Archive for the ‘Enforcement’ Category
Thursday, 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 »
Thursday, 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 »
Monday, 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 »
Thursday, 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 »
Wednesday, 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 »
Tuesday, 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 »
Friday, April 16th, 2010
Today, the SEC brought a securities fraud action against Goldman Sachs (NYSE: GS) for “making materially misleading statements and omissions in connection with” a CDO called ABACUS 2007-AC1 (“ABACUS”). Goldman Sachs structured and marketed ABACUS to investors.
According to the SEC, “Goldman Sachs failed to disclose to investors vital information about [ABACUS], in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against [ABACUS].” “The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement of the SEC. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” added Khuzami. Investors in ABACUS lost over $1 billion.
Presently, K&T 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. Retail and institutional investors who have sustained losses in the ABACUS CDO can contact K&T to explore their legal rights and options.
Posted in Enforcement, Fraud, Goldman Sachs, Misrepresentation, Mortgage-backed securities, Omission, SEC, Structured Asset-Backed Securities, Subprime | No Comments »
Wednesday, April 7th, 2010
The Securities Law Firm of Klayman & Toskes, P.A. announced today that the SEC and FINRA have charged Morgan Keegan in connection with the Regions Morgan Keegan (“RMK”) Bond Funds. Morgan Keegan is owned by Regions Financial Corp. (NYSE: RF). The SEC specifically alleged that Morgan Keegan perpetrated a “fraudulent scheme”, and “failed to employ reasonable procedures to price the Funds’ portfolio securities and, as a result of that failure, did not calculate accurate NAVs for the Funds.” The SEC goes on to state that “despite these failures, Morgan Keegan recklessly published daily NAVs of the Funds which it could not know were accurate and, as distributor of the Funds’ shares, sold shares to investors based on those NAVs.”
According to FINRA, Morgan Keegan “market[ed] and [sold the RMK Bond Funds] to investors using false and misleading sales materials – costing investors well over $1 billion.” FINRA’s Complaint alleges that “the misleading sales materials, combined with the firm’s misleading and deficient internal guidance and failure to train its brokers about the risks, led Morgan Keegan’s brokers to make material misrepresentations to investors.” FINRA further states that “Morgan Keegan failed to establish, maintain and enforce an adequate supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with the federal securities laws and FINRA rules.”
Presently, K&T is prosecuting numerous arbitration claims against Morgan Keegan on behalf of investors of the RMK Bond Funds before FINRA Dispute Resolution. Retail and institutional investors who have sustained investment losses in the RMK Bond Funds can contact K&T to explore their legal rights and options. If you wish to discuss this announcement or have investment losses of $100,000 or more in the RMK Bond Funds, please contact our law firm.
Posted in Arbitration, Enforcement, FINRA, Failure to Supervise, Fraud, General, Legal Rights and Options, Misrepresentation, Morgan Keegan, RMK Bond Funds, SEC | No Comments »
Tuesday, March 30th, 2010
FINRA has expelled Provident Asset Management, LLC, a Dallas-based broker-dealer, for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme.
The expulsion of Provident Asset Management is the first produced by a FINRA initiative involving active examinations and investigations of broker-dealers involved in retail sales of private placement interests, as well as broker-dealers affiliated with private placement issuers. FINRA is looking at firms’ compliance with suitability, supervision and advertising rules, as well as potential instances of fraud. The initiative was undertaken in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings.
Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. In fact, investors’ funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, the firm acted as the agent in an oil and gas private placement offering but failed to establish an escrow account for investors’ funds during the contingency period of the offering.
“Provident facilitated the sale of a series of fraudulent private placements that were marketed to unsuspecting customers as income-producing investments, when it was simply using new investors’ money to pay previous investors the promised dividends – a classic Ponzi scheme,” said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “While the private placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics.”
FINRA found that from September 2006 through January 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by Provident Royalties, LLC. Provident Asset Management’s only business line was acting as the wholesaling broker-dealer for the Provident Royalties’ offerings, which were sold to customers through more than 50 retail broker-dealers nationwide, raising over $480 million through approximately 7,700 individual investments made by thousands of investors.
FINRA’s broader investigation into broker-dealers that sold the Provident and other troubled private placement offerings is continuing.
The Provident Royalties private placement memoranda promised investors returns of up to 18 percent per year and said the funds raised through each offering would be used to purchase interests in all aspects of the oil and gas business.
In an effort to market the Provident Royalties offerings, the firm falsely represented that: investors’ funds would be used by each individual Provident Royalties offering to purchase interests in the oil and gas business for that offering; the subscription proceeds of each offering would be deposited into an account for that offering and become assets for that offering; approximately 86 percent of the subscription proceeds would be allocated to acquiring interests in the oil and gas business; and, dividends paid to investors would be derived from revenues, primarily from the sale of oil and gas assets.
In fact, Provident Royalties deposited the investors’ funds from each offering into a separate bank account. Then, in the fashion of a classic Ponzi scheme, the money was either moved freely from one account to another or was swept into one of Provident Royalties’ operating accounts and used to pay dividends and principal to earlier investors.
On July 2, 2009, the SEC filed a civil injunction action in the Northern District of Texas naming Provident Asset Management, Provident Royalties and others, seeking a temporary restraining order and an emergency asset freeze and appointment of a federal equity receiver to take control of the entities and preserve their assets for the benefit of the defrauded investors.
In concluding this settlement, Provident Asset Management neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Posted in Arbitration, Enforcement, FINRA, Fraud, Private Placements, Provident Royalties/Shale Royalties | No Comments »
Wednesday, February 17th, 2010
Yesterday, the Financial Industry Regulatory Authority (FINRA) announced its first enforcement action involving the sales of reverse convertible notes (RCNs) — fining H&R Block Financial Advisors, Inc., (n/k/a Ameriprise Advisor Services, Inc.) $200,000 for failing to establish adequate supervisory systems and procedures for supervising sales of RCNs to retail customers. FINRA also fined and suspended H&R Block broker Andrew MacGill for making unsuitable sales of RCNs to a retired couple. The firm was ordered to pay $75,000 in restitution to the couple for losses they incurred.
At the same time, FINRA released an Investor Alert, Reverse Convertibles – Complex Investment Vehicles, to educate retail investors about how these products work, what risks they involve and what factors to consider before investing in an RCN. FINRA also issued Regulatory Notice 10-09, reminding firms of their sales practice obligations when recommending or selling RCNs to retail investors.
“Reverse convertible notes are complex investments which, like many structured products, often entail significant risk of loss,” said FINRA Chairman and CEO Richard Ketchum. “They are among the most popular structured products with retail investors, primarily because of the high yields they offer. But they also involve terms, features and risks that can be difficult for the retail investors who are buying them and the brokers who are selling them to evaluate.
“Firms selling reverse convertibles or similar structured products must ensure that their brokers understand the risks and costs associated with these products and perform adequate suitability analyses before recommending them to any customer. Firms must also have procedures in place to monitor customer accounts for potentially unsuitable concentration levels of these products,” Ketchum said. “For their part, investors should be prepared to ask their brokers the right kinds of questions about the risks, features and fees to determine whether reverse convertibles are right for them — and if they are, how much of their portfolio should be invested in RCNs. For the typical retail investor, for instance, it would be unwise to put anything more than a small portion of life savings into riskier structured products such as RCNs.”
An RCN is a structured product that typically consists of a high-yield, short-term note of an issuer and effectively a put option that is linked to the performance of an unrelated, or “linked,” asset – usually a single common stock, but sometimes a basket of stocks, an index or some other asset. As a general rule, upon maturity of an RCN, the investor will receive either his full principal investment or a predetermined number of shares of the linked equity (which may be worth less than the principal investment), depending on the performance of the linked equity. Generally speaking, the higher the coupon rate, the higher the expected volatility of the linked equity and the greater the likelihood of the investment resulting in payment of shares. Reverse convertibles not only come with the risks that fixed income products ordinarily carry, such as issuer default and inflation risk, but with additional risks of the underlying asset, which can depreciate or even become worthless. The initial investment for most RCNs is $1,000 per unit and most RCNs have maturity dates ranging from three months to one year.
In the enforcement matter announced yesterday, FINRA found that during the period from January 2004 through December 2007, H&R Block engaged in sales of RCNs without having a system or procedures in place to effectively monitor customer accounts for potential over-concentrations in RCNs. As a result, the firm failed to detect and respond to indications of potential over-concentration in RCNs in numerous customer accounts.
FINRA found that H&R Block utilized an automated surveillance system to facilitate its suitability review of securities transactions and to monitor customer accounts for potentially unsuitable positions and activity. The system would flag for review any transaction or account meeting certain parameters established by the firm relating to, for example, account turnover and concentration levels in a particular security or class of security. The firm’s system, however, was not configured or designed to monitor RCN transactions or RCN positions in customer accounts and the firm did not establish an effective alternative means to do so. As a result, H&R Block failed to detect and respond to indications of potentially unsuitable RCN concentration levels in numerous customer accounts. Additionally, the firm failed to provide sufficient guidance to its supervising managers on how to assess suitability in connection with their brokers’ recommendation of RCNs.
FINRA found that the retired couple receiving restitution had, on MacGill’s recommendation, invested nearly 40 percent of their total liquid net worth in nine RCNs. This exposed the customers to a risk of loss that was inconsistent with their investment objectives and risk tolerance and which ultimately resulted in substantial loss. FINRA suspended MacGill from associating with any FINRA regulated firm in any capacity for a period of 15 days, fined him $10,000, and ordered him to disgorge $2,023 in commissions that he earned from his sales of RCNs to the couple.
In concluding this settlement, H&R Block and MacGill neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA first addressed sales practices for structured products in a 2005 Regulatory Notice that cautioned brokerage firms about potential sales practice violations when selling structured products to retail customers and provided guidance to firms on their suitability and supervision obligations when selling such instruments to the public.
Posted in Enforcement, FINRA, Failure to Supervise, General, H&R Block Financial Advisors, Negligence, Reverse Convertible Notes, Unsuitability | No Comments »
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