May 1, 2014

March - April 2014 Disciplinary Actions

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)

April 24, 2014

Update: Charles Schwab to Allow Customer Class Actions

Today, Charles Schwab agreed to end a long standing dispute over their customer's right to participate in securities class action lawsuits. In a settlement reached with the Financial Industry Regulatory Authority (FINRA), Charles Schwab agreed to pay a $500,000 fine and refrain from including language in its customer agreements that would prevent customers from participating in class actions. Click here for our earlier blog post on this subject.

Brokerage firms have always included language in their customer agreements requiring all disputes to be resolved through FINRA's securities arbitration program--with one exception: Customers were allowed to skip arbitration if a related securities class action lawsuit had been filed. Schwab's recent settlement with FINRA preserves the status quo and maintains a customer's right to either pursue an individual arbitration claim or join a class action.

Arbitration vs. Class Action

The decision whether to join a class action or go it alone in arbitration depends on a variety of factors. In previous blog posts, we've noted that customers with legitimate arbitration claims tend to do much better financially in arbitration. If customers with viable claims can recover more money in arbitration, why would Schwab want to prevent class actions and force all customers to go to arbitration? A major reason is that class actions can be very expensive to defend. In a class action, all affected customers are automatically included in the lawsuit. Even though class members are often paid "pennies on the dollar," total class action payments can be substantial. For example, Schwab agreed to pay more than $200,000 million to settle a class action involving the firm's Yield Plus Fund. By attempting to limit class actions, Schwab was undoubtedly trying to bank on the fact that only a small number of customers will actually go through the legal and financial hassle of pursuing an individual arbitration claim.

Related blog post:

Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

March 24, 2014

Regulators Fine LPL Financial LLC $950,000 Over Unsuitable Alternative Investments Sales

Thumbnail image for lpl.jpgToday, LPL Financial LLC reached a settlement with the Financial Industry Regulatory Authority (FINRA) over the firm's failure to adequately supervise the sale of non-traded REITs and other risky alternative investments. LPL's settlement with FINRA specifically mentioned former LPL broker Gary J. Chackman for his role in selling "dozens" of alternative investments that were unsuitable and exceeded the firm's guidelines, which he was able to conceal by using false customer financial information. Chackman has been the subject of numerous securities arbitration claims.

Last year, LPL agreed to pay a fine of $500,000 and approximately $2 million in restitution to Massachusetts investors for violating Massachussets suitability rules while selling non-traded REITs, including:

  • Inland American, Cole Property Trust II, Inc.

  • Cole Credit Property Trust III, Inc.

  • Cole Credit Property 1031 Exchange

  • Wells Real Estate Investment Trust II, Inc.

  • W.P. Carey Corporate Property Associates 17

  • Dividend Capital Total Realty

Related blog posts:

LPL Financial, LLC Under Fire for Sale of Non-Traded REITS

Investors Beware: Non-Listed REITs

March 14, 2014

Inland American Real Estate Trust Announces Tender Offer at $6.50 - $6.10 Per Share

Today, Inland American Real Estate Trust, a non-traded REIT, announced a $350 million tender offer at a price range between $6.50 to $6.10 per share. The offer expires April 11, 2014, at 5:00 p.m. (EST). Click here for detailed information about the terms of the tender offer.

At the $6.50/share tentative offering price, Inland investors that paid $10/share will realize a potential loss of $3.50/share--a 35% loss which is unacceptable to many conservative investors who did not appreciate or understand the risks associated with investing in a non-traded REIT. Many affected investors have already taken legal action to recoup their Inland REIT losses via arbitration under the program administered by the Financial Industry Regulatory Authority (FIRNA). Click here for more information about FINRA's arbitration process.

February 25, 2014

Berthel Fisher Fined $775,000 for the Inappropriate Sale of REITs and ETFs

Thumbnail image for violators.jpgYesterday, Berthel Fisher & Co. Financial Services, Inc. entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and agreed to pay a $775,000 fine stemming from sale of unsuitable investments, including non-traded REITs as well as leveraged and inverse ETFs. According to FINRA's BrokerCheck system, Berthel Fisher has been the subject of multiple enforcement actions initiated by FINRA and state securities administrators.

Regulators Stepping Up Supervision of Alternative Investments

Berthel Fisher is the latest of several brokerage firms to get swept up in FINRA's focus on the brokerage industry's sale of risky alternative investments to financial consumers and the failure to properly enforce suitability standards for those investments. The risks associated with investing in non-traded REITs and leveraged/inverse ETFs have been extensively covered in previous blog posts. For more information, see below:

Investors Beware of Non-Listed REITs

Are Leverages and Inverse ETFs Suitable for You?

What Are Leveraged and Inverse ETFs?

February 3, 2014

"Wolf of Wall Street" High Pressure Sales Tactics

Many have complained, myself included, that the movie "Wolf of Wall Street" failed to show the devastation suffered by those who were victimized by Jordan Belfort and his company Stratton Oakmont. Clearly, this movie was produced purely for its entertainment value, not as a documentary or exposé about the evils of the brokerage industry. Nevertheless, the movie may have opened the eyes of some investors to the fact that stockbrokers don't always have their customer's best interest in mind.

As a public service for all of those who didn't see the movie (and those like the elderly couple in the row ahead of me who left the movie early because of all the debauchery being depicted), I am posting actual copies of scripts used by Stratton Oakmont brokers that I've culled from my legal files. My goal is to educate investors about high pressure tactics such as those used by Stratton Oakmont brokers. As illustrated in the scripts below, customers are typically pressured into making a decision immediately over the phone without the benefit of any research or financial data. A common ploy is to get the customer to invest a relatively small amount in a widely known company. Once a relationship is started, the broker will invariably urge the customer to make much larger investments in even riskier securities.

***We disclaim any responsibility for the information contained in the scripts quoted below***

* * *


. . . . We're not a Merrill Lynch or Shearson Lehman, we choose not to be. If we wanted to do a TV commercial, we could. But here at Stratton, our reputation is by word of mouth. We don't require you to purchase 2,000 or 3,000 shares to do business like a major wirehouse would. We don't need to work large, we're willing to work small at the start of a relationship because we know we're right.

My philosophy is to work small, hit a base hit, come back with another idea, hit another base hit, and then another. After I've shown you winner after winner, after winner, and the bases are loaded, you're going to want to step up to the plate and swing for the grand slam.
Give me one shot, let me start the relationship with a base hit. Do this. Open an account for 100 shares, it's just a matter of some basic information.

* * *


. . . . Now [ client's name ], my point to you is this, I can tell you all about Jaguar, Telephone De Mexico and Glaxo, how they traded from the London to the NYSE and dozens of other companies once they got listed, how investors made a fortune. But I'm not going to talk about the market value, the assets of Nestles, the profit margins and the P.E. ratios, because we'll be here all day.

The bottom line is this, what I have been doing for all of my clients A-Z. And hear me out. Is positioning them with large blocks of 5-10,000 shares of Nestles in an attempt to get them involved before Nestles gets its listing on the NYSE because once you read about this in the Wall Street Journal, IT'S TOO LATE! Do you follow me.

Now obviously [ name ], I haven't made you a dime yet, you don't know me from Adam and we don't even have the luxury of a track record together. So, I wouldn't ask you to take down a large block of Nestles like our other clients are doing.

What I propose is this, and please hear me out. Pick up a very small block of 500 shares. It's a cash investment of _____, going into the largest food company in the world. Your funds are not due today or tomorrow, their due in a week. You've probably done this before. First, you'll receive a standard confirmation from my bank clearing agent, Adler Coleman. You probably heard of them.

* * *


. . . . The key to making money in the stock market is to buy into weakness and to sell into strength.

Do you remember Union Carbide when their plant exploded in India; killing over 250,000? India sued Union Carbide for over 3 billion in damages. The stock dropped from $50 a share down to $18--sat there for over a year.

Our analyst--------is fat, bald, and dresses like @#$%&!, but he is one of the most astute minds on Wall Street.

He told us to buy Union Carbide between 18 and 21--the litigation will be settled and the fundamentals of the company dictate much higher prices.

6 months ago, I began buying the stock between 18 and 21 in anticipation of a settlement. 3 months ago they settled. The first day the stock was up 5 dollars--the next day up 6 dollars. We had a 60% return virtually overnight. I saw it happen with Texaco. I was a sheep and was scared to buy; when the stock ran to $50 I kicked myself in the @#$%.

The same thing with RJR. I only bought a touch and, when it traded from 25 to 106, I almost died.

But you know something, I got rich on Union Carbide and there is no way I'm letting you miss Kodak. Once litigation is settled were looking for at least 75 dollars a share.

* * *


. . . . Receiving and reading it in 3 days is not going to make you money. "Working with my timing will." There is no one that knows this stock better than me. I look for fundamentally sound companies that I can combine with a near term event, in this case litigation.

I'm hearing people all over Wall Street speaking about Kodak in terms that I haven't heard in years. It's the strongest story in months. The decision to buy Kodak has been made, not just by me, but by some of the top analysts at Shearson Lehman, Merrill Lynch, Kidder Peabody and Bear Stearns.

* * *


. . . . I bet you make $10-20,000 dollar business decisions every day. I'm sure you didn't get to where you are today by consulting with your wife on everyday decisions.

* * *


. . . . This is Eastman Kodak, we have access to the best and most current information. I can show you a view of the market you will not have seen before unless you were here. We're bringing you opportunity, not history and I'm concerned because you must realize you can't check out the kind of advice I'm giving you--performance speaks--I want to show you results.

January 10, 2014

A Handful of Stifel, Nicholas & Company Customers to Recover Losses for Unsuitable Sales of Leveraged and Inverse ETFs

Two related brokerage firms--Stifel, Nicholas & Company, Incorporated and Century Securities Associates, Inc.--entered into a settlement with the Financial Industry Regulatory Authority (FINRA) over alleged misconduct in the sales of leveraged and inverse exchange traded funds (ETFs). As part of the settlement, Stifel and Century agreed to pay fines totaling $550,000 and to make restitution totaling $474,613 to a select group of 65 customers who were sold ETFs between January 1, 2009 and June 1, 2013. Presumably, the group of customers chosen to receive redemption consists of customers who had selected a conservative investment objective and had held the ETFs for an unreasonable period of time. In its written findings, FINRA provided a brief description of two customers that are entitled to redemption:

  • A Stifel customer with a primary investment objective of "income" who invested in a nontraditional ETF and held if for 18 months that lost $41,000.

  • A Century customer with a primary investment objective of "income" who invested in a nontraditional ETF and held if for 2 ½ years that lost $13,600.

More Than Just 65 Customers May Have Been Damaged

It isn't clear whether the group of customers entitled to automatic redemption under the settlement was limited to those who had "income" selected as their primary investment objective. What about other risk averse investors whose stated objective reflected something that was a notch or two above income? Stifel currently offers four investment objectives and six categories of risk tolerance:

Stifel Investment Objectives

  1. Income

  2. Growth & Income

  3. Growth

  4. Speculation/Active Trading/Complex Strategies

Stifel Risk Tolerance Categories
  1. Conservative

  2. Moderately Conservative

  3. Moderate

  4. Moderate Growth

  5. Moderately Aggressive

  6. Aggressive

According to FINRA, during the period in question, Stifel and Century collectively sold over $670 million worth of nontraditional ETFs to their customers. Leveraged and inverse ETFs are exceptionally risky investment products that are unsuitable for most investors who have no desire to engage in an aggressive and speculative trading strategy. Click here for more blog postings about the risks and pitfalls of investing in leveraged and inverse ETFs. My guess is that the number of affected investors goes well beyond the 65 "conservative investors" included in the Stifel and Century's settlement with FINRA. Investors left out of the settlement always have the option of pursuing an individual claim for damages through FINRA's securities arbitration program. For more information about securities arbitration, click here.

December 10, 2013

Closed-End Fund IPOs Often Give Investors the Short End of the Stick

In last week's blog post about closed-end mutual funds [click here for blog post], I warned investors about paying a premium when investing in a closed-end fund's initial public offering (IPO) and suggested that the most prudent thing to do is invest after the IPO. According to the Closed-End Fund Association (CEMA), IPO fees generally range from 4.5%-4.75%.

Although closed-end funds offer liquidity, investors should view a closed-end fund IPO as a long-term investment. Most problems arise when closed-end funds are traded on a short-term basis. Of the six recently issued IPOs listed below, only the Goldman Sachs MLP Income Opportunities Fund is currently in positive territory, trading about 1% above its IPO price. However, since the Goldman fund began trading just two weeks ago, the jury is still out on how well IPO investors are going to fare both near-term and long-term. As mentioned in a previous blog post, investing in a closed-end fund IPO is almost always a losing short-term bet.

ClearBridge American Energy MLP Fund [CBA] (-18.20%)
IPO date 6/26/2013 @ $20/share. Today's opening price $16.36/share.

KKR Income Opportunities Fund [KIO] (-11.75%)
IPO date 7/26/2013 @ $20/share. Today's opening price $17.65/share.

THL Credit Senior Loan Fund [TSLF] (-12.10%)
IPO date 9/20/2013 @ $20/share. Today's opening price $17.58/share.

Center Coast MLP & Infrastructure Fund [CEN] (-15.15%)
IPO date 9/26/2013 @ $20/share. Today's opening price $16.97/share.

Ares Multi-Strategy Credit Fund [ARMF] (-16.84%)
IPO date 10/29/2013 @ $25/share. Today's opening price $20.79/share.

Goldman Sachs MLP Income Opportunities Fund [GMZ] (+1%)
IPO date 11/25/2013 @ $20/share. Today's opening price $20.20/share.

Related Links:

Investing in Closed-End Fund IPOs: A Risky Bet

FINRA Sanctions Merrill Lynch and UBS for Failing to Supervise the Sale of Closed-End Funds

December 4, 2013

Investing in Closed-End Fund IPOs: A Risky Bet

investor alert.gifLooking for higher returns often means looking for trouble. Some financial advisors seeking to offer investors higher yields have been turning to closed-end funds, which can offer distributions as high as 6%. Unsophisticated investors frequently confuse closed-end funds with standard mutual funds, referred to as "open-end funds." Closed-end funds are complex investment products that carry unique risks that may be inappropriate for more conservative investors. Last month, FINRA, the overseer of the financial industry, issued an Investor Alert urging investors to proceed with caution when investing in closed-end funds. (See "Related Links" below.) Unlike mutual funds, closed-end funds are typically offered through an initial public offering (IPO). After the IPO, closed-end funds trade like stocks. However, as FINRA noted in their alert, investors pay a premium when buying shares in a closed-end IPO. We blogged about this issue back in July 2009, based on a study by Lipper Research explaining that market prices for closed-end funds often plunge after the IPO. (See "Related Links" below.)

If you are still convinced that investing in a closed-end fund IPO is a good idea, read this post: Closed-End Fund IPOs Often Give Investors the Short End of the Stick

What is a risk-averse investor to do? Make sure that the fund is suitable based on your financial situation, risk tolerance and investment objectives. Although there is no guarantee that a post-IPO plunge will lead to a subsequent gain, consider investing after the IPO. Finally, if getting in on the closed-end fund IPO is simply to good to pass up, go in with the understanding that this should be a long-term investment that may take time before premiums paid at the IPO can be recouped.

Related Links:

FINRA Investor Alert: Closed-End Fund Distribution: Where is the Money Coming From?

July 2009 Blog Post: FINRA Sanctions Merrill Lynch and UBS for Failing to Supervise the Sale of Closed-End Funds.

September 24, 2013

Crown Capital Securities L.P. Investor Complaints

ALF is investigating customer complaints and securities arbitration claims surrounding Crown Capital Securities L.P. recommendation and sale of tenant-in-common ("TIC") investments originating from Grub & Ellis Co. Crown Capital is an independent broker-dealer based in Orange, California. TICs and other risky real estate investments, such as non-traded REITs, are only suitable for investors who understand and can tolerate a high degree of risk. For more information or to request a confidential consultation, please us the "contact us" link above.

July 18, 2013

Former Stockbroker for Wells Fargo and Morgan Stanley Indicted for Securities Fraud

On Wednesday, Adorian Boleancu, a former San Francisco Bay Area stockbroker was indicted and charged with 27 counts of fraud. The charges, which include allegations of elder financial abuse, stem from activities between 2007 and 2011 that resulted in Boleancu being permanently barred from the securities industry by the Financial Industry Regulatory Authority ("FINRA") and ordered to pay restitution in the amount of $650,000 to an elderly widow he purportedly defrauded. Boleancu was disbarred by FINRA back in March 2013. The victim also filed lawsuits against the Boleancu's former employers Wells Fargo Advisors and Morgan Stanley seeking damages in excess of $2 million. The lawsuits were ultimately referred to arbitration before FINRA. FINRA is the largest dispute resolution forum for securities complaints. For more information about FINRA arbitration, click here.

June 3, 2013

Commonwealth of Massachusetts Recovers Over $11 Million for Victims of Unsuitable REIT Sales

The Financial Regulator for the Commonwealth of Massachusetts recently announced a settlement with five brokerage firms--Ameriprise Financial Services, Commonwealth Financial Services, Lincoln Financial Advisors, Securities America and Royal Alliance Associates--over the unsuitable sale of a particularly risky real estate investment trust referred to as a "non-traded REIT" due to the fact that this type of REIT has limited liquidity and cannot be freely sold on the open market. See related blog post: Investors Beware: Non-Listed REITs

  • Inland Real Estate Trust, Inc.

  • Inland Western Real Estate Trust, Inc.

  • Inland American Real Estate Trust, Inc.

  • Inland Diversified Real Estate Trust, Inc.

Massachusetts imposes more stringent requirements on the sale of non-traded REITs to its residents and prohibits any investment exceeding 10% of the individual's liquid net worth. In addition to giving restitution to Massachusetts investors, the firms were required to pay administrative fines ranging from $400,000 to $25,000. According to the Secretary of the Commonwealth of Massachusetts, over $11 million will be returned to Massachusetts investors.


Disclosure: The Alcala Law Firm routinely represents clients who have pursued claims against their financial advisors for losses associated with non-traded REITS.

May 15, 2013

J.P. Morgan Securities Broker Expelled for Selling Personal Customer Information

The Financial Industry Regulatory Authority (FINRA) recently expelled a J.P. Morgan Securities broker based in San Jose, California, for engaging in a fraudulent scheme to sell customer information to an accomplice between December 18, 2012, and January 22, 2013. The accomplice used the customer account numbers and signature cards to make unauthorized withdrawals from 10 customers that had accounts with J.P. Morgan's affiliated bank J.P. Morgan Chase Bank. As part of a settlement reached with FINRA, the broker involved in the scheme agreed to be barred from associating with any FINRA member broker-dealer in any capacity.

April 26, 2013

Securities America Fined $100,000 Over IMH Secured Loan Fund & Medical Capital Sales Practices

Thumbnail image for Thumbnail image for Thumbnail image for FINRA-1.gifSecurities America, Inc. has entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and will pay a fine of $100,000 in connection with the sale of two private placements. As part of the settlement, Securities America agreed to the following findings:

  • The firm failed to have a supervisory systems in place designed to identify misrepresentations or misleading statements made to customers regarding two private placements: (1) the IMH Secured Loan Fund and (2) Medical Provider Funding Corporation (aka "Medical Capital").

  • Securities America's email monitoring system failed to identify several emails that misrepresented the liquidity and safety of the IMH Secured Loan Fund.

  • One particular email exaggerated the safety of IMH by describing it as a "very safe, sleep at night investment."

  • Other emails used the words "principal protection" in describing the risk to principal for both IMH and Medical Capital.

In addition to the $100,000 fine, Securities America must conduct a comprehensive review of its supervisory system and make necessary revisions to prevent similar violations.

April 2, 2013

UBS Willow Fund L.L.C. Class Action Update

Thumbnail image for ubs building.jpgOn December 20, 2012, a class action complaint was filed on behalf of all investors who purchased or held the UBS Willow Fund L.L.C. at any time after January 1, 2008. The matter of Ken Boudreau vs. UBS Willow Management L.L.C, UBS Alternative and Quantitative Investments L.L.C, UBS Fund Advisor, L.L.C., Bond Street Capital L.L.C, Sam S. Kim, George W. Gowen, Stephen H. Penman, Virginia G. Breen and Meyer Feldberg was filed in the U.S. District Court for the Southern District of New York. The class action complaint alleges that the UBS Willow Fund made material false and misleading representations and omissions that were communicated to investors through the fund's offering materials and quarterly summaries. As alleged in the complaint, the Willow Fund fundamentally changed its stated investment strategy in January 2008 and began aggressively trading in credit default swaps ("CDS") without disclosing this fact to investors. Eventually, in October 2012, investors were notified that the fund was liquidating primarily because it had suffered significant losses from trading in CDS. The class action seeks damages in excess of $200 million.

In addition to recovering losses through a class action, investors who have suffered significant losses should fully explore their other legal options, including the filing of a securities arbitration claim directly against their financial advisor. Individuals with meaningful claims can often obtain a much larger potential recovery through arbitration. See related blog post: Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?