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.

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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

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Thumbnail image for whistle.jpgOn 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)

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

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.

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.

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: