- Reject aggressive salespeople. Don't feel pressured to act quickly. Give yourself time to do your homework. Don't be afraid to say "no." Request to be put on the "do not call" list.
- Ask questions. Ask what licenses the salesperson has. Get copies of all documents you signed and all information shown to you. Never sign blank or incomplete documents.
- Get help. Ask for help from a trusted family member, friend, attorney or CPA. Don't be embarrassed if you don't understand the investment. Don't invest in something that you don't understand.
- Checkout brokers and advisors. Make sure your financial professional is properly licensed and does not have a history of disciplinary issues by using BrokerCheck.
- Take notes. Keep a record of all conversations and meetings regarding your investments. If trouble arises, they may come in handy.
- Invest within your means. Invest, don't gamble with money you cannot afford to lose. Avoid illiquid investments that are not publicly traded or investments that impose sales charges if you sell or terminate early.
- Put your investment goals in writing. Make sure you know what the stated "investment objective" and "risk tolerance" are for each of your brokerage accounts. Descriptions such as "aggressive" and "speculation" are inappropriate for most investors.
- Periodically review your investment goals and update as necessary. As your financial needs change, be sure to let your financial advisor know. Any changes to your investment objectives or risk tolerance should be verified in writing.
- Monitor your investments. As the saying goes, "trust, but verify." Read everything sent to you. If you have questions or suspect a problem, contact the branch manager and keep notes of your discussions. Take action as soon as there is a problem, don't wait hoping it will go away. See Tip #10.
- Report fraud and abuse. Report suspect abuse to the FINRA or your state securities administrator. Obtain a consultation with an experienced securities attorney to learn about your legal options.
Today, the New York Stock Exchange (NYSE) announced their decision to proceed with delisting Magnum Hunter Resources Corporation (NYSE: MHR). Trading in MHR's common stock will be suspended immediately causing irreparable harm to many main street investors who had invested heavily in MHR.
Related Story: ALF is investigating complaints by investors that suffered significant losses when two Wells Fargo brokers bet heavily on the small cap energy sector, including Magnum Hunter Resources.
By now, readers of this blog are hopefully aware that we are very negative on the marketing and sale of leveraged and inverse exchange-traded funds ("ETFs") to average investors. The New York Times recently published a news piece declaring that ETFs, like those offered by Direxion, were "Public Enemy No. 1."
Still not convinced? Take a look at the year-to-date results for the worst performing Direxion ETFs through 10/7/2015 according to Morningstar--all of them triple-leveraged funds:
Direxion Daily Nat Gas Rltd Bull 3X ETF (GASL) -84.36%
Direxion Daily Brazil Bull 3X ETF (BRZU) -77.04%
Direxion Daily Russia Bear 3X ETF (RUSS) - 70.18%
Direxion Daily Latin America Bull 3X ETF (LBJ) -62.24%
Direxion Daily Gold Miners Bull 3X ETF (NUGT) -62.82%
Direxion Daily Jr Gld Mnrs Bull 3X ETF (JNUG) -60.54%
Direxion Daily Jr Gld Mnrs Bear 3X ETF (JDST) -54.59
Direxion Daily Energy Bull 3X (ERX) -42.22%
Leveraged and Inverse ETFs are Unsuitable for Most Investors
Leveraged and inverse ETFs are not intended for buy and hold investors. The folks who run these super-leveraged and super-risky ETFs acknowledge that the main customers of these funds are active day traders and hedge funds. In a January 2012 Forbes article, Direxion president Daniel O'Neill had this to say about leveraged ETFs:
They're not appropriate for investors. You have to have the right attention span and risk tolerance, and essentially, they're good for traders. They're not really good for investors.
--Daniel O'Neill, President of Direxion
However, despite the risks and the warnings contained in the fund's regulatory disclosures, financial advisors are recommending these ETFs to unqualified investors. For example, our securities law firm is currently pursuing a securities arbitration lawsuit on behalf of a widow whose advisor at LPL financial had her invest in a bear fund ETF that bet against the market between 2011 and 2013. LPL Financial has also been the subject of several multi-million dollar fines and customer lawsuits relating to the brokerage firm's failure to supervise the sale of these risky ETFs to their customers.
Related Blog Posts:
As previously reported in this blog, LPL Financial has recently been faced with numerous fines from various regulators and also securities lawsuits from unhappy investors over the firm's uncontrolled sale of non-traded REITs and leveraged ETFs.
Multi-State Task Force Concludes LPL Overly Sold REITs to Individual Investors
Today, LPL reached yet another million dollar settlement--this time with a Task Force of state regulators. The Task Force investigation determined that LPL sold non-traded REITS in excess of the requirements set forth in the REIT prospectuses, various state concentration limits and LPL's own guidelines. The investigation also concluded that LPL's supervisory system was inadequate. Under the settlement, LPL will remediate investor losses for all sales of non-traded REITs from January 2008 through December 2013 that exceeded the requirements of the REIT prospectuses, applicable state concentration limits or LPL's own guidelines. The Task Formed by the North American Securities Administrators Association (NASAA) included securities regulators from California, Texas, Colorado, Nevada, Maine, Ohio and Virginia.
Related blog posts:
- LPL Financial Ordered to Pay $10 Million Fine and $1.7 Million in Restitution to Customers for Supervisory Lapses (May 6, 2015)
- Alcala Law Firm Files FINRA Arbitration Claim Against LPL Financial Over Risky Investments (May 1, 2015)
- Regulators Fine LPL Financial LLC $950,000 Over Unsuitable Alternative Investments Sales (March 24, 2014)
The Alcala Law Firm has filed a FINRA arbitration claim against LPL Financial LLC arising out of the actions of their registered representative/investment advisor Jane Everingham doing business as Everignham O'Malley in Larkspur, California. The claim, filed on behalf of a customer of Ms. Everingham, involves the following highly risky and speculative investments:
- Proshares Trust Short 20+ Year Treasury [Symbol: TBF]. An Exchange Traded Fund ("ETF") that seeks to achieve the inverse of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. Because these ETFs are reset daily, this type of ETF is unsuitable for investors who plan to hold the fund for longer than one trading session due to the effects of compounding.
- Federated Equity Funds Prudent Bear Fund [Symbol: BEARX]. A mutual fund that seeks capital appreciation primarily through short positions on domestic stocks. "Selling short" generally refers to the act of selling borrowed shares with the hope that the shares can be bought back at a lower price.
- Federated Income Prudent DollarBear Fund [Symbol: PSAFX]. A large percentage of Prudent DollarBear Fund's assets are invested in foreign government securities.
- First Eagle Funds Inc. Gold Fund [Symbol: SGGDX]. A significant portion of the fund's assets are invested in gold or securities directly related to the gold industry.
- Oppenheimer Gold and Special Minerals Fund [Symbol: OPGSX]. This fund invests mainly in common stocks of companies involved with gold or other metals or minerals.
- American Century Global Gold [Symbol: BGEIX]. Another fund that invests in the gold industry.
- FPA New Income Inc. [Symbol: FPINX]. A non-traditional bond fund that has significantly underperformed the benchmark Barclays US Aggregate Bond Index.
ALF's investigation is still ongoing. Anyone with information or questions about this matter, please use the "Contact Us" link above.
Related Blog Posts:
Charles Lynch, a financial advisor with Wells Fargo Advisors in Irvine, California, has one or more pending customer complaints alleging "unsuitable concentration in energy sector." ALF is currently conducting an investigation into related conduct by Mr. Lynch. If you have any questions or information regarding these events, please use the "Contact Us" link above.
 Customer complaint information was verified through FINRA's BrokerCheck system.
 ALF is a securities law firm located in California that specializes in securities arbitration, litigation and mediation. For more information, please select the "Firm Website" link at the top of this page.
Charles Frieda, a dully registered broker and investment advisor with Wells Fargo Advisors in Irvine, California, has one or more customer complaints alleging "unsuitable concentration in small cap energy sector securities." ALF is currently conducting an investigation into related conduct by Mr. Frieda. If you have any information regarding this matter, please use the "Contact Us" link above.
 Customer complaint information has been verified through FINRA's BrokerCheck system.
 The Alcala Law Firm ("ALF") is a California securities law firm specializing in securities arbitration, litigation and mediation. For more information about ALF, please click on the "Firm Website" link at the top of this page.
On May 6, 2015, LPL Financial reached a settlement with the Financial Industry Regulatory Authority ("FINRA") agreeing to pay FINRA a $10 million fine and make restitution payments totaling $1.7 million to a select group of customers who were sold leveraged and inverse exchange traded funds ("ETFs").
Restitution Will be Limited to 327 Customer Accounts
Only customers who purchased certain ETFs are entitled to receive any restitution under the terms of the settlement with FINRA. A total of 327 customer accounts are covered under the restitution program. Payments will range from a high of $83,034.97 to a low of $1.02 per account. LPL has 120 days to provide regulators with proof that payment has been made.
Restitution Will Not Cover Other Investment Losses
LPL's regulatory troubles reached critical levels during a period of time when the firm more than doubled in size. LPL Financial is now one of the nation's largest independent broker/dealers and is a leading distributor of financial products. Along the way, LPL has received numerous regulatory fines and penalties--all relating to the firm's failure to properly supervise their financial advisors.
The latest $10 million fine involves widespread supervisory failures by LPL. The $1.7 million in restitution offered to select customers looks paltry compared to the $10 million fine FINRA is collecting for itself. The seriousness of this disciplinary action recognizes that LPL's supervisory problems go well beyond the sale of risky ETFs in a handful of customer accounts. As the old saying goes: "Where there's smoke, there's fire." In LPL's settlement with regulators, FINRA lists numerous examples of LPL's supervisory deficiencies, including:
- Failing to monitor the length of time leveraged and inverse ETFs were held in customer accounts even though such funds are designed as short-term investments.
- Failing to deliver prospectuses to customers.
- Permitting the sale of ETFs by financial advisors who had not taken the mandatory training on the risk of these products.
- Failing to supervise the sale of variable annuity contracts and mutual funds.
- Failing to supervise the sale of non-traded real estate investment trusts ("REITs").
Arbitration: Another Avenue of Relief
Restitution is not the only relief available to LPL customers. For example, our securities law firm recently filed a FINRA arbitration claim against LPL on behalf of a woman who had invested in ETFs as well as several other risky investments offered by LPL that are not covered under the restitution plan. The lawsuit against LPL Financial seeks to recover losses over and above any amount that the customer receives through restitution. The bottom line: LPL customers need to carefully weight their options and, when in doubt, get in touch with an experienced securities lawyer.
LPL Financial Ordered to Pay $10 Million Fine and $1.7 Million in Restitution to Customers for Supervisory Lapses
Today, the Financial Industry Regulatory Authority ("FINRA") reached a settlement with LPL Financial LLC totaling $11.7 Million over multiple failures in the firm's supervision of customer transactions involving non-traditional exchange traded funds ("ETFs"), variable annuities, mutual funds and non-traded real estate investment trusts ("REITs").
As part of the settlement, LPL will be required to pay $1,664,592.04 million in restitution, plus interest, to customers affected by the firm's failure to supervise the sale of non-traditional ETFs. FINRA has stepped up its enforcement efforts over the sale of non-traditional ETF such as leveraged and inverse ETFs, which are complex and risky investments that we have covered at length in several blog posts. Click here for more information about leveraged and inverse ETFs.
LPL has 120 days to locate and provide proof of payment to all affected customers. According to the settlement, a total of 327 unidentified customer accounts are entitled to receive payments ranging from $1.02 to $83,034.97 per account.
Related Blog Posts:
The Alcala Law Firm, a California-based securities law firm, has filed a securities arbitration claim against LPL Financial before the Financial Industry Regulatory Authority (FINRA) involving the sale of risky and unsuitable investments in a managed account causing a customer to suffer significant losses between 2011 and 2013--a period of time when the overall stock market enjoyed positive returns. The customer's investments included an inverse exchange traded fund ("ETF"), a bear fund that bet against the market and several gold funds.
In related news, on May 6, 2015, LPL was fined $10 Million by FINRA for widespread supervisory violations and ordered to pay $1.7 in restitution to customers who were sold leveraged and inverse ETFs. Click here for related blog post. LPL, headquartered in Boston, has grown from approximately 8,300 registered representative in 2007 to 18,433. However, LPL's rapid growth has created problems with regulatory authorities who have repeatedly fined the firm for failure to supervise their growing legion of financial advisors. LPL paid disciplinary fines totaling $2.95 million in 2014 and $8 million (plus $2 million in restitution) in 2013 for supervisory lapses.
Related Blog Post:
Today, the Securities and Exchange Commission ("SEC") announced a whistleblower award in excess of a million dollars to a compliance officer who provided information to the SEC after his employer failed to take steps to prevent harm to investors. Whistleblower awards typically range between 10 to 30 percent of the money collected in a successful enforcement action involving penalties of more than $1 million.
Currently, the SEC has paid more than $50 million to 16 whistleblowers who provide the SEC with unique and useful information that leads to a successful enforcement action.
The Alcala Law Firm has filed a securities arbitration claim before the Financial Industry Regulatory Authority (FINRA) against Cantella & Co., Inc. alleging elder financial abuse on behalf of a 68-year-old woman diagnosed with dementia. Also named as respondents in the arbitration proceeding where two other brokerage firms where the customer previously maintained accounts as she followed her stockbroker Dennis ("Deno") Webb from firm to firm. The other respondents named in the claim include: MML Investors Services, Inc. and optionsXpress, Inc. (a subsidiary of Charles Schwab & Co. that was formerly doing business as brokersXpress LLC) This investigation is still ongoing. For further information, please contact us.
For many financial consumers, the new rule changes requiring stockbrokers to provide more reliable pricing information for REITs (real estate investment trusts) and DPPs (direct participation programs) will be a case of "too little, too late." After the market crash of 2008, our securities law firm was inundated with inquiries from investors who had purchased non-traded REITs offered through real estate companies such as American Realty Capital, Berhinger Harvard, Inland American, KBS Real Estate-typically at a price of $10.00 per share. In many cases, the $10 per share price never changed from month-to-month, despite the fact that the real estate market was suffering catastrophic losses, giving investors a false sense of security about their REITs value.
Starting in April 2016, rule changes designed to better protect financial consumers will go into effect. Although the new changes won't put any restrictions on the sale of REITs and DPPs to financial consumers, the changes will require greater disclosure of the per share estimated value of the REIT or DPP. A summary of the rule changes is provided at the end of this blog post.
Investors Should Proceed With Caution When Considering a Non-Traded REIT Investment
While FINRA is taking steps to better protect investors, investors should still be careful and follow the tips FINRA has created for when an investor is considering unlisted REITs.
Investors should avoid putting their entire investment into one REIT or the same family of REITs because their initial investment is not guaranteed and may increase or decrease in value. Investing proceeds from one unlisted REIT to another should be carefully considered because it may only be in the best interest of the sales representative who receives a commission for the transaction.
- Investors should not base their decision to invest on the current distributions of an unlisted REIT because they are not guaranteed. REIT distributions can be suspended or stopped completely because they can be partially or entirely funded by cash from investor capital or borrowings.
- If an investor reinvests their distributions they should be aware that their reinvestments may be illiquid for a long period of time because they are subject to the same redemption policies as other investments.
- Getting money out of an unlisted REIT can be extremely difficult because the redemption policies can change at any time. Therefore investors that will want their money back in the near future should avoid unlisted REITs.
- As an investor do not rely on claims that an unlisted REIT is going public because the process is lengthy and may actually never happen. If the REIT does go public then the trade price could be less than its current valuation.
- It is in the best interest of older investors to not invest a large portion of their retirement income into an unlisted REIT.
Even though FINRA is taking steps to improve the transparency of unlisted REITs the investment itself has not changed and is still inappropriate for most conservative or moderate risk investors.
Overview of FINRA/NASD Rule Changes
 Financial Industry Regulatory Authority (FINRA) Rule 2310
To help increase the transparency of unlisted REITs FINRA amended Rule 2310(b)(5) to prevent any member from participating in a public offering of a REIT or DPP unless the issuer has disclosed three things:
- The DPP or REITs per share estimated value in the DPP or REIT periodic reports
- An explanation of how the value was determined; and
- The date of the valuation
The amended Rule 2130(b)(5) also requires the issuer of the DPP or REIT offering to include in each customer's account statement the per share estimated value that is based on the assets and liabilities of the DPP or REIT and determined by or with the help of a third party valuation expert. The issuer must also provide a written opinion or report explaining the scope of the review and the valuation method used.
 National Association of Securities Dealers (NASD) Rule 2340
The amendments to NASD Rule 2340(c) require firms to disclose how much money is taken out for fees and commissions for each investment by including them in the calculations of the share value. To calculate the new share value the amendment provides two different methods: a net investment approach or an appraised value method.
- Net Investment: Firms must disclose that part of a customer's distribution includes a net investment and that the net investment reduces the estimated per-share value on their account statement. The valuation is based on the percentage of the amount available for investment. If there is no amount available for investment provided then the firm must provide another equivalent disclosure.
- Appraised Value: The estimated per share value included in the Issuer Report is based on a valuation of the assets and liabilities of the unlisted REIT. These valuations must be done at least annually and by a third-party valuation expert using an approach that follows standard industry practice.
- Disclosures: To help address customer misunderstandings new Rule 2340(c)(2)(A) requires account statements that include a net investment to also disclose that part of the distribution includes a return of capital and that the return on capital reduces their estimated per share value. This requirement only apply to account statements that include a net investment where part of the distribution includes a return on capital.
New Rule 2340(c)(2)(B) require firms to disclose the nature of the REIT investment as well as the fact that the REIT is not listed on a national securities exchange, is generally illiquid, and the estimated value on the customer's statement may be higher than the price the customer actually receives for selling the security. These disclosures are required for all account statements that include per share estimated values for the REIT or DPP.
On September 22, 2014 the Securities and Exchange Commission (SEC) announced a $30 million dollar securities fraud whistleblower award, their largest award since the program started in 2011. The award is more than double the amount of the previous highest award of $14 million. The tipper is the fourth person from a foreign country to receive an award from the Whistleblower program. Because the whistleblower engaged a lawyer to file his or her claim, under the SEC Whistleblower rules, the tipper will remain anonymous and their name will be omitted from all documents or information that could potentially reveal his or her identity. Although the SEC does try to protect the identity of all tippers, those who bypass using a lawyer to file their claim run the risk of having their identity revealed in certain circumstances.
In 2014 the SEC received more than 3,620 tips and paid out more than $1.9 million in whistleblower awards. The amount of awards ranged from $150,000 to $875,000 and included awards to whistleblowers that received their initial award in previous years but were entitled to more because the SEC or criminal authorities were able to collect additional money from the defendants. The amount of tips has increased dramatically since the start of the program and, with this $30 million dollar award, the incentive for whistleblowers continues to grow.
William Jeffrey Austin (WBB Securitiies, Redlands, California) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $7,500 and suspended from association with any FINRA member in any capacity for 30 business days. The fine must be paid either immediately upon Austin's reassociation with a FINRA member firm following his suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier. Without admitting or denying the findings, Austin consented to the described sanctions and to the entry of findings that he exercised discretion in a customer account without obtaining the customer's written authorization or his firm's acceptance of the account as discretionary.
The findings stated that Austin's firm did not allow discretionary trading in customer accounts and did not accept the customer's accounts as discretionary. Austin provided a response on firm compliance questionnaires in which he falsely attested that he did not exercise discretionary authority over client accounts. The suspension was in effect from February 18, 2014, through March 31, 2014. (FINRA Case #2012031890301 )
Matthew Alan Trulli (Foothill Securities, 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. The suspension is in effect from February 18, 2014, through February 17, 2015. ( FINRA Case #2012032304201)
Michelle Lee Kern (aka Michelle Lee Mertena) (Ameriprise Financial Services, Inc., Roseville/Sacramento, California) 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, Kern consented to the described sanction and to the entry of findings that she unlawfully converted to her own use approximately $569,000 from customers' brokerage accounts through unauthorized electronic withdraws and used the funds to pay her personal credit card bills. The findings stated that Kern also unlawfully converted approximately $100,000 from customers by using their checkbooks to write unauthorized checks to herself, and then used the funds to pay her personal credit card bills. Some of the customers were elderly. Kern accepted the checkbooks from the customers to destroy, and instead of destroying them, she forged their signatures and wrote personal checks to herself for approximately $100,000, and then deposited the funds into her personal checking account. Kern forged the customer signatures to create the false impression that the customers had authorized the deposit of checks into her personal checking account. ( FINRA Case #2013035458501)