FINRA has made brokerage firm “culture” one of its top priorities for 2016. FINRA refers to “culture” as how management sets the bar for the firm and how culture effects their brokers interaction with clients and their business. According to FINRA, firm culture has a profound influence on how a broker-dealer conducts its business, including how it manages conflicts of interest. This is a new area FINRA is trying to investigate.

One way FINRA is looking into culture is to see if there are any forms of payments and commissions that could affect an employees behavior. FINRA is reaching out to the industry by seeing where firms stand versus enforcing strict “culture” rules on how a brokerage firm must act. Recently, FINRA sent more than a dozen firms 8 questions regarding their firms “culture.” The questions were the following:

” 1. A summary of the key policies and processes by which the firm establishes cultural values. In the summary, include whether this is a board-level function at your broker-dealer or at the corporate parent of the firm. If it is a board-level function, describe the board’s involvement. Also, provide a description of any steps you have initiated or completed in the past 24 months to promote, strengthen or change your firm’s culture.

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.

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.

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.

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.

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.

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.

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.

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.

$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.