August 19th, 2010
Today, The Financial Industry Regulatory Authority (”FINRA”) announced that it fined HSBC Securities (USA) Inc. $375,000 for recommending unsuitable sales of inverse floating rate Collateralized Mortgage Obligations (CMOs) to retail customers. FINRA found that HSBC failed to adequately supervise the suitability of the CMO sales and fully explain the risks of an inverse floating rate or other risky CMO investment to its customers.
According to FINRA, HSBC recommended the sale of CMOs, including inverse floating rate CMOs, to its retail customers. As a result of HSBC not implementing an adequate supervisory system and procedures relating to the sale of inverse floating rate CMOs to retail customers, six of its brokers made 43 unsuitable sales of inverse floaters to retail customers who were unsophisticated investors and not suited for high-risk investments. Moreover, HSBC’s procedures required a supervisor’s pre-approval of any sale in excess of $100,000; FINRA determined that 25 of the 43 CMO sales were in amounts exceeding $100,000 and that in five of these instances, customers lost money in their inverse floating rate CMO investments. HSBC has paid these customers full restitution totaling $320,000.
“Firms must adequately train their brokers on all of the products that they are selling and must reasonably supervise them to ensure that every security recommended is suitable for the particular customer,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “The losses incurred by HSBC’s customers likely would have been avoided had the firm sufficiently trained its brokers on the suitability and risks of inverse floating rate CMOs and reasonably supervised their brokers to ensure that they were making suitable recommendations.”
A CMO is a fixed income security that pools mortgages and issues tranches with various characteristics and risks. CMOs make principal payments throughout the life of the security with the maturity date being the last date by which all of the principal must be returned. The timing of the return of principal payments can vary depending on interest rate changes.
One of the more risky CMO tranches is the inverse floater, a type of tranche that pays an adjustable rate of interest that moves in the opposite direction from movements of an interest rate index, such as LIBOR. Since 1993, FINRA has advised firms that inverse floating rate CMOs “are only suitable for sophisticated investors with a high-risk profile.”
FINRA found that HSBC did not provide its brokers with sufficient guidance and training regarding the risks and suitability of CMOs. In particular, the firm did not inform its registered representatives that inverse floaters were only suitable for sophisticated investors with a high-risk profile. In addition, the firm did not provide its registered representatives with information regarding the risks associated with the specific inverse floaters that were available to be sold.
FINRA also found that HSBC failed to comply with a FINRA rule, adopted in November 2003, which requires firms to offer certain educational materials before the sale of a CMO to any person, other than an institutional investor. The educational materials must include, among other things, the characteristics and risks of CMOs, in general, and the specific characteristics and risks associated with the different tranches of a CMO.
During the relevant time period, HSBC did not advise its registered persons that they were required to offer written educational material to their customers before they sold them CMOs. Although HSBC provided its brokers with a CMO brochure, the brokers did not offer the brochure to every CMO investor, nor did they know that they were required to give the materials to all potential CMO investors before selling them a CMO. Moreover, the brochures did not comply with FINRA’s content standards. In particular, the brochure failed to discuss inverse floaters and failed to include a section on risks associated with purchasing CMOs.
In concluding this settlement, HSBC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Posted in Collateralized Mortgage Obligations, Enforcement, FINRA, Failure to Supervise, HSBC Securities, Suitability | No Comments »
August 19th, 2010
The Financial Industry Regulatory Authority (”FINRA”) said yesterday that it has fined Merrill Lynch $500,000 for failing to provide sales charge discounts to customers on eligible purchases of Unit Investment Trusts (”UITs”). Further, FINRA found that Merrill Lynch failed to have an adequate supervisory system in place to ensure customers received appropriate UIT discounts. Merrill Lynch also agreed to provide remediation of more than $2 million to affected customers.
“Firms have been on notice since at least 2004 that they must develop and implement procedures to ensure customers receive appropriate sales charge discounts for UIT investments,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “In this case, it was critical for the firm to ensure that its brokers were diligent in providing sales charge discounts to which customers were entitled. This failure resulted in increased investment costs to Merrill’s customers.”
A UIT is a type of investment company that offers redeemable units, of a generally fixed portfolio of securities, that terminate on a specific date. UIT sponsors generally offer sales charge discounts to investors, known as “breakpoint discounts” and “rollover and exchange discounts.”
A breakpoint discount is a reduced sales charge based on the dollar amount of the purchase – the higher the amount the greater the discount. Breakpoints generally function as a sliding reduction in the sales charge percentage available for purchases, usually beginning at $25,000 or $50,000 (or the corresponding number of units).
A rollover or exchange discount is a reduced sales charge that is offered to investors who use the termination or redemption proceeds from one UIT to purchase another UIT.
In March of 2004, the NASD n/k/a FINRA issued a Regulatory Notice to firms titled, Unit Investment Trust Sales. (A copy of the Regulatory Notice can be found here: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003157.pdf)
The Notice reminds broker-dealers that they should develop and implement procedures to ensure customers receive appropriate sales charge discounts for UITs.
FINRA found that before May 2008, Merrill Lynch’s written supervisory procedures had little to no information or guidance regarding UIT sales charge discounts. Even after the firm established procedures addressing UIT sales charge discounts, the procedures were inaccurate and conflicting.
FINRA also determined that Merrill Lynch’s procedures lacked substantive guidelines, instructions, policies or steps for brokers or their supervisors to follow to determine if a customer’s UIT purchase qualified for and received a sales charge discount. As a result of its defective procedures, between October 2006 and June 2008, the firm failed to appropriately apply discounts on rollover and breakpoint purchases resulting in customers being overcharged on their UIT purchases.
According to FINRA, Merrill Lynch also approved for distribution, and for use in client presentations, inaccurate and misleading UIT sales literature. The presentation discussed sales charge discounts, but led clients to believe that they were only entitled to a discount if they used UIT proceeds to purchase a new UIT offered by the same sponsor.
As part of the settlement, Merrill Lynch is providing restitution to all customers who were overcharged when purchasing UITs through the firm, from January 2006 to the present. Merrill Lynch settled this matter without admitting or denying the allegations, but consented to the entry of FINRA’s findings.
Posted in Enforcement, FINRA, Merrill Lynch | No Comments »
August 10th, 2010
The Securities Arbitration Law Firm of Klayman & Toskes, P.A., announced today that it is investigating potential claims on behalf of investors who purchased 1861 Capital Management municipal bond arbitrage funds from UBS. Our investigation shows that four separate 1861 Capital Management fixed income arbitrage funds were marketed and sold by UBS. These included 1861 Capital Municipal Enterprise Domestic Fund, LP, 1861 Capital Municipal Enterprise Offshore Fund, Ltd., 1861 Capital Discovery Domestic Fund, LP, and 1861 Capital Discovery Offshore Fund, Ltd.
Presently, Klayman & Toskes is representing numerous investors who sustained losses in leveraged municipal bond arbitrage hedge funds sold by Wall Street brokerage firms. The municipal bond arbitrage strategy employed by these funds was risky and exposed investors to losing their principal investment. Nonetheless, the funds were represented by brokerage firms to be fixed income products that could provide higher yield, and were touted as being safe and secure investments, not subject to a significant amount of volatility or risk. In reality, however, the arbitrage strategy was a highly leveraged bet on interest rates, on liquidity, on the value of short call options, and on credit risk. Due to the lack of disclosure and/or misrepresentations concerning the risks of these products, unsuspecting investors who were looking to preserve their capital sustained substantial losses.
Klayman & Toskes is also investigating and/or processing claims concerning other leveraged municipal bond arbitrage hedge funds including Citigroup’s ASTA/MAT Funds, Aravali Fund, Blue River Asset Management, GEM Capital, Rockwater Hedge Fund, LLC, Stone and Youngberg Municipal Advantage Fund, and TW Tax Advantaged Fund.
Posted in 1861 Capital Management, General, Leverage, Municipal Arbitrage Strategy, UBS | 1 Comment »
August 2nd, 2010
The Financial Industry Regulatory Authority (”FINRA”) has announced that it ordered SunTrust Investment Services, Inc. of Atlanta, GA, to pay $1.44 million to resolve charges related to unsuitable unit investment trust (UIT), closed-end fund (CEF) and mutual fund transactions. Of that amount, $900,000 is a fine that includes nearly $224,000 in disgorgement of commissions earned on the unsuitable trades. The remaining $540,000 represents restitution to 17 customers who incurred losses.
As part of this settlement, SunTrust must also review all UIT purchases and provide remediation to all eligible customers who did not receive the maximum sales charge discount.
“Firms must monitor for patterns of UIT and closed-end fund sales to ensure that such sales are suitable for the customer,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “SunTrust failed to meet that obligation, which caused its customers, including elderly customers, to incur significant losses.”
FINRA found that SunTrust, through two brokers in the firm’s Maryland Region, engaged in a pattern of unsuitable short-term UIT, CEF and mutual fund transactions in accounts of 17 customers, most of whom were elderly and/or disabled. The brokers also engaged in unsuitable margin transactions in the accounts of 10 of the 17 customers. In addition, FINRA found that SunTrust failed to ensure that eligible customers received the maximum sales charge discount on UIT purchases and lacked adequate systems and procedures for monitoring and supervising UIT, CEF and margin transactions.
FINRA previously sanctioned one of the individual brokers involved in this matter, David Bredenburg of Timonium, MD, permanently barring him from working in the securities industry. FINRA has filed a complaint against the second broker, charging him with numerous violations, including unsuitable recommendations, sales and use of margin; failure to provide maximum sales charge discounts on UIT transactions; and, engaging in discretionary trading in customer accounts without written authorization. FINRA also suspended the two brokers’ former supervisor, Donald Mattran of Bel Air, MD, for six months in any principal capacity and fined him $10,000.
FINRA found that between February 2004 and November 2006, SunTrust, through Bredenburg and, it is alleged, the second broker, recommended 294 unsuitable short-term UIT, CEF and mutual fund transactions in the accounts of 17 customers. The two brokers repeatedly recommended that the customers sell UITs and CEFs less than one year – and sometimes as soon as one month – after purchasing the securities at the broker’s recommendation, with little or no economic benefit to the customer.
FINRA further found that SunTrust, through the two brokers, recommended to 10 of those customers unsuitable purchases and sales of securities on margin – failing to adequately disclose the risks and costs of trading on margin and lacking a reasonable basis for their recommendations. As a result, the customers paid over $133,000 in margin interest.
FINRA also found that SunTrust lacked adequate systems and procedures to monitor UIT and CEF transactions and margin accounts, and to ensure that customers purchasing UITs received applicable sales charge discounts.
Furthermore, FINRA found that between February 2004 and December 2005, Mattran and SunTrust approved each short-term transaction, including transactions placed using margin, and did not respond adequately to red flags suggesting that the transactions were unsuitable. For example, the trade blotter listed over 200 sales of UITs and CEFs among the 17 customers’ accounts and compliance reviews in August 2004 and April 2005 alerted Mattran and the firm to questionable short-term UIT and CEF transactions by both brokers.
FINRA’s action barring Bredenburg found that between February 2004 and March 2009 – while he was registered first with SunTrust and later with Merrill Lynch – Bredenburg recommended at least 167 unsuitable short-term UIT and CEF transactions, including switches, to 13 customers who were elderly, retired or disabled and who had conservative to moderate investment profiles. He also recommended unsuitable transactions on margin and unsuitable variable annuity liquidations. FINRA further found that Bredenburg failed to disclose to customers the costs and fees associated with short-term CEF and UIT transactions, failed to ensure that customers received maximum sales charge discounts on UIT purchases and engaged in discretionary trading without prior written authorization.
In addition, FINRA found that between August 2008 and February 2009, while registered with Merrill Lynch, Bredenburg accessed a customer’s Merrill Lynch brokerage account through the internet and, without the customer’s knowledge, transferred funds from the customer’s account to pay Bredenburg’s personal expenses, including mortgage, car loan and credit cards. Merrill Lynch has compensated firm customers affected by Bredenburg’s misconduct.
In concluding these settlements, SunTrust, Bredenburg and Mattran neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA’s charges against the second broker alleged to be involved are pending.
Posted in Enforcement, FINRA, General, SunTrust Investment Services | No Comments »
July 22nd, 2010
Yesterday, the Financial Industry Regulatory Authority (”FINRA”) announced that it fined Deutsche Bank Securities $7.5 million for negligently misrepresenting delinquency data in connection with the issuance of subprime securities. In settling the matter, Deutsche Bank Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA determined that Deutsche Bank Securities negligently misrepresented and underreported the percentages of mortgages that were delinquent in the prospectus supplements of six subprime residential mortgage backed securities (MBS) that were issued in 2006. FINRA added that Deutsche Bank Securities failed to correct errors by a third party vendor and servicers, which underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 additional subprime MBS issued in 2007. Further, FINRA said, Deutsche Bank Securities failed to establish a system to supervise its reporting of required historical delinquency information.
“It is critically important that firms provide accurate information for their customers to use in evaluating investments,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “Future returns on subprime securitizations are affected by mortgage holders who fail to make loan payments. Delinquency rates constitute material information for investors. Deutsche Bank Securities’ failure to ensure that the delinquency information was accurate is an unacceptable failure to meet this important obligation.”
Delinquency rates constitute material information for MBS investments because that data affects the investor’s ability to evaluate the fair market value, the yields on the certificates and the anticipated holding periods of each of these securitizations. Investors may consider this information in assessing the profitability of these securitizations and in determining whether future returns would be disrupted by mortgage holders who fail to make loan payments.
During 2006 and 2007, Deutsche Bank Securities underwrote subprime MBS and sold them to institutional investors. FINRA determined that in the prospectus supplements of six subprime securitizations worth approximately $2.2 billion offered in March 2006, the firm described a method of calculating delinquencies that was in fact different from the method it actually used. As a result, delinquencies were underreported. For example, in one MBS deal, Deutsche Bank Securities reported that under its described method of calculation, 8.75 percent of the loans were between 30 – 59 days delinquent, corresponding to $14 million in delinquent loans. But the actual delinquency numbers computed under the method Deutsche Bank Securities disclosed were significantly higher, with 24.02 percent of the loans between 30 – 59 days delinquent, corresponding to $38.5 million in delinquent loans.
FINRA also found that Deutsche Bank Securities negligently underreported historical delinquency rates on a website the firm maintained that was referenced in prospectus materials in connection with the sale of 16 MBS.
Issuers of subprime MBS are required to disclose historical performance information for prior securitizations that contain similar mortgage loans as collateral. That information, which includes historical delinquency rates, is called “static pool” information – and it is one of the disclosure requirements for asset-backed securities under Securities and Exchange Commission (SEC) Regulation AB. After Regulation AB became effective in December 2005, Deutsche Bank Securities prospectus supplements for new subprime MBS offerings informed investors they could view static pool information on the firm’s Regulation AB website.
According to FINRA, in January 2007, Deutsche Bank Securities learned that the outside vendor it retained to populate its Regulation AB website was underreporting delinquencies as a result of errors made by the servicers responsible for tracking delinquencies. Deutsche Bank Securities was able to determine that these errors affected 16 securitizations and was able to provide corrected delinquency data for 13 of them to the vendor to use going forward. But the vendor failed to use the corrected data. The firm never ensured that the vendor posted the corrected static pool information and continued to refer investors to the inaccurate information about these 13 securitizations on the Regulation AB website. While Deutsche Bank Securities was not able to determine the extent to which delinquency rates were underreported in the remaining three affected securitizations, the firm continued to use this data without indicating on its Regulation AB website that the information was inaccurate.
Presently, Klayman & Toskes is prosecuting numerous arbitration claims on behalf of aggrieved investors to recover losses sustained in mortgage-backed securities and structured asset-backed securities. These claims have been filed with FINRA Dispute Resolution. The attorneys at Klayman & Toskes are dedicated to pursuing claims on behalf of investors who have suffered investment losses. It continues its representation of investors throughout the world in securities arbitration and litigation matters against major Wall Street brokerage firms.
Posted in Deutsche Bank Securities, Enforcement, FINRA, Mortgage-backed securities | No Comments »
July 21st, 2010
The Financial Industry Regulatory Authority (”FINRA”) recently annoucned that the amount of information available to the public about current and former securities brokers will expand significantly in coming months, as FINRA implements changes to its free, online BrokerCheck service recently approved by the Securities and Exchange Commission.
The changes will increase the number of customer complaints reported publicly; extend the public disclosure period for the full record of a broker who leaves the industry from two years to 10 years; and, make certain information about former brokers available permanently, such as criminal convictions and certain civil injunctive actions and arbitration awards against the broker.
The changes will also formalize a dispute process for current or former brokers to dispute the accuracy of, or update, factual information disclosed through BrokerCheck.
“This additional information will benefit investors who are considering whether to conduct, or continue to conduct, business with a particular securities firm or broker,” said FINRA Chairman and CEO Rick Ketchum. “Just as important, it will provide valuable information about persons who have left the securities industry, often not of their own accord, who have established themselves in other segments of the financial services industry and can still cause great harm to the investing public.”
When the expansion is implemented, BrokerCheck will:
- Disclose all “historic” complaints against a broker dating back to 1999, when electronic filing of broker information began. Generally, historic complaints are customer complaints, arbitrations or litigations more than two years old that have not been adjudicated or have been settled for an amount less than the reporting requirement (currently $15,000). They are currently reported on BrokerCheck when the broker has three or more currently disclosable regulatory actions, customer complaints, arbitrations, litigations or historic complaints. The expanded BrokerCheck will disclose all historic complaints dating back to 1999 for individual brokers who are currently registered or whose registrations were terminated within the preceding 10 years.
- Expand the disclosure period for former brokers. Currently, a broker’s record is publicly available for two years after he or she leaves the securities industry. That two-year period coincides with the period in which an individual remains subject to FINRA’s jurisdiction and within which an individual can return to the industry without having to take re-qualifying exams. The expanded BrokerCheck will make a former broker’s record public for 10 years, so investors can access information about individuals who may work in other sectors of the financial services industry or who have attained other positions of trust.
- Further expand the amount of information that is permanently available on former brokers. Last year, BrokerCheck started making information about final regulatory actions (i.e. bars, suspensions, fines, etc.) against former brokers permanently available to the public. The expanded BrokerCheck will make additional information that has been reported to FINRA since 1999 permanently available – including reportable criminal convictions or pleas of guilty or nolo contendere; civil injunctions or findings of involvement in a violation of any investment-related statute or regulation; and, arbitration awards or civil judgments based on the individual’s involvement in alleged sales practice violations.
- Formalize the process for current and former brokers to dispute the accuracy of factual information disclosed through BrokerCheck. Brokers will be able to submit a written notice of the dispute to FINRA – FINRA will post the appropriate form on its website – with all available supporting documentation. If FINRA determines that the dispute is eligible for investigation, it will add a general notation to the broker’s BrokerCheck report stating that the broker is disputing certain information in the report – and that notation will only be removed when FINRA has resolved the dispute. If its investigation shows the information is in fact inaccurate, FINRA will update, modify or remove that information as appropriate.
The BrokerCheck expansion will be implemented in two phases. In late August, historic complaints will be added to the public records of all current and former brokers. By the end of the year, full records will be publicly available for all brokers whose registrations have terminated within the last 10 years. Also by the end of the year, the additional information that will be permanently available will be added to the records of the appropriate former brokers and the formal dispute process will be fully in place.
FINRA also stated that full details on BrokerCheck’s upcoming expansion will be available in a FINRA Regulatory Notice to be published in the near future.
Tags: Broker Check
Posted in Broker Check, FINRA | No Comments »
July 20th, 2010
The U.S. Securities and Exchange Commission (“SEC”) announced that it settled the securities fraud action with Goldman Sachs (“Goldman”) that was filed against the firm earlier this year. The action dealt with a synthetic CDO called ABACUS 2007-AC1. As part of the settlement, Goldman agreed to pay $550 million and reform its business practices. The settlement is the largest penalty ever paid by a Wall Street firm.
The Consent of Goldman states that it “acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information.” “In particular,” Goldman added, “it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”
“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.”
Further, according to Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement, “The unmistakable message of this lawsuit and today’s settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty.”
In reaching a settlement with the SEC, Goldman neither admitted nor denied the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.
As for the other Defendant named in the SEC’s action regarding the ABACUS product, 31-year old Goldman banker Fabrice Tourre, the fight against the SEC continues. He denies the SEC’s fraud charges. In a filing made late Monday, Tourre said he can’t be held responsible “for any alleged failings” made by the firm. The filing also said, “The purported claims against Mr. Tourre and the allegations upon which they are based are improperly vague, ambiguous and confusing, and omit critical facts…The purported claims against Mr. Tourre are based solely on alleged actions and omissions concerning information known to many different Goldman Sachs employees working in various aspects of its business, including Legal, Compliance, sales and trading.” Whether Tourre has any culpability in connection with the ABACUS product remains to be seen.
Presently, Klayman & Toskes is prosecuting numerous arbitration claims on behalf of aggrieved investors to recover losses sustained in mortgage-backed securities and structured asset-backed securities. These claims have been filed with FINRA Dispute Resolution. The attorneys at Klayman & Toskes are dedicated to pursuing claims on behalf of investors who have suffered investment losses. It continues its representation of investors throughout the world in securities arbitration and litigation matters against major Wall Street brokerage firms.
Posted in General | No Comments »
May 26th, 2010
FINRA said today that it sanctioned Citigroup Global Markets, Inc. (NYSE: C) in the amount of $1.5 million as a result of supervisory violations relating to the handling of trust funds which belonged to Michigan and Tennessee based cemeteries. The sanction represents a $750,000 fine and disgorgement of $750,000 in commissions. The commissions will be reimbursed to the cemetery trusts.
“Firms have a duty to protect customer funds by taking prompt and meaningful action when they encounter indications of possible fraud or misappropriation,” said James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement. “That duty is particularly critical when firms handle trust funds where the beneficiaries may be unsophisticated investors who are unaware of how the funds are being handled.”
According to FINRA, from September 2004 through October 2006, Citigroup broker Mark Singer and two of his customers engaged in a scheme to misappropriate about $60 million from cemetery trust funds. One of Singer’s customers, Clayton Smart, is currently facing criminal charges relating to the scheme in Michigan and Tennessee. Singer’s criminal trial in Tennessee recently ended in a mistrial. Criminal charges remain pending against Singer in Indiana. Smart and a second client of Singer, Craig Bush, have been named as defendants in litigation relating to the scheme.
FINRA added that Singer’s two customers, Smart and Bush, were successive owners of a group of Michigan cemeteries from which funds were believed to be stolen. In August 2004, Smart purchased the cemeteries from Bush using trust funds that had been improperly transferred from the Michigan cemeteries themselves to a company that Smart owned. Soon thereafter, Smart used additional trust funds to buy cemeteries and funeral homes in Tennessee.
FINRA found that a Citigroup branch manager had recruited Singer from another brokerage firm where the scheme was hatched. When Singer joined Citigroup in September of 2004, nearly all of his customer accounts came with him, including the cemetery trust accounts and other accounts belonging to Bush. Singer assisted Bush and Smart in opening numerous Citigroup accounts in their own names, as well as in the names of corporate entities they owned or controlled. Singer helped Bush and Smart deposit cemetery trust funds into some of these accounts and then effectuated improper transfers to third parties. On some occasions, conduit accounts were utilized to mask the transactions. Some of the fund transfers were disguised as fictitious investments made on behalf of the cemeteries.
FINRA’s investigation showed that over a period of more than two years, Citigroup failed to reasonably supervise the handling of these accounts by inadequately responding to a succession of “red flags” – failures that permitted the scheme to continue undetected until October 2006.
The red flag events began in September 2004, FINRA said, shortly after Singer began working at Citigroup. Singer’s former employer warned Citigroup about irregular movement of funds involving accounts connected to the Michigan cemetery trusts – activity that occurred before Bush moved his accounts to Citigroup and while Bush was still owner of the Michigan cemeteries. After receiving this information, however, FINRA found that Citigroup’s follow-up of the activity in Bush’s accounts was superficial and incomplete.
By November 2004, Citigroup’s management became aware of rapid movement of funds involving Citigroup accounts associated with Bush and Smart – including unusual transfers of cemetery trust funds to accounts opened in the names of third parties – but failed to conduct an adequate inquiry into the matter. In February 2005, Citigroup received information indicating possible misrepresentations by Smart regarding his acquisition of hedge fund investments belonging to the Michigan cemetery trusts, which Smart used as collateral for a personal $24 million line of credit from Citigroup Private Bank. Nevertheless, Citigroup failed to adequately review the matter.
Finally, in May 2006, Citigroup received a whistleblower letter from the principal of a company acting as a third-party trustee for the cemeteries which alleged misconduct by Singer in connection with the handling of the cemetery trusts. Among other things, this letter alleged that Singer was involvement in making unauthorized transfers of cemetery trust funds, as well as Singer’s use of his personal email address to conduct business with the whistleblower, in an apparent attempt to bypass Citigroup’s email monitoring system. Despite the seriousness of these allegations, Citigroup failed to place Singer under special supervision or place restrictions on his activities.
Posted in Citigroup, Enforcement, FINRA, Failure to Supervise, Sanctions | No Comments »
May 26th, 2010
Provident Royalties investors who received a ballot for accepting or rejecting the Fourth Amended Consolidated Plan of Liquidation are advised that the ballot must be received by EPIQ Bankruptcy Solutions by May 28, 2010. Eligible voters should be aware that they have the right to pursue their own claims, rather than assign them to the PR Liquidating Trust. An investor who submits their ballot but fails to exercise the opt-out election will automatically assign to the PR Liquidating Trust their individual claims they may have against their brokerage firm or financial advisor who placed them in the Provident investment, and will be barred from bringing an individual action.
Klayman & Toskes strongly encourages eligible voters who purchased Provident Royalties from a full-service brokerage firm and FINRA member, and sustained damages of $200,000 or more, to consider filing an individual arbitration claim instead of assigning their rights away. By assigning your causes of action and claims to the PR Liquidating Trust, any future lawsuit brought by the Trust to recover Provident losses will most likely be filed as a class action or mass action. However, by participating in a class action or mass action lawsuit, an investor may only recover a nominal amount. If one has experienced significant losses in Provident Royalties, and purchased the investment from a full-service brokerage firm, it may be more beneficial for them to file an individual securities arbitration claim. In 2003, Klayman & Toskes conducted a detailed study of securities arbitration versus class action. The study concluded that investors who file a securities arbitration claim traditionally obtain an overall higher rate of recovery as opposed to participating in a class action lawsuit. To view the full results of the comparison, please visit the following link: http://www.nasd-law.com/documents/classvr.pdf
Under NASD Rules, brokerage firms have an obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the SEC’s Regulation D under the Securities Act of 1933, also known as private placements. Provident Royalties securities were private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Act. Regulation D transactions, however, are not exempt from the antifraud provisions of the federal securities laws. A brokerage firm has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of securities that it recommends, including those sold in a Regulation D offering. Failure to comply with this duty gives rise to an individual cause of action against the brokerage firm who sold the product to the customer.
Provident Royalties investors who received a ballot for accepting or rejecting the Fourth Amended Consolidated Plan of Liquidation can contact Klayman & Toskes to explore their legal rights and options.
Posted in Opt-out, Private Placements, Provident Royalties/Shale Royalties, Regulation D, Suitability | No Comments »
April 27th, 2010
Earlier this month, FINRA issued Regulatory Notice 10-22 which reminds brokerage firms of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the Securities and Exchange Commission’s (”SEC”) Regulation D under the Securities Act of 1933 (”the Act”)—also known as private placements. A copy of Regulatory Notice 10-22 can be found by clicking on this link: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p121304.pdf
Regulation D provides exemptions from the registration requirements of Section 5 under the Act. Regulation D transactions, however, are not exempt from the antifraud provisions of the federal securities laws. A brokerage firm has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of securities that it recommends, including those sold in a Regulation D offering.
Regulatory Notice 10-22 also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that brokerage firms adequately investigate the private placements that they recommend. According to a recent estimate by the SEC, in 2008, companies intended to issue about $609 billion of securities in Regulation D offerings, making it a key source of capital for American business, particularly small businesses.
“An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests,” said FINRA Chairman and CEO Rick Ketchum. “That initiative has uncovered misconduct, including fraud and sales practice abuses. While several enforcement actions have been taken and additional investigations are underway, FINRA is taking this opportunity to remind firms of their substantial duties when engaging in the sale of private placement offerings.”
Recent problems uncovered by FINRA in Regulation D offerings have resulted in various brokerage firms being sanctioned for providing private placement memoranda and sales materials to investors that contained inaccurate statements or omitted information necessary to make informed investment decisions.
Private placements under Regulation D are typically sold to “accredited” investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, Regulatory Notice 10-22 emphasizes that a brokerage firm’s suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D. In addition to conducting a reasonable investigation concerning the issuer and its securities, a brokerage firm must have reasonable grounds to believe that the investment is suitable for the particular customer to whom it’s offered and ensure that the customer fully understands the risks involved in the investment.
FINRA has brought three enforcement actions in recent months involving private placement offering violations. They include a complaint charging McGinn, Smith & Co. and its president with securities fraud in the sales of tens of millions of dollars in unregistered securities, the expulsion of Provident Asset Management for marketing a series of fraudulent private placement offered by an affiliate in a massive Ponzi scheme;, and fines totaling $750,000 against Pacific Cornerstone Capital, Inc. and its former CEO for failing to include complete information in private placement offering documents and marketing material, as well as for advertising violations and supervisory failures.
Klaymay & Toskes is presently prosecuting numerous arbitration claims against various brokerage firms across the country to recover losses sustained in private placements. These include Medical Capital, Provident Royalties, and Shale Royalties investments.
Posted in Arbitration, Enforcement, FINRA, McGinn, Medical Capital, Pacific Cornerstone Capital, Private Placements, Provident Asset Management, Provident Royalties/Shale Royalties, Regulation D, Regulatory Notice, Smith & Co., Suitability | 1 Comment »
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