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Naming Names: FINRA's Disciplinary Action Report, April 2014

Each month and again on a quarterly basis, the agency that regulates the financial industry, FINRA (Financial Industry Regulatory Authority), produces a detailed report that runs down all disciplinary actions recently taken against brokerage firms and brokers. This long and often colorful list of alleged wrongdoing and misconduct reads a lot like a police blotter. We strongly encourage any investor who suspects their broker and/or broker-dealer of having lost them money on dubious terms to at least skim this report to see if you recognize any names.

For our part, in addition to announcing the release of a report to help get the word out about alleged misdeeds, we like to pick out some of the highlights. Specifically, we’re looking for schemes or abuses that might be more far-reaching than the individual cases brought through the FINRA arbitration process. In other words, we name names here because we hope to raise awareness out there about brokers and products that might otherwise go unnoticed except for the case appearing in the report…

Stefani Ann Bennett of USBI (CRD #5890347, Registered Representative, Salmon, Idaho) submitted a Letter of Acceptance, Waiver and Consent in which she was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Bennett consented to the described sanction and to the entry of findings that she, without her customer’s knowledge or consent, withdrew $100,000 in cashier’s checks and cash from the customer’s estate checking account at her member firm’s sister bank affiliate and converted the $100,000 for her own use and benefit. The findings stated that Bennett arranged to have five cashier’s checks issued to her personal creditors in the total amount of $97,592.41, and she retained $2,407.59 in cash. (FINRA Case #2014039668101)

William Bradford Coolidge of Stifel Nicolaus (CRD #1636957, Registered Representative, Cordova, Tennessee) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Coolidge consented to the described sanction and to the entry of findings that he effected trades in elderly customers’ accounts without obtaining the customers’ prior written authorization and without his member firm’s acceptance of the accounts as discretionary. The findings stated that Coolidge implemented a trading strategy in elderly customers’ Individual Retirement Accounts (IRAs) and individual accounts to switch mutual funds and unit investment trusts (UITs) to other mutual funds or UITs after holding the investments for a short time period. For one of these customers, in the customer’s IRA account, Coolidge effected mutual fund and UIT purchases and sales in the account after holding the investments for a short time period. Given the customers’ age, investment objectives, and risk profile or annual income, Coolidge’s recommendations were not suitable and were inconsistent with their account objectives. The elderly customers incurred losses totaling $195,127.37 and paid commissions totaling $168,091.21. (FINRA Case #2012032916701)

Richard David Jameison Jr. of Blackrock Investments (CRD #2567029, Registered Principal, Devon, Pennsylvania) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Jameison converted $150,000 from an acquaintance who was not his member firm’s customer. The findings stated that Jameison told the acquaintance about an opportunity to invest, alongside a small group of other investors, in a business enterprise that was being formed. Jameison told the acquaintance that his firm was not involved with raising the money for the enterprise and that any investment in the enterprise would not be made through the firm. Jameison also told the acquaintance that he intended to invest in the enterprise. The acquaintance decided to invest in the enterprise, in part because he understood that Jameison would also be investing. The acquaintance wired $150,000 into a securities account that Jameison owned jointly with his wife. Jameison never invested any of the investor’s funds and converted the bulk of the funds for his own use and benefit. Jameison falsely told the acquaintance that he had realized a profit on his investment. On several occasions, the acquaintance asked Jameison to return the funds along with the earnings on the investment. Jameison wrote checks drawn against joint accounts that he maintained with his wife, each for $198,000, and delivered the checks to the acquaintance. Jameison represented to the acquaintance that the checks represented the return of the $150,000 investment plus the purported return on investment. The checks were drawn against accounts that contained insufficient funds and were dishonored. Jameison’s firm terminated his employment, and the acquaintance and his wife filed a lawsuit against Jameison. Jameison paid the acquaintance and his wife $165,000. The findings also stated that Jameison failed to respond to FINRA’s requests for documents and information relating to his dealings with the acquaintance. Although Jameison, through counsel, represented that the effects of Super Storm Sandy interfered with his ability to respond to the requests, FINRA made four separate requests for the documents and information and gave Jameison several extensions. (FINRA Case #2012033364501)

Richard Martin Ohlhaber of Century Securities Associates and Southwest Securities, Inc., (CRD #2154794, Registered Principal, Keller, Texas) submitted an Offer of Settlement in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, Ohlhaber consented to the described sanction and to the entry of findings that he participated in the sale of life settlement contracts offered by a company to at least 18 customers without providing written notice of his involvement in the sales of the life settlement contracts to either of his FINRA member firms, and never obtained either firm’s permission to engage in such outside business activity. The findings stated that Ohlhaber received commission checks from the company totaling over $300,000. These checks were addressed to an entity whose sole members were Ohlhaber and his wife. Ohlhaber endorsed these checks and deposited them in the entity’s bank account. Ohlhaber had access to this bank account and withdrew or otherwise used the money contained in this bank account. The company was not an approved product at either of Ohlhaber’s firms. Ohlhaber completed questionnaires at both firms in which he represented that he was not engaged in any outside business activity, and he misrepresented to one of the firms that the entity was a “shell” that was not engaged in any business. The findings also stated Ohlhaber provided false sworn testimony which was material to FINRA’s investigation and as a result, impeded the investigation. The findings also included that Ohlhaber loaned money to customers who were not Ohlhaber’s family members. Ohlhaber never informed his firm about these loans and the firm never pre-approved the loans in writing. The firm’s WSPs only permitted loans between registered representatives and customers who are the registered representative’s immediate family members. (FINRA Case #2012032077901)

Allen Hugo Reichman of Oppenheimer & Co. (CRD #1002285, Registered Representative, Irvington, New York) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Reichman consented to the described sanction and to the entry of findings that he failed to appear for FINRA-requested testimony. The findings stated that Reichman’s counsel informed FINRA via telephone that his client would not appear for testimony until after criminal proceedings against him were resolved, and followed up with a letter reiterating his client’s position. Reichman, to date, has not provided the requestedtestimony. Reichman’s failure impeded FINRA’s investigation into a $30 million margin loan issued by his member firm that was used as part of a fraudulent scheme involving an insurance company. (FINRA Case #2010022584502)

Mark Raymond Talley of Fifth Third Securities (CRD #4969783, Registered Representative, Ft. Mitchell, Kentucky) submitted an Offer of Settlement in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, Talley consented to the described sanction and to the entry of findings that he recommended that his customer replace an existing variable annuity with a new variable annuity. The findings stated that Talley misrepresented orally and in writing that the existing variable annuity was out of the surrender period and could be sold without incurring a surrender fee when in fact, the annuity was still in the surrender period and the customer would incur a $15,000 surrender fee if it was sold. As a result of Talley’s representation, the customer sold the annuity and purchased a new one. On a switch form related to the transaction, Talley falsely stated that he verified that the customer’s existing annuity was out of the surrender period and claimed he had obtained this information by speaking to an individual he claimed was an employee of the insurance company that underwrote and issued the annuity. Talley did not, in fact, contact the insurance company. Therefore, the information he placed on the switch form was false. The customer signed the switch form and Talley submitted it to his member firm. The firm filed a Uniform Termination Notice for Securities Industry Registration (Form U5) in which it disclosed that Talley was permitted to resign after the firm determined that he had provided inaccurate information on a client disclosure document. The findings also stated that in connection with FINRA’s investigation into that disclosure, Talley provided false answers to FINRA in response to a request for information. Talley provided partial testimony in a FINRA on-the-record interview, but failed to appear to complete the testimony. (FINRA Case #2012032650301)

Matthew Alan Trulli of Foothill Securities (CRD #3048416, Registered Representative, Visalia, California) submitted a Letter of Acceptance, Waiver and Consent in which he was suspended from association with any FINRA member in any capacity for one year. In light of Trulli’s financial status, no monetary sanction has been imposed. Without admitting or denying the findings, Trulli consented to the described sanction and to the entry of findings that he borrowed a total of approximately $197,500 from his member firm’s customers. The loans were documented with promissory notes. The loans that have reached their maturity date have not been repaid in full. The findings stated that Trulli’s firm prohibited its representatives from participating in borrowing transactions with customers under any circumstances. Trulli provided false information in response to two firm outside business activity reports regarding receiving loans from customers.

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The Financial Industry Regulatory Authority (FINRA) fined Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc., of Marion, Iowa, a combined $775,000 for supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs). As part of the settlement, Berthel Fisher must retain an independent consultant to improve its supervisory procedures relating to its sale of alternative investments.

For the full FINRA Disciplinary Action Report for April 2014, please click here.

If you or anyone you know has been the victim of broker misconduct or investment fraud, please contact a Green Firm attorney immediately for a free consultation at 1-855-462-3330.

Non-Traditional ETFs, Popular and Perilous

News of the perils for retail investors of the complex financial products known as non-traditional ETFs has been fast and furious this year. This shouldn’t be too surprising. Non-traditional ETFs are the “it” investment these days: they have continued to grow in popularity, with their largest year-end proportion ever in 2013. According to Morningstar reporting, these exotic funds now account for 13.2% of all fund assets as of November. If you’re not familiar with non-traditional ETFs, chances are you will be soon: their popularity, in spite of several high profile lawsuits related to inappropriate use and unsuitability claims, seems unstoppable. The latest lawsuit involves a broker-dealer called “Stifel Financial Corporation.” According to a recent article, the securities industry watchdog FINRA (Financial Industry Regulatory Authority), fined and censured Stifel Nicolaus and Century Securities $550,000 and ordered restitution payments of $475,000 to a combined more than 60 customers for misconduct related to the recommendation and sale of leveraged and inverse ETFs.

photo by  Katrina.Tuliao, Creative Commons

photo by Katrina.Tuliao, Creative Commons

And it’s happening all the time.

For the very simple reason that far too many brokers who recommend and sell non-traditional ETFs to customers do not understand how they work. And their brokerage firms do not educate and/or supervise these brokers adequately.

FINRA’s crackdown on offenses connected to non-traditional ETFs is good news for investors whose portfolios have been damaged by these products and their improper use by clueless brokers.

Now, we’ve already said a lot about the havoc non-traditional ETFs have wreaked--but what are they?

Well, since you asked… Non-traditional ETFs are complex financial products designed to achieve specific performance results on a daily basis. An ETF or “Exchange-Traded Fund” is typically a registered investment company whose shares represent an interest in a portfolio of securities that are linked to a specific benchmark or index. (Some ETFs, for example, those invested in commodities or currencies, may not however be registered). ETFs are funds, but unlike traditional mutual funds, they are traded throughout the day on a securities exchange at market prices.

Non-traditional ETFs include both leveraged and inverse ETFs as well as leveraged inverse ETFs. Leveraged ETFs aim to deliver multiples of the performances of the underlying index or benchmark that the fund is tracking. Inverse ETFs or “short funds” on the other hand deliver the opposite of the index or benchmark. Some ETFs are both leveraged and inverse, in which case they combine qualities from both categories of ETFs, hoping to deliver multiples on the inverse of the performance of the index or benchmark. These are called “leveraged inverse ETFs” or “ultra-short funds.” To achieve results, non-traditional ETFs deploy various investment strategies that include swaps, futures contracts, and other derivative instruments. Again, and most crucially, both leveraged and inverse ETFs are designed to give results on a daily basis only.

On a daily basis, non-traditional ETFs “reset.” This key characteristic of the product is the one most often misunderstood or misapplied by investors and professional financial advisors alike. Since leveraged and inverse ETFs are intended for daily use only, holding shares in them for longer-term investment can be dangerous due to the effects of compounding, particularly in volatile markets. Non-traditional ETFs can be an effective means of trading and shorting within a complex investment strategy when closely monitored by a financial professional. However, they  are typically not suitable for intermediate or long-term investment and any financial advisor who uses them in this way may be guilty of misconduct and/or unsuitability.

If you’ve gotten this far, you now probably know more than most brokers about how this product works.

If you or anyone you know has been the victim of broker misconduct or investment fraud, please contact us immediately at 1-855-462-3330.