequately trained. Unfortunately, this system broke down on every level.

One such example occurred with former registered representative, Michael Taillon who operated solely out of an office based in Virginia. An ongoing arbitration claim states that Taillon violated FINRA regulations pertaining to a Notice to Members which correlates to the sale of non-traditional, leveraged exchange traded funds (ETFs). This arbitration stems from a FINRA claim which was filed in late 2013. The arbitration claim states Taillon made advisements that were unsuitable which included the following ETFs:

• Rydex Inverse S&P 500 Strategy
• Rydex S&P 500
• ProShares Short S&P 500
• ProShares UltraShort Real Estate
• ProShares UltraShort Oil & Gas
• ProShares UltraShort Financial
• ProShares UltraShort Basic Materials
• ProShares Ultra S&P 500
• ProShares Ultra Basic Materials
• ProShares Ultra QQQ

Subsequently, Taillon’s registration with LPL Financial was dissolved in January of 2014.

This is just one illustration of the failure on the part of LPL Financial’s supervisory duties. In addition to the multitude of FINRA actions, the Massachusetts Securities Division filed an administrative complaint against the company for allowing its advisors to sell real estate investment trusts (REITs) in a manner that breaches not only the state’s procedures, but also those of LPL Financial’s own procedures. With the inherently high risk associated with REITs, it is especially important that advisors explain any and all risks that these investments pose to their clients.

With investment advisors’ potential commissions just beginning at 6%, it is easy to see how these advisors can become over-zealous in recommending certain investments to clients. That does not, however, preclude them from having to understand and follow the rules and regulations that govern which investments they favor. It is the fiduciary responsibility of each investment firm and their advisors to recommend only those investments for which their clients have a risk-tolerance. Failure to do so constitutes breach of fiduciary duty and negligence on the part of both the advisors and the investment firm that oversees the practices of those advisors.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of LPL Financial, LLC; Mr. Taillon; or any other LPL investment advisor, please give us a call at 1-877-STOCK-LAW for a free consultation.

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August 12, 2014

Total Wealth Management Sanctions Kickbacks

Top Executives Foster Flagrant Fraud Practices

It goes without saying that there is a lot of money to be made in the investment industry. Even when investment firms and advisors follow the rules that govern the industry, they stand to earn substantial sums in commissions if they are skilled at their profession. Knowing this makes it particularly deplorable when brokerage firms and their employees engage in acts of misconduct in order to increase their profits. The firms and advisors that do so may benefit from these misdeeds, but their clients suffer financial losses as a result of their shady business practices. Regrettably, there are many ways to surreptitiously increase profits for advisors. Not all of these methods are illegal, but do fall under the category of breach of fiduciary duty and fraud when the best interests of the clients are set aside for the sake of profits.

Recently, the Securities and Exchange Commission leveled charges against Southern California-based Total Wealth Management for just such infractions. According to the SEC complaint, Total Wealth Management’s chief executive officer and owner, Jacob Cooper; their chief compliance officer, Nathan McNamee; and an investment advisor, Douglas Shoemaker, all breached their fiduciary responsibilities. The enforcement division of the SEC claims that these individuals held revenue sharing agreements that were not disclosed to their clients. These agreements resulted in kickbacks that were paid to the individuals as “revenue sharing fees.” This created conflicts of interest because the investments that were being suggested were proprietary funds known as the Altus family of funds. The company also misrepresented the level of due diligence that it provided on the investments that it recommended.

“Investment advisers owe a fiduciary duty of utmost good faith and full and fair disclosure to their clients,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “Total Wealth violated that duty with its pervasive practice of placing clients in funds holding risky investments while concealing the revenue sharing fees they paid themselves.”

Not only did the company hide the fact that it was receiving these revenue sharing fees, it also resorted to some rather unsavory business practices to garner new business. Per the SEC, Cooper attempted to draw in more investors through the use of paid radio advertising, yet continued to fail to inform them of the fees that Total Wealth received from the funds that Cooper was promoting.

Additionally, this is not the first time that acts of fiscal impropriety have been committed by Cooper. He founded Total Wealth Management in 2009 after he resigned from his previous position with SunAmerica Securities amid accusations by a client that he had forged the client’s signature. More recently, there was a complaint filed against Cooper in Superior Court relating to how Cooper went about touting Total Wealth Management.

“During these radio shows, Cooper would urge investors to move from investing in the volatile stock market to safer investments that TWM would assist his investment-adviser clients to find,” the suit states. “Cooper told listeners his extensive experience in personal wealth management rendered him an expert source of financial guidance through tough economic times.”

Although Cooper made claims regarding his “extensive experience,” according to Cooper’s broker disclosure report, he occupied each of his previous positions as a broker for less than two years, and he is no longer registered with any securities firms.

The SEC’s stance in the administrative proceedings is that these kickbacks were intentionally undisclosed to Total Wealth Management’s investors and the company knowingly violated the antifraud provisions of federal securities laws. It further contends that the firm failed to comply with Form ADV disclosure requirements and the rule governing custody. The regulator is seeking to have the erroneously obtained funds forfeited, interest applied, as well as other financial penalties. They are also seeking a seek-and-desist order to prevent any of these individuals from engaging in further actions of this nature.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the acts of fraud and misrepresentation by Total Wealth Management, Mr. Cooper, Mr. McNamee, or Mr. Shoemaker, please give us a call at 1-877-STOCK-LAW for a free consultation.

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August 4, 2014

U.S. Attorney’s Office Files Parallel Action in Response to Previous CFTC Fraud Charges

The types of investments that one can invest in are nearly as diverse as the brokers who trade them and the investors who invest in them. One such investment practice is commodity futures pools. This type of investment is a private investment which ‘pools’ investor monies to be used in the futures and commodities markets. This allows the fund to be used as a single investment vehicle to increase leverage, with the anticipated outcome being greater profit potential. When managed appropriately, a commodity futures pool can garner significant profits for investors. It is unfortunate that, just like other investments, there are those who use these investment opportunities to defraud customers.

In January 2011, the U.S. Commodity Futures Trading Commission (CFTC), the regulatory agency that oversees the trading of futures, issued a press release announcing that the agency had gotten a federal court order to freeze the assets of Robert J. Andres and Winsome Investment Trust, both based in Houston, Texas, as well as Robert L. Holloway of San Diego, California, and US Ventures, LLC of Salt Lake City, Utah. The order also served to stop the possible destruction of any of the books or records belonging to any of the defendants.

The order was the result of a CFTC anti-fraud civil complaint that was filed in federal court earlier that month. The complaint stated that Andres and Winsome had fraudulently solicited others to commit to investing in a commodity futures pool. The complaint also stated that the defendants had misappropriated these funds and attempted to hide the fraud by generating phony account statements to those who participated in the pool that did not accurately reflect the profitability of the investments.

The complaint alleges that from approximately May 2005 until November 2008, Andres and Winsome fraudulently sought out roughly $50.2 million from more than 240 people with the promise to invest these funds into a commodity futures pool that Holloway and US Ventures controlled. In order to entice investors, Andres and Winsome claimed an erroneous level of performance and made assurances to the investors that they would receive the return of not only their principal investment, but also profits. Yet, in spite of Andres’ and Winsome’s assertions, US Venture’s and Holloway’s trading was unsuccessful and realized overall net losses of almost $11 million. Additionally, the complaint states that more than $26 million was deposited in US Venture’s trading accounts by Andres and Winsome, but they then withdrew nearly 60% of those funds.

Allegedly, the defendants only traded a small amount of the funds in the pool and embezzled a much larger part of the monies to pay pool participants in a manner very similar to how a Ponzi scheme works. Instead of pay-outs to the participants, Andres and Holloway supposedly used the funds to settle personal and business expenses that were unrelated to the pool. For instance, Holloway used a portion of these monies for his own homes, cars, and lawn and maid services among other things according to the complaint. In Andres’ case, he used these monies to invest in other businesses, one of which was an aerospace consulting firm in which he invested $4.2 million. This was in addition to giving a portion of these funds to his wife.

In an effort to hide their nefarious activities, the defendants made up profitability reports that did not reflect the true nature of the trading. These reports indicated that trading had always been profitable and suffered no losses. Many times Holloway purportedly instructed US Ventures employees to use his estimated trading results when issuing these statements to participants. The fact that nearly $11 million was lost through trading was not included on these statements which actually showed daily returns of up to 1.6613%.

At the time that the original complaint was filed in 2011, the CFTC was seeking disgorgement of ill-gotten gains, restitution to defrauded customers, civil monetary penalties, and permanent injunctions which would prohibit trading and further violations of federal commodities law. As a result of this complaint and the actions that it alleges against the defendants, last month the CFTC procured a federal court order against the defendants. This order states that all four defendants must pay civil penalties in the amount of $32,370,000, as well as restitution in the amount of $12 million in reparations to clients whom they defrauded. The order continues on to state that all four of the defendants are banned from trading and registration, as well as from committing further violations of the Commodity Exchange Act.

In a parallel action, the U.S. Attorney’s Office for the District of Utah has filed criminal charges against both men. Andres pleaded guilty and is set to face sentencing for five counts of wire fraud on August 20, 2014. Holloway was indicted on four counts of wire fraud and one count of making and filing a false income tax return. His trial date was set for July 8, 2014, but has been rescheduled to July 29, 2014.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of Andres, Holloway, or either of these companies by participating in this fraudulent commodity futures pool, please give us a call at 1-877-STOCK-LAW for a free consultation.

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August 1, 2014

Judge Orders Attorney to Pay Nearly $4 Million in Prime Bank Investment Scheme

Every day I deal with cases of investment brokers or firms who perpetrate acts of fraud or who fail to uphold their fiduciary duties to their clients. Seeing these actions committed against unsuspecting investors on a frequent basis is what motivates me to work in the field of stock fraud law. Sometimes, however, even I have to shake my head at the depth of which this type of corruption occurs. How one or two individuals manage to get so many others to agree to be complicit in these cases of investment impropriety is often surprising. Such is the case with Bernard H. Butts, Jr., a Miami, Florida-based attorney. Granted, as attorneys, influencing others is part of what we do, but it is generally to protect the best interests of our clients, not to pad our bank accounts.

Last September, the Securities and Exchange Commission secured an emergency court order to terminate a prime bank scam propagated by Butts and several of his associates. Prime bank scams are deceitful investment practices that claim to offer considerable profits on investments, often as much as 100% annually. Typically these work in Ponzi-scheme fashion with those touting the investments ultimately draining the investment funds for personal gain. Such was the case with Butts, his cohorts, and several companies with which they were affiliated.

The SEC’s complaint states that Butts; Douglas J. Anisky; James Baggs, Sidney Banner of Express Commercial Capital, LLC; and Fotios Geievelis, Jr. (a.k.a. Frank Anastasio) of Worldwide Funding III Limited, LLC solicited funds from about 45 U.S. and international investors which amounted to over $3.5 million dollars.

Worldwide Funding for which Geivelis is the manager and registered agent, promised investors returns of nearly $8.7 million (U.S.) within 15 to 45 days of investing $60,000 to $90,000, with further returns of 14% a week for the following 40 to 42 weeks. Butts fulfilled the role of escrow agent for these transactions while also soliciting investors. Both men told investors that these funds would remain in the escrow account established by Butts until the company had gotten the bank instruments that were needed to produce the pledged funds. This did not occur as Butts immediately removed the funds from his trust account. He then parceled out about 45% of the money to Geivelis, 10% to sales agents, and kept about 45% for his own personal gain.

The SEC charges that these monies were not used to purchase the promised bank instruments, but instead Geivelis used his pay-out from the escrow account for his personal benefit for things such as travel and gambling. Anisky, Banner, Express Commercial Capital, and Baggs are implicated in the investigation because each sold interests in the scam even though they knew it was a deceptive endeavor.

The complaint goes on to charge each defendant with violations to various sections of the Securities Act of 1933, as well as violations of the Securities Exchange Act of 1934. Furthermore, the complaint states Butts, Geivelis, Anisky, Banner, Express Commercial Capital, and Baggs committed violations of Section 15(a) of the Exchange Act. Additionally, Bernard H. Butts, Jr. PA; Butts Holding Corporation; Margaret A. Hering; Global Worldwide Funding Ventures, Inc.; and PW Consulting Group LLC have been named as relief defendants because it is believed that they may have received ill-gotten assets from the scheme and that those funds should be returned to investors.

When the complaint was filed last year, the SEC’s request for emergency relief including a temporary restraining order and an asset freeze was granted by the court. This was to prevent any remaining investor funds from dissipating. The SEC was also seeking permanent injunctions, the return of the illicit funds, and monetary penalties from each of the defendants.

In a consent judgment earlier this month regarding this case, federal judge, the Honorable Jose E. Martinez, ordered Butts to pay nearly $4 million as a result of his orchestration of the prime bank fraud. This $4 million is to be returned to those investors who were duped by Butts and his cronies. This amount includes $1,691,608 in disgorgement, $96,232.99 in pre-judgment interest, and $2,059,284.19 as a penalty. Additionally, Butts and his wife, Margaret A. Hering, must also disgorge $100,000 and pay $4,570.82 in pre-judgment interest. All funds received by the SEC will be returned to harmed investors through a Fair Fund. To date, more than $1.9 million has been transferred from the accounts of Butts and his companies to the registry. The court order also mandates that an additional $2+ million that was seized from Butts and his companies by the U.S. Secret Service must also be transferred to the registry.

Butts has agreed to be barred from the securities industry and to be suspended from practicing as an attorney on behalf of any entity regulated by the SEC.

The SEC states that there are red flags that help investors to avoid being victimized by high-yield investment program scams. Just a few of these are excessive guaranteed returns, fictitious financial instruments, extreme secrecy, claims that the investments are an exclusive opportunity, and an inordinate complexity surrounding the investments.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the acts of fraud and misrepresentation by Mr. Butts or any of the other defendants in this matter, please give us a call at 1-877-STOCK-LAW for a free consultation.

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July 30, 2014

Florida Transfer Agent Charged by SEC with Defrauding Investors

Criminal Charges Also Filed

Although being an investment broker usually requires a strong sales technique, various regulatory agencies and stringent laws are in place to ensure fairness within the market. When an advisor goes awry and begins engaging in boiler room practices that are illegal or otherwise contrary to the client’s best interests, he or she stands to face significant legal and financial ramifications once the illicit behavior is exposed. There maybe a few shills out there who are getting away with questionable methods that they employee to solicit investors, but sooner or later, most of these disreputable perpetrators will be found out. One such example is a Florida-based transfer agent and its owner. The Securities and Exchange Commission (SEC) has charged Cecil Franklin Speight and International Stock Transfer, Inc. (IST) with using boiler room tactics in an attempt to sell worthless securities that they touted as having a high rate of return or reduced pricing.

A transfer agent is a financial institution that is used by a company to maintain the records of investors, as well as account balances and transactions. Additionally, transfer agents can issue and cancel certificates and handle other types of problems related to these actions. These transfer agents are usually third-party financial institutions; however, some companies act as their own transfer agent. This was the case with Speight who was the registered transfer agent for IST. An investigation conducted by the SEC found that Speight was abusing this position by making and issuing fake securities certificates to U.S. investors as well as investors abroad. Speight solicited and obtained millions of dollars from hopeful investors who believed they were buying high-yield investments and discounted stock. What the investors actually received from Speight and International Stock were counterfeit certificates that the investors believed to be authentic.

The SEC’s complaint states that Speight’s scheme of falsification included the issuance of fake foreign bond and stock certificates for a publicly-traded microcap company with no connection to IST. In an attempt to make the investments look sound and to hide how he was really spending investors’ funds, Speight used the bank accounts of two attorneys into which he deposited these funds. The money was then transferred to IST and ultimately spent by IST and Speight. The funds were used to pay personal expenses for Speight who then solicited new investors so that he could make interest payouts to existing foreign bond clients. The SEC believes that there were roughly 70 victims of Speight and IST from whom they stole more than $3.3 million.

“Speight brazenly misused his transfer agent authority to commit fraud by creating fake certificates and acting as if he was authorized by issuers to do so,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “His promise of high-yield investment returns and his use of attorneys to receive investor money were simply lures to take advantage of unsuspecting investors.”

The SEC’s complaint also charged Speight and IST with violating several sections of the anti-fraud provisions of securities law. The complaint charged IST with violating the transfer agent books and records requirements of the Exchange Act, and Speight with aiding and abetting such violations. Both Speight and IST have agreed to the entry of judgments that permanently prohibit them from committing any further securities law violations. They are also required to relinquish all illicitly obtained profits, pay pre-judgment interest, and also pay any other penalties as determined by the court, which must approve the settlement. Additionally, Speight will be barred from serving as an officer or director of a public company and from participating in any penny stock offerings. The court will determine monetary sanctions at a later date.

Due to the criminality of these actions, the U.S. Attorney’s Office for the Eastern District of New York subsequently announced that they were filing criminal charges against Speight.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of Mr. Speight or International Stock Transfer, Inc., please give us a call at 1-877-STOCK-LAW for a free consultation.

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July 25, 2014

Goldman Sachs Group, Inc. to Face Judge in September

Major Influence in Mortgage-Backed Securities Failures

In 2007-2008, the United States experienced what was unquestionably the most devastating housing crisis in its history. Regrettably, this housing market crash wrought financial shockwaves that still have our national economy reeling. Although there have been other financial crises that have impacted the economic health of the U.S., not since the stock market crash of 1929 have we endured such pecuniary woes.

Beginning around 2000, in effort to provide economic stimulus in the wake of the recession, the Federal Reserve and many lending institutions promoted loans with the express purpose of investing in the housing market. The public began to see an increase in home prices in conjunction with unconventional methods of financing such as adjustable loans or zero-down payment loans, and a real estate furor ensued. Buyers who might not otherwise qualify for financing now found themselves eligible for subprime credit, and many these buyers purchased properties with the intention of “flipping” them – purchasing homes while the market was still depressed and selling them later for huge profits.

Then in 2006, many of these buyers who had received subprime loans began going into default. Once the bottom fell out of the housing market the following year, these subprime loans ceased and interest rates soared. Millions of homeowners who would not have otherwise been able to purchase homes, or who purchased homes that they ordinarily could not afford, lost their homes to foreclosure. Even businesses were effected by the decrease in subprime loans and the increase in interests rates. Needless to say, the financial implications became pervasive in every aspect of the economy ultimately resulting in unemployment of over 10% by 2009.

Many times the financial institutions that developed these less-than-solid loans would then securitize them. This is the process of these mortgage-backed securities being pooled based upon the level of risk of the individual mortgages and then sold off to investors in an effort to create liquidity in the market. Two agencies that participated in the securitization of these subprime loans were the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Both agencies are government-sponsored enterprises (GSE) whose loans are backed by the federal government and carry a credit rating that rivals that of the U.S. Treasury so these loans tend to have lower interest rates than conventional loans.

All of the GSE Certificates that Fannie Mae and Freddie Mac purchased were from Goldman Sachs. As government-backed agencies, this presented a particularly keen risk to the economy. Consequently, in September of 2007, the Treasury took over both Fannie Mae and Freddie Mac, incurring over $5 trillion in mortgages.

As an independent regulatory agency that oversees such secondary mortgage markets as Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has filed a complaint against Goldman Sachs on behalf of these agencies. According to the complaint, Goldman Sachs, as the lead underwriter, sponsor, and depositor of more than 35 securitizations, the firm capitalized on the mortgage-backed securities crisis. The company purchased many of these loans at the beginning of the financial crisis, only to turn around and sell them knowing that there was an impending crisis in the market. The complaint also states that the company had “enormous incentive to process as many of these loans as quickly as possible.” This included over $162 billion in residential loans, subprime mortgages, and lines of credit.

According to the FHFA, Goldman Sachs received an emailed report in December 2006 from the CEO of a subprime mortgage lender that Goldman partially owned. The email that was directed to Kevin Gasvoda, the head of Goldman’s whole loan trading desk, stated, “Credit quality has risen to become the major crisis in the non-prime industry. We are seeing unprecedented defaults and fraud in the market, inflated appraisals, inflated income and occupancy fraud.”

“Goldman had unique and confidential access to the dire warnings directly provided by its own affiliate and proprietary originators that the subprime mortgage market was experiencing ‘unprecedented defaults and fraud,’” the brief said. “Yet Goldman failed to respond, except to the extent it sought to profit through shorting the market.”

The complaint also alleges that in addition to the information contained in this email, Goldman Sachs had “sophisticated and powerful proprietary models” that gave them an advantage in analyzing the subprime mortgage trends which should have provided them with insight into the looming mortgage disaster. Additionally, the FHFA alleges that Goldman Sachs failed to perform its due diligence to ensure their statements complied with what was recorded on their Registration Statements and that the firm aided and abetted fraud.

At the request of the FHFA, Goldman Sachs will face a jury trial which is set for September 29, 2014. The agency is seeking recovery of the amounts paid for the GSE Certificates, including interest; the GSE’s monetary losses, including their diminished value, principal, and interest; undisclosed punitive damages; attorney fees; prejudgment interest; and any additional relief that the court deems appropriate.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of Goldman Sachs Group, Inc. or any of its affiliates, please give us a call at 1-877-STOCK-LAW for a free consultation.

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July 15, 2014

Oppenheimer Advisor Targets Elderly Widow

With trillions of dollars being manipulated by investment advisors and brokerage firms on a daily or even hourly basis, the magnitude of the influence of financial markets on world economies is nearly incomprehensible. Every developed country in the world has a financial market which bears influence on every other country’s financial market. Each country has specific laws and regulations which are governed by certain regulatory agencies. Here in the U.S., the major securities watchdog agency is the Securities and Exchange Commission (SEC). This system of interconnectedness has fostered the development of investment firms of titanic proportions with global subsidiaries.

Regrettably, the scope upon which these companies operate often makes it quite difficult to regulate. It also opens up investment firms to wide-scale regulatory infractions. Even when regulatory agencies find and address cases of fraud, supervisory failures, and so forth, the penalty for committing these acts results in little more than a fine. Even with fines that stretch into the millions of dollars range, for these gigantic companies the fines amount to nothing more than the cost of doing business. The SEC and other agencies may work diligently to curtail illegal activities by investment firms and financial advisors, but the profits made by committing regulatory infractions is often too great to ignore for many companies. A simple inquiry of the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck or an internet search on any given firm or investment advisor will often reveal incident after incident of malfeasance on the part of many of these firms and advisors.

It is a heinous practice that some firms and advisors commit these acts against companies or extremely wealthy investors who are looking to increase their profits. Yet, when the average investor or, or worse still - the elderly investor, places their trust in these firms only to possibly lose their life’s saving as a result of these inappropriate actions, it is especially egregious. This is exactly what one Oppenheimer & Co., Inc. investment advisor has done.

A recent arbitration action has been filed with FINRA on behalf of an 85-year-old woman. The woman asserts that her investment advisor “churned” her investment accounts. Churning is the act of excessively trading an account so that the advisor can charge higher fees and increase his commission. Although not illegal, churning is not an acceptable or advisable practice on behalf of someone who is retired, elderly, or an investor whose investment objective is conservation.

According to the arbitration Statement of Claim, the claimant states that she needed to maintain the funds that were invested into the accounts of her and her deceased husband. Although the investment advisor was aware of this, he engaged in repeatedly investing their money in risky stocks that lacked diversification with the intent of generating greater personal commissions. Diversifying investments can often mitigate financial losses, so failing to do so on the part of an advisor puts his clients’ funds at great risk. The Statement of Claim continues on to state that the advisor recommended an “alpha” account which presents high risk to the investor as a means to cover up his excessive trading. This advisor’s actions resulted in losses of $700,000 for the elderly woman.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of your Oppenheimer investment advisor or due to other supervisory failures on the part of Oppenheimer & Co., Inc., please give us a call at 1-877-STOCK-LAW for a free consultation.

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July 1, 2014

Barred Investment Advisor Swindles Clients for Nearly $9 Million

Whether it’s stocks, bonds, futures, derivatives, or any other type of security, the process of investing can be quite lucrative. The number of people who have become millionaires as a result their investment practices is incalculable, but there is probably one thing that they all could count on – either the business acuity to make good investment choices for themselves or they had good judgment in selecting an investment advisor. Granted, most of us will never become super-wealthy through our investments, but hopefully we will find an investment advisor who can help us make the right decisions to at least live comfortably in our retirement. This process often relies heavily upon trusting the knowledge and the rectitude of the investment advisor.

Regrettably, this trust is sometimes betrayed, as evidenced by a recent investigation initiated by the Securities and Exchange Commission (SEC). The SEC subsequently sought an emergency enforcement action against Albany, N.Y.-based investment advisor Scott Valente and his firm, The ELIV Group, LLC.

According to the allegations by the SEC, Valente and ELIV enticed 80 or so clients into investing $8.8 million. Valente misrepresented his abilities and the performance of his investment practice history by making claims that these clients would see large, regular returns on their investments. Furthermore, his assurances to clients further belied the truth of the matter in that investments that ELIV had made in the previous three years all failed to yield positive results and in fact, these investments suffered deficits.

The SEC’s complaint which was filed in U.S. District Court for the Southern District of New York, states that Valente boasted a 30-year career of successful investment practices that were “dedicated to the highest standards of service.” In the complaint, he also stated that he created ELIV Group because he felt there “had to be a better way for clients to achieve financial independence” than that as practiced by the corporate financial industry. What he neglected to tell his clients and prospective clients is that not only did he fail in his own personal financial life, (he filed for bankruptcy twice), but he was also forced out of the broker-dealer industry in 2009 by the Financial Industry Regulatory Authority (FINRA). This action by FINRA came on the heels of 21 disputes that were raised against him and his practices.

In addition to these misrepresentations, Valente used a significant portion of his clients’ funds to support his personal expenses. He used large cash withdrawals totaling over $2.6 million to pay for such items as home improvements and mortgage payments, even spending clients’ money on such frivolous and self-serving items as a vacation condo and jewelry. These narcissistic actions in conjunction with his inability to realize profits for his clients made a significant impact on the amount of funds that remain available. The SEC’s request for an emergency freeze is an effort to prevent further taxing of these dwindling funds as Valente is still in the process of garnering new clients through the misrepresentation of his abilities.

“Valente used his one-man advisory firm to fraudulently lure unsuspecting investors in the Albany and Warwick communities to invest millions of dollars with him as advisory clients,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “He said all the right things to make investors believe he was making the right investments and taking the right precautions with their money, but he was merely telling blatant false tales about the safety and success of the investments.”

The allegations by the SEC against Valente and ELIV Group state that clients were assured their principal investments were guaranteed because they were backed by a large money market fund. This was patently untrue and the majority of these investments were illiquid. Valente reassured his clients that he and his company engaged an independent auditor but this was also a falsehood because said auditor never actually existed. Additionally, falsified documents were sent to clients giving them a fictitious accounting of the monthly performance of their investments.

The SEC’s complaint charges Valente and ELIV with violating several sections of the SEC Act of 1934 as well as other violations. It is working to obtain a restraining order which will freeze any assets of Valente or ELIV Group as well as prevent them from continuing to commit such actions. Additionally, it is the aim of the SEC to obtain a final judgment which mandates that Valente and ELIV Group must disgorge any gains obtained through these actions, as well as pre-judgment interest and financial penalties.

The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of Mr. Valente or ELIV Group, please give us a call at 1-877-STOCK-LAW for a free consultation.

(Sources: SEC; FINRA; Investment News)

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June 24, 2014

UBS Continues to Face Controversy over Puerto Rico Muni Bonds

$5 Million Class Action Just One More Headache for Embattled UBS

It is certainly not uncommon to hear about the mishandling of investors’ funds by investment firms. Fraud, whether is it through omission of critical information or misinformation, occurs frequently in the investment industry. Many times acts of fraud are committed by companies few people have ever heard of and at other times, the names of large companies seem to continually arise in relation to misconduct within the investment community.

One such company that we keep hearing about is UBS Puerto Rico. As I discussed in a previous blog, UBS PR was the subject of a Securities and Exchange Commission investigation in 2012. At that time, the SEC determined that in 2008 and 2009, UBS PR had engaged in gross misconduct by misrepresenting the liquidity and value of its closed-end funds (CEF). Two of the company’s high level executives, Juan Carlos Ortiz-Leon and Miguel A. Ferrer, were culpable in obscuring critical information from clients pertaining to these CEFs, including the fact that UBS PR controlled the secondary market. The company also pushed the sale of these funds without revealing to its clients that pricing was set by the trade desk. As a result of this type of nefarious behavior by UBS PR, the SEC has fined the firm nearly $27 million in disgorgement, interest, and penalties as well as an order to cease-and-desist, but the company’s woes don’t end there.

In addition to the issues established by the SEC against UBS PR, another ominous shadow has been cast over the parent company of UBS AG. According to a complaint filed on May 5 in U.S. District Court for the Southern District of New York, a class action has been filed against the titan investment firm on behalf of seven of its investors. This class action, which is seeking more than $5 million in damages, is based upon the claim that UBS AG Wealth Management breached its fiduciary duties through possible conflicts of interest arising from the sale of Puerto Rico municipal bond funds.

These were proprietary products that yielded high commissions for the firm and were touted as tax-free investments that were secure fixed income securities. The investors were also assured that their principal would remain unscathed, yet the funds were largely underwritten by UBS and were intrinsically erratic. According to the complaint, these funds were “cash cows” for the defendants because as the primary or secondary underwriter, UBS gained more than $200 million in underwriting fees in roughly a five-year timespan.

The complaint continues on to say that in addition to the underwriting fees that UBS obtained, the firm also garnered fees for managing the Puerto Rico closed-bond funds which resulted in the company earning additional fees of approximately $50 million. Clients ultimately paid 4.75% in commissions to UBS when they invested in these bonds, a much higher fee than if they had been advised by UBS to invest in individual securities or bonds.

This most recent complaint is just one of many that have been filed regarding these bond funds, as more than 200 arbitration claims have been filed with the Financial Industry Regulatory Authority (FINRA). It is, however, the first time that allegations of breach of fiduciary duty have been the central issue of the complaint, and it is also the first time that the amount of fees that UBS obtained from these transactions have been presented.

“The fee issue in the class actions, and for that matter in arbitrations, will be an extremely important issue,” said one attorney who is representing some of the claimants in these FINRA arbitrations.

Blum Law Group represents clients who have been victimized by brokers or investment firms. If you have suffered financial losses as a result of the mismanagement of UBS PR’s CEFs or the breaches of fiduciary duties of UBS AG, please call the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


Sources: Bloomberg News; Silver Law Firm; previous blog; Investment News

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June 20, 2014

Rafferty Capital Markets Enables Unregistered Firm to Engage in Illegal Trades

Company Settles SEC Charges for Almost $850,000

Whenever there is an economic financial crisis it seems that more financial industry regulations are implemented or ones that are in effect tend to become more stringent. Yet there are many detractors in the field of investing that believe that it is an industry that is already far too heavily regulated. Often the argument is that business could flourish more readily with less oversight. The problem with this type of thinking is that such a scenario would allow for many more dubious actions within the financial industry than already exist.

One safeguard that regulatory agencies implement in effort to prevent questionable activities is by requiring that any investment firm that transacts business within the United States must be registered with the Securities and Exchange Commission. This registration requires companies that offer securities for public sale to reveal financial and other pertinent information about the company. This is to ensure that investors can make informed decisions about the suitability of the company or companies with which they place their investments. This SEC requirement also mandates that even companies that are appropriately registered cannot facilitate securities transactions for any investment firm which is not properly registered.

This issue is the subject of a recent SEC investigation and settlement agreement. A SEC order filed earlier this month states that from May 2009 until February 2010, Rafferty Capital Markets, a registered broker-dealer firm based in New York, illegally aided a non-registered company in transacting approximately $4 million in illicit trades. Rafferty assisted the undisclosed company by agreeing to allow the unregistered company to use the Rafferty name and systems as the broker/dealer on approximately 100 securities trades. Even though Rafferty held the appropriate licensing and handled the trades, the business end of the transactions was governed by the unregistered firm.

Although five of the firm’s staff members were registered representatives of Rafferty, they worked from offices located at the unregistered company which exerted exclusive control over trading decisions and what fees these staffers would receive. Additionally, Rafferty did not maintain communications with its representatives while they were operating from the unregistered company’s offices nor did they engage in appropriate oversight of the company’s record-keeping. As a result, one of their representatives hid two trades which resulted in record-keeping inaccuracies. Although Rafferty exercised no influence over these matters, they did garner 15% of the monies obtained from these trades as commissions in exchange for allowing the unregistered company to use their systems to execute the trades.

“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”

The SEC’s order determined that Rafferty intentionally breached several sections of the Securities and Exchange Act, and also intentionally abetted the unregistered firm to do so, as well. Rafferty did not concede any guilt nor did they refute the charges, but they did agree to surrender the illegally obtained profits of $637,615 that were gained from these transactions. They also agreed to payment of interest in the amount of $82,011 and a financial penalty of $130,000. These amends totaled almost $850,000. The SEC investigation is still underway.

Blum Law Group represents clients who have been victimized by brokers or investment firms. If you feel that you have suffered financial losses due to the actions of Rafferty Capital Markets, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


(Sources: SEC press release; SEC complaint; Bloomberg Businessweek; Reuters; RCM website; Rafferty Holdings website)

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June 18, 2014

Private Fund Manager Charged by SEC for Theft of Investor Funds

Develops Ponzi Scheme in an Attempt to Cover His Tracks

When it comes to investing, it is paramount that investors are able to trust their investment advisor. Often when someone chooses an investment advisor, their selection is often based upon advertising saturation, word-of-mouth, or a referral from a friend. A referral from a friend is probably a great way to select an advisor because the friend probably has knowledge of the advisor’s level of trustworthiness. Sadly, a recent Securities and Exchange Commission (SEC) charge leveled against private security fund manager, Gaeton Della Penna of Sarasota, Florida, was the result of one such trusted advisor who preyed upon several personal acquaintances that he knew from his church.

According to the complaint filed by the SEC, Della Penna created and managed three Florida limited liabilities companies, A-G Hedge Group, LLC; The Contrarian Fund, LLC; and The New Economy Fund, LLC, collectively referred to in the SEC complaint as the “Funds.” The complaint alleges that from 2008 until 2013, Della Penna used these three private investment funds to raise $3.8 million by telling investors that their investments would be invested into small companies or traded in securities. He made claims that these investments would realize a 5% annual return along with 80% trading profits. To other investors, he pledged a 10% return on the funds that he claimed to be investing in small companies.

Although Della Penna represented himself to be a savvy trader who consistently garnered profits for his investors, his inability to invest successfully on behalf of his clients resulted in him losing most of the monies with which he had been entrusted. To further exacerbate the losses of his clients, he siphoned off $1.1 million of the money he had gleaned from them and used it for personal gain. He made mortgage payments on his 10,000 square foot home and even gave some of the stolen money to his girlfriend, with whom he lived.

When his fraudulent activities began to come undone, he created a Ponzi scheme by targeting new investors to raise funds to give to previous investors under the guise of returns on their earlier investments. He even went so far as to distribute fake account statements to give to some investors in an attempt to back up his assertions that the investments he made for them were profitable.

“Della Penna lied to investors about his trading track record in order to gain their trust and pocket their investments,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “He fostered a false sense of security by creating bogus account statements showing positive returns when, in reality, he was operating a Ponzi scheme and stealing investor money.”

In 2000, Della Penna formed Gaeton Capital Advisors, LLC. The SEC has named this company as a relief defendant because in addition to his making mortgage payments and payments to his girlfriend, he also funneled investor monies into Gaeton Capital.

The SEC is seeking the surrender of the illegally obtained profits, pre-judgment interest, other financial penalties, and a permanent injunction against Della Penna to prevent him from committing any further such violations. Additionally the U.S. Attorney’s Office for the Middle District of Florida has filed criminal charges against him.

Blum Law Group represents clients who have been victimized by brokers or investment firms. If you feel that you have suffered financial losses due to the acts of fraud committed by Mr. Della Penna, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


(Sources: SEC press release; SEC complaint)

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June 17, 2014

FINRA Castigates Prodigious Morgan Stanley Smith Barney for Supervisory Failures

Ambiguous IPO Sales Terminology Costs Firm $5 Million

The use of language can be a powerful thing especially in the business world where concise communication is fundamental. With the steadily increasing liabilities associated with conducting business, it requires hyper-vigilance in saying what you mean, meaning what you say, and following the rules. In the field of investments, there can be a lot of paperwork generated in the interest of full disclosure, and the way to transact business is clearly defined and closely monitored by regulatory agencies. This is to ensure that the interests of investors are protected and that all parties involved in the investment industry are following the same practices. It is the responsibility of each broker, advisor, and investment firm to understand the language set forth in the rules that govern the industry and to strictly abide by them. When they don’t, sooner or later, it is likely one regulatory agency or another will be slapping them with fines, penalties, and/or even criminal charges.

Such was the case with Morgan Stanley Smith Barney last week. The Financial Industry Regulatory Authority (FINRA) fined the mega-firm $5 million for failing to accurately supervise many of its brokers who were using the terms “indication of interest” and “conditional offer to buy” interchangeably. For a powerhouse brokerage firm that has been around for more than 75 years and has more than $1.65 trillion in client assets that it manages, they should have known better.

According to a recent FINRA press release, from February 16, 2012 until May 1, 2013 Morgan Stanley Smith Barney enticed investors to purchase shares in 83 initial public offerings (IPOs). Unfortunately, the company fell short in establishing appropriate policies, procedures, and training guidelines for its sales staff to help them delineate the difference between the two terms when offering the IPO shares to perspective clients.

An indication of interest (IOI) can be offered before the registration date of an IPO because it is not a binding commitment, as it is illegal to sell a security before it is fully registered. The IOI will only become irrevocable if the purchase is approved by the client after the completion of the IPO registration. A conditional offer to buy, however, becomes effective as a purchase after the registration of the IPO and upon acceptance by the firm unless the client takes action to revoke it. The problem for Morgan Stanley Smith Barney arose when in February, 2012 the company instituted a policy that began allowing its staff to use these terms synonymously. Consequently, sales of the shares were being processed without getting reaffirmation from their clients.

FINRA’s stance is that since the firm failed to provide the appropriate training to its financial advisors, it is conceivable that neither the sales staff nor the clients were aware of what kind of commitment they were making. The regulatory agency also found that the firm did not ensure that its policies were being adhered to and failed to institute procedures to make sure that conditional offers were being conducting in a manner consistent with federal securities laws and FINRA regulations. FINRA did state that on May 1, 2013, Stanley Smith Barney clarified its policy to advisors, and they have begun reaffirming all customer orders after the final pricing terms became available.

Approximately 68,000 investors purchased shares in the firm’s biggest offering, however, a FINRA spokesperson stated that there isn’t any evidence to indicate that any of the firm’s clients were negatively effected by these supervisory insufficiencies.

FINRA executive, Brad Bennett, said, "Customers must understand when they are entering a contract to buy shares in an IPO. This starts with the firm's duty to establish clear procedural guidelines for soliciting conditional offers to buy and to educate its sales force regarding this type of solicitation. There must not be ambiguity regarding the customer's obligations given the significant legal differences between an indication of interest and a conditional offer to buy."

Although Morgan Stanley Smith Barney neither admitted nor denied the charges, the firm did consent to the entry of FINRA's findings.

If you feel that you have been negatively impacted as a result of Morgan Stanley Smith Barney’s supervisory failures, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.


Sources: FINRA.org; Investmentnews.com; Wikipedia.com; Investopedia.com


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