Securities and Exchange Commission (SEC) recently announced awards of approximately $10 million and $13 million, respectively, to two whistleblowers.  Since the Whistleblower program began, the SEC has awarded over $928 million to whistleblowers who provided information and assistance that led to a successful SEC enforcement action.

For more information, read the following blog post:

A Securities Lawyer’s Advice to Would-be Whistleblowers

Unmarked-Obstacles-200x300Since 1979, the Securities and Exchange Commission (SEC) has required all registered investment advisors to provide their clients (or prospective clients) with a written disclosure statement.  The client disclosure statement is commonly referred to as the “brochure.”  The brochure is intended to provide customers with essential information that would help them make an informed decision whether to retain or hire an advisor.  One critical category of information that an advisor must disclose is “Disciplinary Information.”  As part of their disclosure obligation, the advisor’s brochure must include essential facts about any legal or disciplinary events that are material to a customer’s evaluation of the advisor’s integrity.  Logically, a customer would consider any customer arbitration claims or lawsuits against an advisor to be material.  However, in response to objections from the securities industry, the SEC has determined that advisors do not have to disclose customer lawsuits in their client brochures.  For obvious reasons, the securities industry feared that telling customers that their advisor is the subject of one or more customer lawsuits or complaints would be bad for business.

A False Sense of Security

Consequently, there are many customers who have no idea whether their advisor has a checkered past or is currently being sued by one or more customers.  In my securities law firm, I have come across numerous instances where advisors with multiple customer lawsuits or complaints have been providing their customers with brochures that deceptively state:  “There are no applicable disciplinary events that are required to be disclosed.”  Such statements are, in my opinion, entirely misleading because the typical customer will simply conclude that the advisor has never been involved in any customer arbitration claims or lawsuits.  To be fair, some firms do include a notice in their brochure that additional information can be found on the BrokerCheck website operated by the Financial Industry Regulatory Authority (FINRA) or on the SEC’s Investment Advisor Public Disclosure online resource.  [Links to these sites are provided below.]. However, including an innocuous reference to the FINRA and SEC databases does not adequately protect the investing public from an advisory firm’s affirmative statement in the brochure that there is nothing to report.

On November 7, 2019, an arbitration panel for the Financial Industry Regulatory Authority (FINRA) ordered Watsonville, California, stockbroker Kenneth Barroga and Crown Capital Securities, L.P. to pay over $160,000 in damages to a customer who had invested her entire life savings in non-traded real estate investment trusts (REITs) and business development companies (BDCs).  The award included damages for elder financial abuse.

The REITs and BDCs involved are listed below:


  • Business Development Corporation of America
  • Sierra Income Corporation
  • Steadfast Income REIT Inc.
  • ARC Realty Finance Trust Inc.
  • Benefit Street Partners Realty Trust, Inc.
  • ARC Healthcare Trust II
  • Healthcare Trust, Inc.
  • Northstar Healthcare Income

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Seniors-Sign-300x300This is a follow up to our last blog post: 5 Warning Signs of senior Investment Fraud and Elder Financial Abuse.   Summarized below are three very recent examples of enforcement actions by the Financial Industry Regulatory Authority (FINRA) that illustrate the growing problem of elder financial abuse and the situations that can arise when stockbrokers take advantage of their most vulnerable clients.

Excessive Trading:  In what appears to be a slap on the wrist, FINRA suspended a broker for 8 months for engaging in excessive short-term trading in several elderly client accounts, including a 95-year old widow who lost $283,000 and a couple in their 70s who lost $239,000.  They were each charged more than $260,000 and $210,000, respectively, in commissions and markups.   The broker, who was fired by UBS Financial Services, was not required to pay any fine or restitution to his victims—perhaps due to his bankruptcy filing.  In August 2019, the broker’s suspension will be lifted and he can resume working as a stockbroker.

Control of Customer Accounts:  A stockbroker formerly affiliated with LPL Financial was permanently barred for her role in taking control over two customer accounts and misappropriating funds. According to FINRA, the broker received $9,000 from a terminally ill client after inducing him to name her as the beneficiary of  a “transfer-on-death” bank account.  The broker also received over $60,000 following the death of an elderly client that had named the broker as a joint owner on their bank account; and another $248,000 as a beneficiary of the customer’s estate.  None of these clients were family members of the broker.

Senior-Xing-thumb-200x300-200x300In 1959, people 65 or older had the highest rate of poverty than any other generation according to the U.S. Census Bureau.  Today, older Americans are better off financially than any other generation.  Bank robber Willie Sutton once famously said that he robbed banks because, “That’s where the money is.”  If Willie Sutton were alive today, he would find it easier and more rewarding to prey upon senior citizens.  Although awareness of senior financial fraud is increasing, cases involving elder investment fraud and financial abuse are on the rise.  Early detection and prevention are your best defense.  Elder financial abuse typically occurs when someone exploits a position of influence or trust in order to gain access to the elderly person’s assets.  Examples of financial abuse may include:

  1. Unexpected changes in wills, trusts or powers of attorney
  2. Sudden or unexplained check cashing, transfers or withdrawals
  3. Opening of a new new brokerage account (or multiple accounts) or changing brokerage firms
  4. Unusual increase in investment activity or change in investment style
  5. Overly secretive or reluctance to discuss financial matters

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Hourglass-236x300When evaluating a potential securities arbitration case, the very first task we do is perform a statute of limitations analysis.  In a nutshell, a “statute of limitations” is a law that specifies the maximum amount of time that someone can wait before bringing a lawsuit.  Once the statute runs out, the legal claim is no longer valid.  The deadline for filing a lawsuit varies depending upon the claims or causes of action involved.

The table below lists the California statute of limitations that typically arise in FINRA arbitrations.

  • Breach of Written Contract – 4 years
  • Breach of Oral Contract – 2 years
  • Breach of Fiduciary Duty – 4 years
  • Fraud & Misrepresentation – 3 years

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lpl-150x150On November 1, 2018, the Financial Regulatory Authority (“FINRA”) entered into a $2.75 million settlement with LPL Financial for supervisory failures related to the firm’s anti-money laundering (“AML”) program and customer complaint reporting practices.  Most disturbing for financial consumers is LPL’s failure to disclose and report customer complaints.  Customer complaints must be reported to FINRA within 30 days of a qualifying event.

Although LPL entered into the settlement without having to admit or deny any of FINRA’s findings, FINRA’s factual findings reflect badly on LPL’s supervisory practices which have already been the subject of numerous fines and regulatory inquiries.  LPL recently settled a multi-state action agreeing to pay a fine of $499,000 to each participating jurisdiction that could ultimately reach $26,000,000.

Accurate tracking and reporting of customer complaints is critical to the supervision and monitoring of stockbrokers.  According to FINRA, LPL avoided reporting customer complaints by narrowly interpreting the disclosure rules.  As a result, customer complaints that should have been reported were not.  This disciplinary information is also valuable to financial consumers and is publicly available through FINRA’s BrokerCheck system.  BrokerCheck provides useful information that all financial consumers should use when evaluating and selecting a stockbroker or investment advisor.

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wells-fargo-wagon-300x225On June 25, 2018, Wells Fargo Advisors settled a cease-and-desist proceeding by the SEC over securities law violations involving fraudulent sale of market-linked certificates of deposit (“MLCDs”) and market linked notes (“MLNs”).

Sort-Term Trading:  The High Cost of Investing and Re-Investing

MLCDs and MLNs are intended to be long-term investments with limited liquidity that are usually held until maturity.  According to the SEC, Wells Fargo customers were charged large upfront fees equal to approximately 5% – 6% of their principal amount.  The SEC alleged that Wells Fargo representatives encouraged customers to redeem their MLCD and MLN investments prior to maturity at a loss and use the proceeds from the early redemption to re-invest in new MLCDs and MLNs with the exchange causing a loss in investment value of 7% or more.  The SEC noted that one Wells Fargo representative engaged in 1,167 such exchanges that involved 201 accounts over a 2 1/2 -year period.

sec crestOn February 28, 2018, the Securities Exchange Commission (“SEC”) announced the settlement of charges against Ameriprise for recommending high-fee mutual fund shares to their customers when less expensive share classes were available from the same mutual fund.  As part of the settlement, Ameripise will pay a fine of $230,000 “without admitting or denying” the SEC’s findings of malfeasance.  According to the SEC’s investigation, more than 1,700 customer accounts were charged $1,778,592 in unnecessary mutual fund fees and charges.  Unfortunately, investors will not be entitled to any restitution under the terms of the SEC’s settlement.  Affected investors, however, are free to pursue their own remedies—usually through the filing of a securities arbitration matter before the Financial Industry Regulatory Authority (“FINRA”).

Ameriprise’s Conduct Amounted to Securities Fraud

As an investment advisor, Ameriprise is subject to both the Investment Advisers Act of 1940 and the Securities Act of 1933.  According to the SEC’s findings, Ameriprise willfully violated Sections 17(a)(2) & 17(a)(3) of the Securities Act by engaging in a course of business that operates as a fraud or deceit upon its customers and by omitting or failing to disclose material facts to its customers.  Specifically, Ameriprise failed to provide its customers with material information regarding the compensation they received for selling more expensive mutual fund shares such as Class A shares that carried up-front sales charges or Class B and C shares with contingent deferred sales charges (“CDSCs”) and higher internal fees and expenses.  More importantly, Ameriprise failed to disclose that the firm would earn increased revenue when customers these more expensive mutual fund shares. As noted by the SEC, “information about this cost structure would accordingly be important to a reasonable investor.”

I get just as excited about a $15,000 win by the University of San Francisco School of Law’s Investor Justice Clinic (“IJC”) as I do by a six-figure recovery at my securities law firm.

On October 30, 2017, an arbitrator with the Financial Industry Regulatory Authority (FINRA) awarded $14,750 plus interest to a 63-year-old woman from Lake Forest, California who was invested in a risky and unsuitable investment strategy that involved commodities futures.  Given the small dollar amount involved and the level of effort required to pursue this case, it is doubtful that the customer would’ve been able to afford to hire an experienced securities arbitration lawyer.

FINRA’s Simplified Arbitration Process

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