Don't Let Your Broker Put You On "Hold"

Even the safest investment may become unsuitable over time

It’s safe to say most of the broker misconduct and fraud cases we litigate revolve around the concept of unsuitability. Unsuitability as a concept is well-defined by the Financial Industry Regulatory Authority (FINRA) that regulates the securities industry as any kind of investment or investment strategy that is inappropriate for a particular investor based on their age, life situation, risk tolerance, and investment objectives. However, in practice, especially when it comes to how investors or their investments change over time, establishing unsuitability can get pretty complicated and slippery. Imagine, as in one claim we filed recently, that before the financial crises of 2008-2009, a broker sells an unsophisticated conservative customer $100,000 worth of what has traditionally been very safe and reliable bank stock in, say, Wachovia. At that moment in time, the investment is completely appropriate and suitable for that particular investor. But then, eventually, when the financial crisis rapidly erodes the value of the Wachovia stock as well as, even more importantly, when that bank stock becomes much more risky, can we still say it’s an appropriate investment? No. The name is still the same, Wachovia. But it’s not the same security. It’s not only losing value, it’s become far too risky for the same investor, whose profile and risk tolerance have not changed at all. In other words, Wachovia, once suitable for our investor, is no longer appropriate to them, and the financial advisor in charge of the account has a legal obligation to inform the investor of this change and record the interaction with the investor. At least, that’s what FINRA’s 2012 rule states and is the subject of a recent review.

FINRA holds brokers responsible for monitoring changes in investments

Creative Commons. Photo by Jenny Downing

The key thing to take away from this is that, as an investor, you can hardly be aware of how an investment which your broker recommended you “hold” has evolved into a risky investment that may no longer belong in your portfolio. That’s what you pay your broker commissions for. It’s his or her job to keep an eye on the market, your portfolio, and how the two interact. And that’s also why financial advisors who fail to monitor their explicit and implied “hold” recommendations are exposed to litigation if their client loses money. What’s more, brokers have access to internal and independent outside research companies that are constantly assessing and reassessing the risk attached to every possible kind of security. Most ordinary folks don’t have access to this information, and wouldn’t know what to do with even if they did. And that’s ok. Because financial advisors are well-paid professionals whose expertise on these matters you, as a novice, pay them for. It’s when they fail to hold up their end of the bargain that they open themselves up to claims of negligence. And rightly so. Just like the diseases doctors are responsible for keeping a diagnostic eye on as they evolve over time, investments unfold in real time and form part of an extremely dynamic marketplace. As the old saying goes, “Nothing is constant but change.” Brokers have to realize and be held accountable for what happens in their clients’ investment portfolios after they’ve made the sale and taken their commission. Far too often, once brokers have placed investors in certain securities and organized their portfolio, they forget it about and move on to the next client. After all, brokers are also salespeople and under constant pressure to find new clients. Still, it’s completely unacceptable and negligent for brokers to ignore the clients they do have for the clients they want to have. And FINRA has made it very clear once again that they will not tolerate financial advisors putting investors on “hold” without a very good reason for doing so.

As always, if you or anyone you know has been the victim of broker misconduct or securities fraud, please contact us immediately for a free consultation.

FINRA Investor Alert: Beware Private Placements

Investor Alert: Beware Private Placements

Yesterday, the US securities industry watchdog, the Financial Industry Regulatory Authority (FINRA), issued its latest investor alert. The alert addressed new issues related to investing in private placement deals. If you’re not familiar with FINRA and its investor alerts, you should know that the agency is responsible not just for regulating the securities industry, but also for identifying problems surrounding new financial products and trends in broker misconduct and investment fraud.

The fact that private placement deals have earned their place on FINRA’s watchlist can be taken as a clear indication that these deals should be approached with caution and that they are almost certainly not appropriate for the casual and/or unsophisticated investor. In other words, buyer beware.

What Is a Private Placement?

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A private placement is a limited offering of a company’s securities that is not SEC-registered and not public. Most importantly, perhaps, as stipulated by Regulation D of the Securities Act of 1933, private placements are only suitable for “accredited investors.”

Put simply, accredited investors are high net-worth individuals with assets of $1 million or more (not counting primary residence), with strong verifiable incomes over the past two years. If you do not meet these requirements, you should absolutely not be invested in a private placement, nor should your broker invest your money into one. Such investments would be deemed unsuitable according to FINRA rules and regulations.

If You’re An Accredited Investor…

If, on the other hand, you do qualify as an accredited investor and you are interested in purchasing securities as part of a private placement deal, proceed with all due caution. As FINRA warns, companies that issue private placements are not required to file the same financial reports as publicly-traded companies, and these securities often include risks and liquidity considerations that more simple and transparent securities do not. When considering a private placement, investors and brokers should carefully read all documents supplied by the issuing company, including especially the offering memorandum or prospectus. Then, make sure that the risk and liquidity issues associated with this securities fit well into your overall investment portfolio.

Private Placements Afflict Many Retail Investors

We greatly appreciate FINRA's calling attention to the pitfalls of private placement deals, since over the years we’ve seen far too many cases of novice investors purchasing these securities when they were not accredited investors and/or when they did not understand the product itself. And of course, they lost a lot of hard-earned money doing so.

As always, if you or anyone you know has been the victim of broker misconduct or investment fraud related to private placements or any other financial security, please contact us for a free consultation.

What's In It For You? Broker Transfer Incentives

The heavily-regulated fiduciary relationship between financial advisor and investor is the bedrock on which the whole system of contractual American investing rests. Without it, brokers could treat your money like it was their own. (Unfortunately, sometimes they still do: click here to see a few eye-opening cases…). But with the core fiduciary relationship in place and the Financial Industry Regulatory Authority (FINRA) perpetually looking over brokers’ shoulders to make sure they honor that relationship, investing money in our great country goes smoothly. Of course, there will always be bumps in the road, including when the fiduciary relationship becomes less straightforward, more fraught with nuance and complexity. This usually happens when the broker’s interest and the investor’s interest become misaligned somewhere. In other words, in certain circumstances, what’s good for you the investor may or may not be good for your broker (like when you push to invest in products with lower fee/commission rates). Or, conversely, what’s good for your broker may or may not be good for you the investor. An example of the latter often occurs when a broker is recruited away from his current brokerage firm by another firm using big incentives. In this case, the first thing the broker will do is call you up and say, “Hey! I just got transferred to this great new firm. You should come jump ship with me!”

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Maybe. Then again, maybe not.

Recently, FINRA has been pushing for changes in the disclosure rules surrounding recruiting and transfers such as these, for the very reason that while it may be great news for brokers to jump firms because they stand to get a large bonus for bringing their client book with them, it may require you, their client, to liquidate your portfolio and reconstitute it at another firm, incurring surrender charges and opening you up to ugly tax implications, and so on. In other words, bully for the broker. Not so bully for you. That’s why FINRA is considering requiring brokers to disclose any incentive structure from their new firm for up to one full year after transfer to their clients. This way, you know what your broker stands to gain from you transferring, and you can make an informed decision on your own instead of just going along because your broker said so.

While these changes are still on the books at FINRA and are scheduled to be addressed at their meeting next week, they’re also a useful reminder that in the specific situation where your broker has been transferred and asks you to go along with them, even without FINRA behind you, you can ask them to explain to you what’s in it for you. You can even ask them what’s in it for them. Always, always, always keep in mind that your broker is a professional who works for you. We’ve seen far too many cases of broker misconduct or investment fraud perpetrated because customers give brokers way too much deference and leeway. Here, as in any retail business, brokers and customers alike would be wise to remember: “The customer is always right.”

As always, if you or anyone you know has the victim of broker misconduct or investment fraud, please contact us immediately for a free consultation.

Don't Become a Statistic: Fight Financial Fraud

It could be due to the fact that all day long pretty much all we do is speak to ordinary folks about how they lost their hard-earned money due to investment fraud and broker misconduct; write letters and FINRA claims about all kinds of financial scams and negligence; and educate ourselves on the latest trends in everything fishy and devious going on in the world of financial securities. BUT. This week, a couple phone calls we received and a couple articles we read brought home to us with powerful force once again just how many Americans get duped and how easy it would be not to.

photo credit Don Haskins, Creative Commons license

See, one poor lady called us up to tell us she and her husband had lost $500,000 of their retirement money because of their broker. There was only problem. Their broker wasn’t a broker. He was an insurance consultant! The phony broker is now up on felony charges. But that doesn’t help the poor couple that called us… The fake broker was broke. And since he didn’t actually work for a sponsoring brokerage firm, well, there was no one to recover damages from.

Another case involved a gentleman who had lost a lot of money because his broker had put him in a bunch of assets that were patently unsuitable for the customer. As we talked, we discovered that the gentleman, in spite of the fact that the broker had lost a sizable chunk of his portfolio, had stayed with this broker and still, believe it or not, had his money invested with him! When we asked why, he said he’d listened to dozens of brokers pitch him on why they were the right broker for him, and they all sounded the same…

Finally, the FINRA Investor Education Survey report “Financial Fraud and Fraud Susceptibility in the United States” came out the other day, with some staggering findings. Some of the highlights (or lowlights, come to think of it) include the fact that:

• Over 80% of respondents to the survey had been solicited in potential scams

• Over 40% of respondents could not identify classic “red flag” signs of fraud

• Around 60% of respondents under-reported fraud

• Around 18% of respondents had been asked to purchase an investment that offered a commission for referring other investors.

Clearly, Americans are not nearly prepared enough to recognize and combat financial fraud schemes. As securities attorneys, we are often frustrated by the fact that we can’t help people until after they’ve been bilked out of their life-savings or taken for a ride by a phony broker. And so we wanted to take a moment to remind everyone out there who is or may become an investor that the old saying, “If it sounds too good to be true, it probably is,” is about the surest way to protect yourself against investment scams. We can all be tempted. Who doesn’t want to double their money overnight? Unfortunately, far more people lose all their money thinking that way than ever double it. Do your due diligence. Just because a nice man in a suit says he’s a broker, doesn’t mean he’s a broker. Do a background check on all brokers who solicit or trade for you with FINRA’s comprehensive BrokerCheck. For more tips, tools, and techniques in our collective fight against broker misconduct and fraud, please download our free Self-Defense Guide.

As always, if you or someone you know has the victim of broker misconduct or financial fraud, please contact us immediately for a free consultation.

Naming Names: FINRA's August Disciplinary Action Report

Reading FINRA’s monthly Disciplinary Action Report is a little like reading a police blotter. There’s an almost endless list of brokers under scrutiny for trying to get away with dumb, reckless, or malevolent acts. They get investigated, fined, and/or expelled by FINRA. The report for August 2013 recently came out, and again we found the usual stunning array of villains and victims. For instance…

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One broker who allegedly impersonated his own client while on the phone with his own brokerage company in order to re-route his client’s statements to him. One would assume did this to hide massive losses from his client.

Another broker duped his own grandmother, who was suffering from dementia, into purchasing shares in a fictional company the broker owned.

Still another bad broker deceived his parents by diverting almost $1.5M in funds from their investment accounts into bank accounts he controlled.

And of course the report includes far too many brokers who convinced their customers to give them personal loans. Don’t ever loan your financial advisor money!

Normally, we soak up the FINRA report and keep an eye out for new trends and schemes in broker misconduct. But this month, for the first time, we thought we’d share. Since FINRA’s reports don’t have nearly as wide a readership as they deserve, we figured we’d run down some of the cases that caught our attention and that also might have affected more customers than those mentioned in FINRA’s summaries. In other words, if you’ve been the victim of investment fraud or broker misconduct, you might want to scan our abridged list of alleged offenders below--then take a look at FINRA’s complete list by clicking here, or try their wonderful tool called BrokerCheck by clicking right here. Enough with the build-up, it’s time to name names…

Charles Crotts, a broker based in Lexington, North Carolina and formerly of American Portfolios Financial Services (APFS) and Royal Alliance Associates, has been barred from FINRA for allegedly improperly borrowing money from clients, making unsuitable investment recommendations, and getting into some shady “undisclosed outside business activities” (hm). Read more here.

Darrell Frazier of Dublin, Ohio and formerly of Park Avenue Securities LLC, got himself barred from FINRA membership for allegedly guaranteeing customers not only protecting against loss of principal but a 7 or more percent return on their investments in a variable annuity he was promoting. Although Frazier neither admitted nor denied it, the claim also alleged that he lied to customers when they did not see their “guaranteed” return, and that he made all kinds of other glaringly unsuitable recommendations.

Read more here.

Based out of McGregor, Texas, Roger Fuller, formerly of Chase Investment Services, got himself barred from FINRA in a claim that stated he may have forged documents and had ownership interests in securities accounts at an executing member firm.

Read more here.

FINRA barred broker Jon Guay of San Jose, California and formerly of Cuna Brokerage Services, QA3 Financial Corp, and Wunderlich Securities for a claim that Guay neither admitted nor denied that found Guay taking his customers’ money for a futures trading account or to invest in a specific company only to deposit the funds, guess where, into a bank account he controlled. Guay also allegedly got involved in a dodgy mutual fund scheme.

Read more here.

From the Big Apple, New York, New York, Juan Carlos Parets formerly of Westrock Advisors, Joseph Gunnar & Co, and John Carris Investments, settled with FINRA and was suspended for allegedly misleading customers and omitting material in a promissory note offering. According to the claim, which Parets neither admitted nor denied, he also did not understand the product he was selling to his customers, nor was the product suitable for them.

Read more here.

In addition to actions taken, FINRA also provides a list of complaints that are unresolved and should therefore not be taken as an indication of culpability or guilt. But…

Richard Blair of Austin, Texas and formerly of Murchison Investment Bankers, IMS Securities, and Wealth Solutions Inc. was named in a claim alleging that Blair mislead his clients and did not put their interest before his own when steering them toward a real estate investment trust, the Cole REIT. Also, Blair allegedly provided retail customers with false or misleading forms in deals involving the purchase of those pesky variable annuities.

Read more here.

John Carris Investments LLC along with brokers Jason Barter, George Carris, and Andrey Tkatchenko can’t be happy about a complaint filed against them by FINRA that alleges they were involved in a highly complex and manipulative “intentional prearranged trading” scheme.

Read more here.

Jeremy Tintle of Atlanta, Georgia and formerly of Morgan Keegan & Company and Oppenheimer & Company will have to fight the claim filed against him by FINRA that alleges he inappropriately recommended private securities that were speculative and illiquid to a retail investor, losing her around $150,000.

Read more here.

If you’ve lost money and you think it may be due to broker misconduct but you don’t see your broker’s name above, please check FINRA’s complete report or enter your broker’s name into BrokerCheck.

And, as always, if you or someone you know think you’ve been the victim of broker misconduct or investment fraud, please contact us immediately for a free consultation.

Nowhere to Hide for Brokers with a Checkered Past

Slowly but surely, reform and greater accountability is coming to the financial industry. In the aftermath of the financial crisis of 2008-9, the Obama administration promised Americans that it would tighten the grip on a roguish financial industry that put the economic health of the entire country in jeopardy. Although not all that much has happened since, a series of recent amendments and expansions by the SEC and its regulatory body, FINRA (Financial Industry Regulatory Authority), suggests that change, although slow to arrive, is finally on the way. In our previous post, we mentioned proposed amendments to SEC and FINRA rules and regulations that would give them the ability to inflict more financial pain on not just crooked stock brokers but the brokerage firms that sponsor them. Since many brokers who come under fire by FINRA end up going bankrupt, preventing their victims from seeing any rewards even when they win arbitration, holding large brokerage houses with deep pockets accountable increases the chances that victims will get some of the money back--and encourages stricter compliance within the brokerages themselves, in order to avoid future losses.

More recently, the SEC has quietly approved several important amendment to FINRA Rule 8312 which involves the expansion of information provided by FINRA's BrokerCheck. If you haven't checked out BrokerCheck yet, you should. It's an incredibly powerful and useful tool in the fight against broker misconduct, since it makes available to everyone from attorneys and hiring brokerage firms to novice investors information about stock brokers who have run afoul of the regulatory system. Thanks to the recent amendments, there will be more information available about bad stock brokers than ever before. The expansions are described by FINRA in its Regulatory Notice 10-34: 

(1) make publicly available in BrokerCheck all historic customer complaints that became non-reportable after the implementation of Web CRD;

(2) permanently make publicly available in BrokerCheck information about former associated persons of a member firm, as reported to CRD on a uniform registration form if they were (a) convicted of or pled guilty or no contest to certain crimes; (b) subject to a civil injunction involving investment-related activity or found in a civil court to have been involved in a violation of investment-related statutes or regulations; or (c) named as a respondent or defendant in an arbitration or civil litigation in which they were alleged to have committed a sales practice violation, and which resulted in an award or civil judgment against them;

(3) expand the BrokerCheck disclosure period for former associated persons of a member firm to 10 years from two years; and 

(4) codify FINRA’s current process for disputing the accuracy of (or updating) information disclosed through BrokerCheck.

By supplementing the information FINRA already includes in BrokerCheck searches, they are closing the net on brokers whose infractions pre-dated the implementation of Web CRD (the equivalent of badge or serial numbers for brokers, which stay with them wherever they go) and providing more comprehensive records on the relationships between rogue stock brokers and the brokerage firms that hire them. Amendment (3), especially in relation to the increased liability discussed in the post linked to above, harbingers a new era in financial industry regulation where not just individual brokers who can easily take shelter under bankruptcy laws are held accountable for misdeeds, but where major brokerage firms are also effectively on notice that supervision is an absolute necessity and increased liability a new way of life.

These are promising developments for investors who are still feeling the sting of perhaps the second worst economic calamity in our country's history. Change is here.

As always if you or anyone you know has been the victim of broker misconduct or investment fraud, please contact us immediately here or call 1-855-462-3330.

Who's Calling, Please? Brokerage Impostor Cold Calls

Since many people who invest money through FINRA-registered brokers do not know what FINRA (Financial Regulatory Agency) is, let alone keep up with the agency's latest warnings, we like to raise awareness out there among everyone who is kind enough to read our blog  whenever FINRA issues a new alert or warning. Usually these warnings come as a result of an uptick in cases seen in FINRA's arbitration process. And so, by our reasoning, if FINRA has been seeing more cases of a certain type of investment fraud or broker misconduct, then maybe you out there have too. Or maybe we can help prevent others from falling prey to it. At any rate, this week saw FINRA issue a new alert titled, "Cold Calls from Brokerage Firm Impostors--Beware of Old-Fashioned Phishing."

As the warning describes, scam artists have recently been cold-calling citizens while impersonating at least one well-known brokerage firm and engaging them in conversation in the hope of getting people to reveal personal financial information, including of course their social security numbers. As FINRA notes, this scheme is a throwback twist on what's known as Internet "phishing," or spattering people with spam messages with the intention of culling financial information for nefarious purposes. We say "throwback" because this more recent version of the scam uses not email but the somewhat old-fashioned telephone cold-call, which as the fraudsters must know adds a much more personal element to the phishing. After all, over the past decade or so we've learned to be very suspicious of emails find their way into our inbox from Nigeria and so on, but we may be a little less wary of an actual person talking to us on the phone, especially if they say they work for such-and-such major brokerage firm. 

The mechanics of the scam work like this. Once the caller gets you on the line, he or she will tell you about a special offer on Certificates of Deposit (CDs) or some other financial product. They'll insist that, if you invest, you can get yields well above the norm. If you seem even remotely interested, they don't go in for the kill right away. They say they'll have their supervisor get back to you with more information, or else they may send you applications forms to fill out. At some point in these interactions, however, they will try to obtain your personal financial information. Once they have it, they'll use it to steal your money or your identity.  And that's very bad news indeed.

FINRA provides a few useful tips for how to avoid getting fleeced by this particular scam. We would add that like most scams, the fraudsters rely on two key dynamics: false promises and lack of due diligence. You can beat this scam and many others like it simply by always sticking to the rule of thumb that "if it sounds too good to be true, it probably is;" and by insisting that, rather you giving them more information, they give you more information. That way, you can look more deeply into the background they claim to have, whether it's with a large brokerage company or as an independent. You can call the brokerage itself, the compliance office, FINRA's general intake phone line, or use FINRA's BrokerCheck to see if your shady cold-caller is who they say they are.  

If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation. 

Deadbeat Brokerages Leave Investors in the Lurch

As if investors needed another reason to very carefully select and vet their financial advisors, a recent article indicates a significant uptick in the number of investors who have won FINRA (Financial Industry Regulatory Authority) arbitration cases against negligent broker dealers that have not recovered any of the money they are entitled to.

According to statistics provided to the Chicago Tribune, in 2011 nearly 11% of claims that investors had been awarded by FINRA went unpaid. That's up from around 4% in the two previous years. Historically, around 15-33% of the total awards granted by FINRA have never made it into the hands of investors. We're talking tens of millions of dollars! 

One big reason this is happening is that FINRA does not require that broker dealers carry insurance in the event of an unfavorable outcome in securities arbitration. And so, rather than pay out hundreds of thousands of dollars in damages, many small brokerages will simply bankrupt themselves and the brokers will move elsewhere. That leaves the investor whose claim has been successful holding the proverbial bag.  And since FINRA is not actually part of the criminal justice system, investors who find themselves in this lamentable position are truly stuck: they can't take brokers to court.

Besides the lack of what would essentially be a form of malpractice insurance, another major contributing factor to this depressing situation is that most brokerages compel clients to sign binding arbitration clauses when they engage the services of the broker dealer. These clauses, which many investors are not aware of when they sign up with a brokerage firm, mandate that in the case of a dispute, clients will be forced to take their case through the FINRA arbitration process rather than the US Criminal Justice System. And that's all well-and-good, as long as FINRA is able to enforce its judgments and awards. But obviously it's having a harder time doing that now than it has in the past.

FINRA needs to take a closer look at broker dealer binding arbitration clauses and their standing within the larger justice system. If brokerage firms are not going to honor the awards that FINRA grants to damaged investors, should the clauses that protect firms from criminal action continue to be honored? And why not require or somehow strongly recommend malpractice insurance? Doctors and lawyers almost universally carry it.

These systemic changes may never come. In the meantime, however, investors can take action. They can protect themselves from deadbeat brokerage firms by doing as much background research on firms and brokers as possible, before ever signing a contract. As you might imagine, most of the broker dealers who fold rather than pay up are small-time operators, many with a history of misconduct or shady dealings. Any investor doing their own due diligence could probably see them coming a mile away. Rather than small, unreliable operators, investors should be looking for firms with a long track record of financial stability and probity. Name recognition isn't such a bad indicator of reliability in the financial securities industry, either. After all, there's probably a reason big name firms have stuck around so long and are recognizable: they generally do the right thing. If as an investor you're interested in a smaller firm, call them up and question them about their compliance policies, corporate structure, history, and so on.

In other words, be proactive and be diligent. While the regulatory system may take many years to change (if it ever does), going that extra step to make sure your life-savings are in safe hands can be done any time. We encourage you to do it now!

As always, if you or anyone you know has been the victim of broker misconduct or financial advisor fraud, please contact us immediately for a free consultation.

SEC Launches Informative Site for Investors

Ramping up their effort to become a kind of consumer protection agency for novice investors, the SEC recently launched a very helpful site featuring tons of great investment advice at Investor.gov.  

A lot of the suggestions featured here are also included in our 10 Tips for Financial Self-Defense, so download that if you haven't already. In order to supplement your arsenal of weapons in the fight against financial misconduct and bad brokers, check out the SEC site. It touches on everything from how markets work to investment basics to retirement planning. Of course, this body of knowledge is exactly why, as a novice investor, you might engaged the services of a broker. But as with everything from buying a car to picking the right doctor, the more research you can do on your own, the less likely you will be to get fleeced. Information, after all, is power. And there's a wealth of information on the SEC site. Click here to go to the introductory video that gives you a tour.

For the social media savvy, better hop on the SEC Investor Ed twitter feed. We have! Here, you'll get updates and investor alerts that will help you get out in front of problems with your investments that you may not have anticipated or simply do not understand. For example, Ponzi schemes. We've got a page on our site explaining the history of the Ponzi scheme and how it works. If you thought these scams faded with the incarceration of Bernie Madoff, think again. According to the latest SEC investor alert, they are alive and well among virtual currencies like Bitcoin. Other alerts on scary yet fascinating topics include Investment Options Implying SEC Endorsement, Pump-and-Dump Stock Email schemes, and Binary Options and Fraud. With our own blog here at The Green Firm, we'll do our best to keep abreast of the latest trends in investor scams and try to develop the legal angle for you. So stay tuned to the SEC and to us!

As always, if you or anyone you know has been the victim of broker misconduct or investment fraud, please contact us immediately for a free consultation. 

SEC May Pack More Heat Soon

A bipartisan effort in Congress is underway to give the SEC more sting when it comes to securities law violators. All we can say is: it's about time! Lawmakers are pushing hard to increase the limits of the fines the SEC is allowed to slap broker dealers and brokerages with to up to $1 million per violation for individual brokers and up to $10 million per offense for firms. Basically, the bill's backers in Congress want the SEC to be able to inflict enough financial pain on brokerages to change the culture. Right now, most firms tend to view the SEC fines as a nuisance--the cost of doing business. If, however, the bill that was written by Senator Jack Reed, a Democrat from Rhode Island and Chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment; and Senator Charles Grassley, a Republican from Iowa and ranking member of the Senate Judiciary Committee gets passed in Congress, the SEC will be getting some serious new regulatory firepower.

Ultimately, what lawmakers hope is that steeper penalties and more pain will result in fewer repeat offenders along with heightened self-regulation on the part of brokerages, who will be forced to beef up or wake up their compliance departments and come down much harder on rogue brokers. Under the new law, not only would broker dealers be more likely to increase vigilance around compliance issues, they would also be much less tolerant of individual broker misconduct. Since heftier fines means broker dealers are more exposed by any bad brokers they sponsor, they'd be foolish not to crack down on rule breakers and/or terminate those who cannot toe the regulatory line. 

Some critics of the bill say that rather than raising its punitive powers lawmakers should be looking to strengthen the SEC's enforcement abilities by granting the commission more funding for personnel and financial expertise. But just last year, the SEC set a record for enforcement actions and fines. Still others say the SEC is most effective on moral terms: they insist that suffering an SEC action is usually a career-ending event. Still, the larger fines written into the bill seem directed more at the brokerages than the individual brokers. By setting their sights on crooked firms, lawmakers have made it clear they want not just to punish offenders and inflict pain, but instigate real change.

It's hard to predict how far the bill will get in Congress before the current session ends in December. But we at The Green Firm hope change comes sooner rather than later.

As always, if you or anyone you know has been the victim of broker misconduct, please contact us for a free consultation.

Stockbrokers Who Cheat

Some brokers start cheating early. A recent Reuters piece reminded us of how important it is for retail investors to remain ever-vigilant when dealing with representative of a financial industry so rife with rule-benders and rule-breakers. As you may know, the industry watchdog, FINRA (Financial Industry Regulatory Authority) requires would-be brokers to pass a series of licensing exams before they can handle other people's money. The most common exam is known as the "Series 7," or general stockbroker exam, and it's a 250 multiple-choice question test that ensures candidates have a strong grasp of industry rules and regulations as well as how to invest appropriately according to client risk tolerances and investment objectives. In 2012, according to FINRA, around 32% of Series 7 test-takers failed the exam. Another handful cheated and got caught. Who knows how many cheated and didn't get caught. 

Normally, a candidate who gets caught cheating on any of the FINRA exams will be banned from the financial industry. In rare cases, he or she will receive a lengthy suspension. Some of the more colorful examples of broker cheating include hiring a better prepared test-taker to ace the exam; stashing review materials in the ceiling tiles of a test center bathroom; and using the old cheat-sheet during the test. Although new technologies such as palm scanning, test randomization (which means each individual gets a unique test generated from scores of possible questions, so peeking at your neighbor's answers is pointless), and in some cases video surveillance have significantly cut back on the amount of broker subterfuge going on each year, the impulse to game the system remains alive and well in some shady quarters. And apparently it's not just aspiring brokers who are guilty of cheating, it's test-prep professionals, too, who try to steal test questions to better prepare their students.

Although it's amusing to hear anecdotes like these, which harken back to high school midterms or the SATs, we must remember that these cheaters could have been our future brokers, the ones handling our life-savings or 401Ks. And again, not every cheater gets caught. And some cheaters, as we've seen in so many of our cases, are late bloomers. They wait till they pass their exams before they really start cheating.

If you or anyone you know has been the victim of broker fraud or misconduct, please contact us immediately for a free consultation. 

Brokerages Can Point the Finger But They're Still Liable

Just the other day, a FINRA (Financial Industry Regulatory Authority) arbitration panel found Wells Fargo liable for $2.8 million because Wells Fargo failed to adequately supervise a major account in which there was significant fraudulent activity. As we've mentioned in previous posts, even though Wells Fargo did not perpetrate nor was it a party to the misconduct itself, the fact that Wells Fargo (back then it was Wachovia) served as the supervising broker-dealer of the investment accounts in which fraud was taking place under FINRA's regulations means that it's on the hook. This is important from the standpoint of fiduciary responsibility and internal financial industry checks-and-balances, as well as from the practical legal and economic standpoint of recovering losses suffered due to financial misconduct of various kinds. From a fiduciary standpoint, it's vital that brokerage firms and not just individual brokers or investment advisors (or in the Wells Fargo case, a secretary at a law firm representing the aggrieved Boca Raton-based family investment partnership) be held accountable for misconduct occurring within client accounts. When something goes wrong, in the eyes of FINRA, brokerages cannot simply point the finger at rogue brokers or scheming secretaries and say it's strictly the other guy's/gal's fault. Now, not only is this good internal practice, forcing brokerages to monitor and regulate themselves as the first line of defense against misconduct, but legally it often enables clients who lose money--in this case, some $6 million--at the hands of crooks to go after the brokerage firm, too. In the Wells Fargo case, the family investment partnership successfully prosecuted the secretary who perpetrated the fraud against them in civil court. Unfortunately, the secretary was unable to pay the damages. Surprise, surprise. The partnership's legal team then smartly took their case to FINRA, and shined the spotlight of accountability on Wells Fargo. Although the secretary was the agent of fraud and not working for Wells Fargo, the bank was found by a FINRA arbitration panel to be liable for negligence to the tune of $2.8 million, since they didn't catch the fraud and losses in the accounts as soon as they should have. Obviously, the partnership has a much better chance of recovering money from Wells Fargo than from a disgraced secretary.

If you or anyone you know has been the victim of broker misconduct of any kind, please contact us immediately for a free consultation.

Email Hacking Can Drain Your Investment Accounts

A recent investor alert about email hacking issued by financial industry watchdog FINRA (Financial Industry Regulatory Authority) reminded us that scams can come from almost any direction at any time, and we thought we should do our part to help get the word out about the latest in investor fraud and criminal activity. At The Green Firm, we generally focus our attention on the ways in which crooked brokers and irresponsible brokerage firms get over on their unwitting clients. But if you're an investor, you should always keep in mind that threats to your investments and your financial security often come from that most insidious, complex, and anonymous of sources: the internet. 

According to FINRA's alert, they have recently been receiving an increasing number of reports of investor email accounts being hacked and those compromised accounts being used to send instructions to brokerages regarding the transfer or withdrawal of funds. Basically, what happens is, once a hacker has broken into your email, they search your contacts and/or sent email; they find your broker or brokerage's email address; and then they email a request for your money to be wired out of your account to a third-party account, often overseas. And poof! Your money disappears.

FINRA isn't the only agency getting the word out on this. Apparently it's happening often enough for the FBI, the Financial Services Information Sharing and Analysis Center (FS-ISAC), and the Internet Crime Complaint Center (I3C) to be issuing warnings of their own.

If you're unfortunate enough to have your email account hacked, there are some telltale signs that will help you act quickly and do damage control before your money vanishes. First, you'll probably get messages or notifications from friends that your account has been sending Spam messages. Second, you may see a sudden influx of "bounced" email messages in your inbox, as the hacker or hacker's program sends out a flurry of random emails, often to contacts with invalid addresses. Finally, you may find you can no longer access your own email account because the password has been changed.

Now, here's what you do if you notice any of those things we just mentioned: 

1) Notify your broker and brokerage firm immediately that your account may have been hacked. 

2) Notify your bank and credit card holders of possible fraud activity.

3) Check your online statement for unauthorized activity. 

4) Change all your usernames and passwords on all your email accounts and online investment accounts. 

Hopefully, if you act fast enough, the fraudsters won't get very far with their scamming. Once you've done all of the above, you may as well also notify the security agencies so that they can help prevent others from fallen victim to the same scams and crooks.  

Alt Mutual Funds Not Like Traditional Ones

If you've been keeping up with the activities of financial industry watchdog FINRA (Financial Industry Regulatory Agency) like we have, you've probably noticed an important trend: FINRA has issued a number of warnings recently about complex financial products that have made their way into investor portfolios, sometimes without investors realizing just how complex and--more to the point--how risky they actually are.

The latest warning concerned so-called "Alternative Mutual Funds," which contain more exotic strategies and asset mixes than their traditional counterparts, including hedging and leveraging through derivatives and short-selling. According to a recent Reuters article, these Alt Funds, which can resemble hedge funds but remain subject to the regulation by the Investment Company Act of 1940, have become increasingly popular in recent years as investors seek greater yields while trying to avoid getting burned like they did in 2008. Whatever their motivation, investors need to be exercise all due caution when considering purchasing Alt Funds because these funds may conceal risks that the unsophisticated and sophisticated investors alike may not be fully aware of. 

If you or your investment advisor are thinking about buying into an Alternative Mutual Fund, FINRA's Investor Alert on the subject strongly suggests taking a close look at the following points: Investment  Structure,  Strategy Risks, Investment Objectives, Operating Expenses, Fund Manager, and Performance History. Investigating these points will provide you with greater insight into a financial product whose complexity will almost certainly raise suitability issues in the near future. Indeed, if past experience is any indication, FINRA's Investor Alert portends greater scrutiny of not only this product but of brokers and investment advisors who see fit to recommend Alt Funds to clients.

Plain Broker-Dealers Aren't Always so Plain

Brokerages have a primary fiduciary and legal obligation to protect their clients. Period. Unfortunately, greed and other unsavory considerations often get the best of them, and far too many brokerages tend to lose sight of this fundamental tenet of the financial industry. Soon, they’re serving themselves at the expense of their clients. A recent article on the Financial Regulatory Authority’s disciplinary actions against Cedar Brook Financial Partners for allegedly making false statements about high-risk funds sold to wealth management firm Pepper Pike is another sharp reminder that brokerages are often willing to bend or break the rules to turn a profit.

According to the article, FINRA punished Cedar Brook for making “false and misleading statements” about two funds: Medical Capital Holdings Inc, or MedCap, and IMH Fund, a security backed by subprime mortgages. MedCap in particular created massive problems for firms like Cedar Brook, when the Anaheim, CA-based company was revealed to be a Ponzi scheme sold to investors across the country and totalling nearly $2.2 billion in notes. The fraud was exposed by the SEC. The whole works. Oh boy.

Now, MedCap was a superlative fraud. But that’s got nothing to do with Cedar Brook. Except that Cedar Brook allegedly went wrong by misrepresenting just how risky the financial products being offered by MedCap and IMH actually were to investors--as well as altering at least three of their own investors’ accounts to create a false presentations of their net worth, concealing unbalanced portfolio distributions and potential unsuitability issues. Bad news. And it turns out Cedar Brook were not the only brokerage guilty of playing dirty over MedCap and IMH fund. According to FINRA’s records, across the country, 18 firms and 66 individual brokers have suffered disciplinary action over MedCap; and 15 firms and 40 brokers have suffered similarly over the IMH fund. And you can bet your bottom dollar there’s more where that came from.

Until this most recent scandal, Cedar Brook was a fairly well-regarded Midwestern brokerage. But beneath that veneer of respectability lurked a significant history of complaints against its principals that any informed investors could have accessed via FINRA’s BrokerCheck, which provides a history of any and all complaints against brokerage firms and individual brokers nationwide. After all, around 95% of registered brokers have NO complaints on their record.

If you or anyone you know has been the victim of broker misconduct or fraud, please contact us immediately for a free consultation.

No Such Thing As a "Free Lunch" (Seminar)

The Financial Industry Regulatory Authority or FINRA reports that 64% of Americans over 40 years old have at one time or another received unsolicited invitations to enjoy a so-called "free lunch seminar" that promises to teach them about money management and investing. Those are some impressive figures. Alas, as we all know, there's no such thing as a free lunch in this world. So if you do choose to accept one of these invitations, be prepared for the usual salesperson full-court press as the sponsoring firms or brokers who are behind the seminar try their darndest to turn you into a new client or sell you something you probably don't want. Typically, these seminars transform into a veritable flea market of sales pitches involving books, financial products, money management tools or software, or investing services. You may get a bellyful of appetizing lunch gratis, but you'll also most certainly be getting an earful of sales palaver as well.

According to a recent article on the subject, "Securities regulators such as FINRA conducted more than 100 examinations of free-meal seminars. In half the cases, invitations and advertisements contained exaggerated or misleading claims, and 12 percent of them appeared to involve fraud."

Wow. With those daunting statistics in mind, if you still want to attend a free lunch seminar, do yourself a big favor and:

Commit to nothing. It's ok to grab a lunch on someone's else tab, especially if it's good eats (!), but knowing in advance you're inevitably going to come under pressure from financial salespeople connected to the seminar means you can steel yourself for no matter what they come at you with. Of course, always be polite, accept whatever literature or information packets they're handing out, but do not agree to or sign anything while you're at the seminar, especially if you haven't done any background research ahead of time. Which brings us to...

Do background research. It's the Age of Information, people! There's absolutely no reason in the world you should be attending a free lunch seminar/sales pitch session without knowing something about who's behind it and who's going to be doing the speaking. General research can be done through Google or social media. If the seminar sponsors are brokerages or individual brokers, use FINRA's wonderful online resource BrokerCheck to look into their professional history. If you're still not sure who you're dealing with by the time you get to the seminar, turn the tables on the pitch masters by putting them on the spot by asking for references. Let them feel some high-pressure.

We at The Green Firm have handled several cases in the past that involved our client being sold a bill-of-goods at one of these shady seminars. Don't be their next victim. If, however, you or anyone you know has already been the victim of broker fraud or fraud related to informational seminars hosted by financial industry professionals, please contact us immediately for a free consultation.

Brokers Are Not Just "Order-Takers"

The financial world has been undergoing several years of reform, to varying degrees of success. But the more circumscribed world of financial advisers has lagged behind--until now. If you’re an investor or even just a casual reader of the Business or Financial pages of the newspaper, get ready to hear a lot more about “fiduciary standard” in the next few years.

According to several recent articles, the SEC is gearing up its campaign to raise the standard for financial advisers who often claim, especially when they’re being sued for misconduct or negligence, that they’re only “order-takers” when it comes to important investment decisions. Yeah, right. Then why all the fees? And why call themselves “advisers” at all?

The truth is, at the moment, financial advisers are held to a somewhat lower standard of fiduciary obligation known as “suitability.” This standard involves a suitable match between a customer’s stated investment objectives and risk-tolerance and the financial products a financial advisor places them in. The SEC’s new standard would raise the bar. Brokers would not simply be asked to ensure that investments comply with suitability, but that brokers uphold the interests of their clients absolutely. As an article on CNBC mentions, “The current regulatory system means that brokers are legally permitted to recommend a higher-priced mutual fund to investors even if they know a low-cost one with better returns exists. Many brokers are compensated partly by commissions from mutual funds.”

With the SEC’s help, the world of investment just may become a little safer and more friendly to the interests of investors whose money is at stake in the first place. After all, shouldn’t financial advisors who are responsible for the life-savings of many of their customers, be held to professional standards that resemble the standards of lawyers, doctors, and CPAs? Of course they should. Right now, brokers are having it both ways. They take significant fees for their expertise, but they deny responsibility when that “expertise” fails them and damages customers.

Is This Investment REIT Or Wrong For You?

xtended periods of uncertainty in the stock market along with low interest rates can drive investors seeking higher returns into the arms of products that they may not fully understand or that may not be appropriate for their financial situation or risk tolerance. Take non-exchange traded real estate investment trusts (REITs), usually referred to as "non-traded REITs." A particularly egregious case we're currently handling reminded us that we needed to get the word out once again about the danger of buying into non-traded REITs if you don't fully grasp how they work. Of course, it's not the customer who would generally consider purchasing such sophisticated financial products; rather, brokers are pitched on such products by REIT representatives; and, seduced by promises of low-risk and high-return, the brokers in turn pitch their clients on them. 

(Very quickly, if you're not familiar with the concept of a "REIT:" a REIT is a trust or company that pools individual investments to purchase large portfolios of income-producing real estate. A very large percentage of the income from these properties is then disbursed annually to shareholders in the form of their distribution or return.)

Before you agree to the purchase of a non-traded REIT at your broker's suggestion (if it's not too late already), bear in mind three very important things:

1. hares of non-traded REITs by definition do not trade on any national securities exchange
2. arly redemptions of the shares you own in a non-traded REIT are strictly limited and in any case come with high fees that cut deep into your potential return
3. Unlike in publicly traded companies, the distributions or returns ou get from non-traded REITs often come from borrowed funds or investor principal

1) The first item means that it can very difficult to determine the value of your investment in the REIT, especially if it starts to go bad. Since the REIT is not part of any actual market or exchange, its valuation is assigned internally and can often be inaccurate or manipulated by those running the fund. Moreover, until the shares are actually sold, the valuation of those shares is pure speculation. It's like a company going public for the first time: the value of its shares can fluctuate wildly in the initial offering and more often than not fails to correspond to projections, even by the experts.

2) Non-traded REITs are an illiquid investment. Be prepared to have your money locked up in a REIT for at least 8 years, possibly longer. In the meantime, if your financial situation changes, and you need to get out of the REIT, you face steep fees and losses. 

3) A unique feature of non-traded REITs is that he distributions or returns you get from them do not come out of earnings or profit, but rather from heavily subsidized debt or initial investor principal. When things go bad, and a non-traded REIT starts losing money, this can look a lot like a Ponzi scheme in that new investors are paid distributions from early investor principal. In some cases, a failing REIT will suspend distributions entirely, n which case not only will an investor be stuck in an illiquid product but it's an illiquid product that provides them with no return whatsoever. 

In investing, as in much else, knowledge is power. Know what you're getting into if you agree to purchase shares in a non-traded REIT. And if you don't know what you're getting into, ask your broker to explain everything to you--along with why he or she thinks this financial product is good for you. For more on non-traded REITS, consult FINRA's tip sheet here.

f you or anyone you know has been the victim of broker misconduct related to the purchase of non-traded REITs or any other financial product, please contact us for a free consultation.

Brokers May Have Been Broken by Financial Crisis

Did post-traumatic stress disorder lead huge numbers of brokers to make bad investment decisions on behalf of customers in the aftermath of the 2008 financial crisis? According to a recently published study from an academic journal called, "The Journal of Financial Therapy" (who knew such a thing existed!), it seems entirely likely they did. The study is based on a survey of financial advisers across the industry, “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Post-Traumatic Stress," and according to an article in MarketWatch the survey found that 93% of financial advisers and planners admitted they'd wrestled with PTSD following the crisis. That's not all, though. Shockingly, fully 40% of respondents to the survey said they had suffered severe PTSD symptoms. The respondent pool was responsible for anywhere between $20-$40 million in assets.

In order to qualify for a clinical diagnosis of PTSD, one must exhibit symptoms including sleep disturbance, high stress levels, anxiety, difficulty concentrating, and self-doubt for a period of more than one month. Many of the financial advisers who took part in the survey claimed that their symptoms continued for far longer than that--in some cases, for years afterward. Moreover, the study shows a correlation between the brokers' PTSD symptoms and a widespread shift in investment strategy over a period of a few years.

Although we sympathize with brokers who suffered personally during one of the worst financial crises in history, we tend to sympathize more with the customers whose life-savings simply vanished during that very same crisis, and who, we're quite sure, experienced their own form of PTSD or worse.

One psychologist quoted in the article mentions that PTSD sufferers tend to engage in very risky behavior like "substance-abuse, aggression, and thrill-seeking." Indeed, at The Green Firm it has been our experience that a surprising number of brokers reeling from the financial crisis have demonstrated such erratic behavior in its aftermath, often at the expense of customers who had already suffered losses due to the market's collapse. No matter how much sympathy we accord to brokers suffering from PTSD, they are still professional investors, still responsible for our money, and they still have supervisors who should be monitoring them for symptoms associated with PTSD as with any other condition that causes them to be unable to do their job. 

If you or anyone you know has been the victim of broker misconduct or any other form of investment fraud or negligence, please contact us immediately for a free consultation.

Shine a Bright Light on a Dark Industry

Sunlight is said to be the best disinfectant. As investor advocates, we're all for more transparency and accountability on the part of financial brokerages. That's why we were dismayed by a recent decision by the Financial Regulatory Authority or FINRA to withdraw their proposal, originally filed with the SEC early this year, to make it very easy for investors to conduct background checks and explore the disciplinary history of brokerage firms and brokers. FINRA had been moving forward quickly with a proposal to compel all registered firms and brokers to include direct links on their websites to FINRA's free research and disclosure website called "BrokerCheck." Additionally, FINRA had also hoped to force brokers to feature prominent links to BrokerCheck on any firm-related social media pages. This last aspect of the proposal received the most push-back from financial industry executives, and caused FINRA to climb down and reassess. Brokers who criticized the proposal suggested that although they did not oppose FINRA's plan in principle, they felt that implementing especially the social media aspects would be so challenging as to prevent them from participating in social media at all. Whatever the truth of that claim, FINRA has decided to regroup and refile soon. 

We hope they do. Easy access to BrokerCheck means investors will be able to "check under the hood" of prospective brokers who may claim to be clean and successful but in fact have a tarnished history of multiple complaints against them. We believe that more access and more transparency means fewer incidents of financial misconduct and fraud. This is progress. One of the reasons brokers get away with multiple acts of fraud is that there's no easy way for investors to verify the brokers own claims about him or herself. Where else can you turn to figure out if your broker, who's investing your hard-earned money, is as trustworthy and reliable as he or she or even her firm says they are? BrokerCheck is an incredible resource, and we're eager to have it available as easily and widely as possible. Hopefully, in the very near future FINRA will re-launch its proposal and shine more bright light on an industry with far too many dark corners.

If you or anyone you know has been the victim of broker misconduct or investment advisor fraud, please contact us for a free consultation.