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.
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ALF Pursues Securities Arbitration Claim Against Wells Fargo Advisors Over Sale of Dividend Capital Total Realty Trust
The Alcala Law Firm, a California securities law firm that works with clients and attorneys nationwide, is currently representing a client in a FINRA securities arbitration proceeding seeking to recover investment losses associated with the Dividend Capital Total Realty Trust Inc. that was recommended by a Wells Fargo Advisors, LLC stockbroker. Dividend Capital Realty Trust is a Real Estate Investment Trust ("REIT") that is not-publicly traded--often referred to as a non-traded REIT. ALF continues to investigate sales practice violations by stockbrokers who improperly recommended the Dividend Capital Total Realty Trust and other non-traded REITs to investors. For many investors, non-traded REITs such as the Dividend Capital Total Realty Trust are unsuitable investments. For more information, please contact us.
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Today, the Financial Industry Regulatory Authority (FINRA) announced that Wells Fargo Investments, LLC was fined $2 million for making unsuitable investments in connection with the sale of reverse convertible notes and for failing to provide required sales charge discounts on Unit Investments Trust (UIT) transactions. FINRA also took the unusual step of requiring Wells Fargo to pay restitution to customers who did not receive UIT discounts and to those who were placed in unsuitable reverse convertibles. More often than not, FINRA will levy a fine on the brokerage firm and leave investors to fend for themselves and try to recoup their losses through FINRA's securities arbitration process.
What are Reverse Convertible Securities?
Reverse convertibles are short-term investments that are tied to an underlying stock or bond. When the security matures, the investor will receive either 100% of the original investment or a predetermined number of shares. When investing in reverse convertibles, investors risk losing a significant portion of their investment if the value of the underlying stock or bond falls below a certain level at maturity. For example, in a reverse convertible bond fund, an investor may be forced to redeem their bonds at a decreased value.
Wells Fargo's Failure to Review Suitability of Reverse Convertible Transactions
FINRA found that Wells Fargo, through one broker, had recommended hundreds of unsuitable reverse convertible transactions. Of the 21 accounts that were found to have unsuitable reverse convertibles, fifteen of those belonged to elderly customers who were over 80 years old. These customers were exposed to risk inconsistent with their investment objectives that resulted in an overconcentration of reverse convertibles in their accounts.
Wells Fargo's Failure to Provide Eligible Customers with UIT Discounts
UITs offer discounts on purchases that exceed certain "breakpoints" or involve proceeds from another UIT during the initial offering period. FINRA found that Wells Fargo failed to provide eligible customers with "breakpoint" and "rollover and exchange" discounts due to the firm's lack of systems for review to ensure that UIT customers received the proper discount.
In my securities arbitration practice, I have witnessed a disturbing trend in which stockbrokers--eager to develop a lucrative fee-based advisory business--are moving all of their clients into wrap accounts. In a "wrap account," an investment advisor agrees to help manage a client's money for an annual fee which covers all commissions and administrative expenses. Wrap account fees can range from 1.5 to 2.5% of the portfolio's value. Because wrap account trades are commission-free, they are best suited for investors who intend to do a lot of trading. The trouble is, most investors neither want nor need a large amount of short-term stock trading. For occasional traders, a traditional commission-based brokerage account may be the most economical way to invest.
Dan Solin, who is a securities attorney, best-selling author and investment advisor, recently published an article in the Huffington Post featuring a case of mine that involved a wrap account offered by Wells Fargo Advisors ( formerly Wachovia Securities). In that case, the broker had transformed his entire brokerage practice into a "wealth management firm" by placing all his clients into wrap accounts that were managed by outside money managers. The arbitrator in that case agreed that moving a retired individual into a wrap account that charged 2.5% per year to invest primarily in equities was asking for trouble. In that case, the wrap account benefitted the broker, not the customer, since the broker would have earned very little in the way of commissions had the customer simply bought and held conservative income-oriented investments.
What should a conservative investor who needs a little hand holding do? The most frugal course of action is to hire an independent financial planner that charges an hourly fee to help develop a long-term investment strategy and periodically assist with rebalancing and adjusting the portfolio. Even at $400 per hour, the savings can be significant compared to paying 1.5 to 2.5% per year to a so called wealth manager.
Here is a bit of good news for investors with securities arbitration claims against 14 of the largest brokerage firms, including Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo. The Financial Industry Regulatory Authority (FINRA) has agreed to extend its year-old pilot program established to give investors the option to request an arbitration panel composed entirely of arbitrators that are not affiliated with the securities industry. Currently, a 3-person arbitration panel must include one industry arbitrator and two public arbitrators. The pilot program was created in response to criticism over whether an industry arbitrator, such as a stockbroker or branch manager, can act impartially when a customer is complaining about securities fraud or account mismanagement by their broker. I've participated in arbitrations with both good and bad industry arbitrators. The trouble is, allowing an industry arbitrator to sit on a panel gives the appearance of bias and takes away from the legitimacy of the proceedings. That should be reason enough to dump the industry arbitrator. My California securities law firm is in favor of the pilot program and we have been actively encouraging clients to participate whenever possible.
The brokerage firms who have agreed to participate in the pilot program are:
Ameriprise Financial Services
Chase Investment Services
Citigroup Global Markets
Fidelity Brokerage Services
Morgan Stanley Smith Barney
UBS Financial Services
Wells Fargo Advisors / Wachovia Securities
Each of the above firms has committed to participate in a limited number of cases under the program on a first come, first served basis. The pilot program will end on October 5, 2010. Since the average arbitration hearing takes 14 ½ months to conclude, most cases in the pilot program have not gone to hearing yet. FINRA plans to compare the results of the pilot program cases with non-pilot cases. Of the 396 arbitration cases that have been decided this year, only 139 (45%) recovered anything at all. Hopefully, the arbitration award results for cases in the pilot program will be much better. If the pilot program results in more awards in favor of customers, will the brokerage industry lobby to keep the industry arbitrator? Let's hope not.
FINRA Sanctions Brokerage Firms Affiliated with Wells Fargo and Washington Mutual Banks for Variable Annuity Sales Violations
Broker-dealers affiliated with Wells Fargo and Washington Mutual, two large banks with close ties to the San Francisco Bay Area, have entered into a settlement with the Financial Industry Regulatory Authority (FINRA) agreeing to pay fines of $275,000 and $250,000, respectively, and consenting to the entry of findings regarding their inadequate supervision of variable annuity, mutual fund and unit investment trust (UIT) transactions with customers. The two bank's sell securities through Wells Fargo Investments and WM Financial Services, which is now doing business as Chase Investment Services. The other firms sanctioned by FINRA are IFMG Securities, PNC Investments and McDonald Investments (now KeyBanc Capital Markets, Inc.). Collectively, the five firms will pay fines to FINRA totalling $1.65 million.
These firms are referred to as "bank broker dealers" because of their close affiliation with a retail bank. A large percentage of a bank broker dealer's business comes directly from referrals by employees of the bank. This arrangement can be misleading to bank customers who are often unaware that they have been referred to a stockbroker who often has a desk or office inside the bank branch.
According to FINRA, the sanctioned firms failed to properly supervise the sales practices of their brokers and did not conduct necessary suitability reviews or investigate questionable variable annuity, mutual fund and UIT sales to its customers, many of whom were elderly. The $1.65 million dollar fine was part of a settlement with FINRA in which the firms consent to the entry of FINRA's findings, but do not actually admit or deny FINRA's findings. Customers affected by these sales practice violations are not entitled to any restitution as a result of the settlement. In order to recoup any losses, affected customers are advised to consult with a securities lawyer.