News & Resources

New FINRA Rules Take Effect to Protect Seniors and Vulnerable Adults from Financial Exploitation

On February 5, 2018, two FINRA rule rules took effect that purport to address the financial exploitation of seniors and vulnerable adults, putting in place a uniform, national standard to protect senior investors. Firms are now required to make reasonable efforts to obtain the name of, and contact information for, a trusted contact person for a customer’s account. In addition, the rule permits FINRA member firms to place a temporary hold on a disbursement of funds or securities when there is a reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold.

The trusted contact person is intended to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of vulnerable investors. The new rule allowing firms to place a temporary hold provides them and their associated persons with a safe harbor from certain FINRA rules. This provision will allow firms to investigate the matter and reach out to the customer, the trusted contact and, as appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation. It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.

The rule changes were approved by the SEC in February 2017. FINRA set February 5, 2018 as the effective date to provide member firms substantial time to prepare and develop policies and procedures.

SEC Halts Ongoing Fraud by Purported Hedge Fund Manager

On February 2, 2018, the Securities and Exchange Commission charged a purported hedge fund manager in New York City with a brazen offering and investment adviser fraud thereby putting an end to an ongoing scheme.

The SEC alleged that, since at least 2014, Nicholas Joseph Genovese and his hedge fund Willow Creek Investments LP raised more than $5.3 million from at least six investors by affirmatively misrepresenting his prior money-management, securities industry experience, and size of operations. In particular, the SEC charged that Genovese: falsely stated that he managed $4 billion of the Genovese Drug Store family’s assets; falsely stated that his hedge fund’s investment adviser had $30-39 billion of assets under management, when, in reality, it appears to have had less than $10 million in assets under management; falsely stated that his advisory firm had between 42 and 60 employees, when, in reality, it had fewer than 10 employees; and falsely stated that his hedge fund had investment gains of 30-40 percent per year, when, in reality, it sustained losses. In addition, in furtherance of his scheme, Genovese lied about his education and prior work experience, and concealed his criminal past from investors.

The SEC also alleged that Genovese and his advisory firm Willow Creek Advisors LLC misappropriated investor funds to fund securities trading in Genovese’s personal brokerage account, which sustained over $8 million of trading losses between 2015 and 2017, and Genovese’s lifestyle by paying approximately $263,000 for, among other things, ATM cash withdrawals, food, hotel and transportation charges, including being chauffeured in a Bentley.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Genovese’s fraud appears to be ongoing as evidenced by recent money coming into his account as well as a recent refusal of an investor’s redemption request.

The SEC’s complaint charged Genovese and his hedge fund with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and charges Genovese and his advisory firm with violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC is seeking a temporary restraining order to freeze their assets and prohibit them from committing further violations of the federal securities laws.  The SEC seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, and for Genovese and his investment advisory firm to pay financial penalties.

Alleged Perpetrator of Ski Slope Investment Scheme Agrees to Pay Back Investor Money, Surrender Properties

On February 2, 2018, the Securities and Exchange Commission announced that the Miami-based businessman behind an alleged scheme involving investments in a Vermont-based ski resort has agreed to pay back more than $81 million of investor money that he used illegally.

According to an SEC complaint filed in 2016, Ariel Quiros allegedly misused more than $50 million in investor funds to purchase a different ski resort and to fund personal expenses such as income taxes and two luxury New York City condominium purchases. Investors were told their money would specifically be used for construction projects at the Jay Peak Resort and a nearby proposed biomedical research facility.

Companies owned by Quiros also allegedly failed to contribute approximately $30 million in investor funds toward Jay Peak construction, with two projects going uncompleted. This jeopardized investors’ investments as well as their participation in the EB-5 Immigrant Investor Program under which Quiros and his businesses solicited the money.

In a settlement subject to court approval, Quiros agreed to be held liable for more than $81 million in disgorgement of ill-gotten gains plus a $1 million penalty, and he must forfeit approximately $417,000 in cash that was frozen after the SEC filed the case. Quiros also agreed to surrender ownership of the two condos and ski resort he purchased with investor funds and give up his stake in more than a dozen other properties, including the Jay Peak Resort. Under the proposed settlement, the properties would be turned over to the court-appointed receiver in the case for the purpose of selling them for the benefit of defrauded investors.

The SEC also announced that a business associate of Quiros, William Stenger of Newport, Vermont, agreed to settle the charges against him in the SEC’s complaint. While Stenger was not alleged to have personally profited from the fraud, he agreed to pay a $75,000 penalty and be barred along with Quiros from participating in any future EB-5 offerings. Quiros and Stenger agreed to their settlements without admitting or denying the allegations in the SEC’s complaint.

FINRA Fines J.P. Morgan Securities LLC $2.8 Million for Customer Protection Rule Violations and Supervisory Failures

On December 27, 2017, FINRA announced that it fined J.P. Morgan Securities $2.8 million for violating the Securities and Exchange Commission’s (SEC) Customer Protection Rule and for related supervisory failures. The SEC rule creates requirements to protect customers’ funds and securities.

To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the Customer Protection Rule requires a broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. These securities must be segregated in a “control location” and be free of liens or any other encumbrance that could prevent customers from taking possession of their securities. A firm cannot use segregated securities for its own purposes.

FINRA found that from March 2008 to June 2016, J.P. Morgan Clearing Corp. did not have reasonable processes in place to ensure that its possession or control systems were operating properly. Shares that should have been segregated were available for the firm’s use, due to systemic coding and design flaws, recurring and unresolved deficits and unreasonable supervision. By failing to move and maintain securities in good control locations, the firm created deficits in foreign and domestic securities valued at hundreds of millions of dollars. For example, J.P. Morgan failed to move Italian securities to a good control location for nearly two years, and on one sample day, created a deficit in 81 Italian securities worth approximately $146 million.

In determining the appropriate monetary sanction, FINRA considered J.P. Morgan’s cooperation in undertaking a plan to address the violations and that it over-reserved cash deposits in an effort to protect customers from its failed segregation of securities. In settling this matter, J.P. Morgan neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

SEC Charges Operators of $1.2 Billion Ponzi Scheme Targeting Main Street Investors

On December 21, 2017, the Securities and Exchange Commission announced charges and an asset freeze against a group of unregistered funds and their owner who allegedly bilked thousands of retail investors, many of them seniors, in a $1.2 billion Ponzi scheme.

According to the SEC’s complaint, Robert H. Shapiro and a group of unregistered investment companies called the Woodbridge Group of Companies LLC, formerly headquartered in Boca Raton, Florida, defrauded more than 8,400 investors in unregistered Woodbridge funds.

The SEC’s complaint alleges that Woodbridge advertised its primary business as issuing loans to supposed third-party commercial property owners paying Woodbridge 11-15 percent annual interest for “hard money,” short-term financing.  In return, Woodbridge promised to pay investors 5-10 percent interest annually.  Woodbridge and Shapiro allegedly sought to avoid investors cashing out at the end of their terms and boasted in marketing materials that “clients keep coming back to [Woodbridge] because time and experience have proven results.  Over 90% national renewal rate!”  While Woodbridge claimed it made high-interest loans to third parties, the SEC’s complaint demonstrates that the vast majority of the borrowers were Shapiro-owned companies that had no income and never made interest payments on the loans.

The SEC’s complaint states that Shapiro and Woodbridge used investors’ money to pay other investors, and paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.”  Shapiro, of Sherman Oaks, California, is alleged to have diverted at least $21 million for his own benefit, including to charter planes, pay country club fees, and buy luxury vehicles and jewelry.  According to the complaint, the scheme collapsed in typical Ponzi fashion in early December as Woodbridge stopped paying investors and filed for Chapter 11 bankruptcy protection.

Shapiro, Woodbridge, and certain affiliated companies are charged with fraud and violations of the securities and broker-dealer registration provisions of the federal securities laws.  The SEC is seeking return of allegedly ill-gotten gains with interest and financial penalties. This law firm is accepting Woodbridge cases on a contingency fee basis. Financial Advisors who recommended Woodbridge may have failed to exercise due diligence, and may have errors and omissions insurance that would cover Woodbridge losses.

FINRA Disciplinary Action Against FSC Securities Corporation

On December 20, 2017, a Letter of Acceptance, Waiver and Consent was issued in which FSC Securities Coporation was censured, fined $100,000, and required to provide FINRA with a plan to remediate eligible customers who qualified for, but did not receive, the applicable mutual fund sales-charge waiver. As part of this settlement, the firm agreed to pay restitution to eligible customers, which is estimated to total $414,261 (the amount eligible customers were overcharged, inclusive of interest). Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge. The findings stated that these eligible customers were instead sold Class A shares with a front-end sales charge, or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. These sales disadvantaged eligible customers by causing the customers to pay higher fees than they were actually required to pay.

The findings also stated that the firm failed to reasonably supervise the application of sales-charge waivers to eligible mutual fund sales. The firm relied on its financial advisors to determine the applicability of sales-charge waivers, but failed to maintain adequate written policies or procedures to assist financial advisors in making this determination. In addition, the firm failed to adequately notify and train its financial advisors regarding the availability of mutual fund sales-charge waivers for eligible customers. The firm also failed to adopt adequate controls to detect instances in which they did not provide sales-charge waivers to eligible customers in connection with their mutual fund purchases. As a result of the firm’s failure to apply available sales-charge waivers, the firm estimates that eligible customers were overcharged by approximately $380,520 for mutual fund purchases made since January 1, 2011. If you believe that you have suffered losses as a result of FSC Securities Corporation’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

FINRA Disciplinary Action Against Next Financial Group, Inc.

On December 6, 2017, a Letter of Acceptance, Waiver and Consent was issued in which Next Financial Group, Inc. was censured, fined $750,000, and required to retain an independent consultant to conduct a comprehensive review of the adequacy of its policies, systems and procedures (written and otherwise) and training. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain, and implement a supervisory system reasonably designed to detect and address excessively traded accounts. The findings stated that the supervisory failings resulted from an inadequate corrective action taken by the firm in response to prior FINRA disciplinary actions that included a failure to use exception reports or any other reasonably designed system to detect excessive trading. In addition, the firm failed to identify excessive trading due to lack of clarity regarding supervisory responsibilities. Due to flaws in its supervisory system, the firm did not reasonably supervise a registered representative’s excessive trading activity. If the firm had instituted reasonably designed procedures to ensure branch audits were completed and findings of excessive trading acted upon, it could have prevented this activity.

The findings also stated that the firm failed to implement a supervisory system and procedures reasonably designed to ensure appropriate suitability determinations in its variable annuity sales, including L-share contracts. The firm failed to establish, maintain and enforce systematic surveillance procedures to identify possible inappropriate rates of variable annuity exchanges. The firm also failed to enforce its existing procedures relating to the suitability review of variable annuity transactions. In addition, the firm did not establish, maintain, and enforce a reasonably designed supervisory system and WSPs related to the sale of multi-share class variable annuities. The firm’s WSPs failed to provide representatives and principals with guidance or suitability considerations for sales of different variable annuity share classes. Moreover, the firm failed to establish, maintain, and enforce WSPs or provide sufficient guidance to its representatives and principals on the sale of long-term income riders, such as long-term income riders with L-share contracts. The findings also included that the firm lacked a supervisory system reasonably designed to ensure that information included on consolidated reports provided to customers was accurate. The firm’s supervisory system was inadequate and it failed to enforce its own procedures.

FINRA also found that the firm failed to have supervisory procedures reasonably designed to detect and monitor for misleading communications on its website. As a result, the firm omitted material facts from its website that caused its communications with the public to be misleading. FINRA also found that the firm failed to establish, maintain, and enforce a system and WSPs reasonably designed to achieve compliance with FINRA rule 2310(c) related to maintaining records of all non-cash compensation received by it or its associated persons. As a result, the firm failed to track and verify non-cash compensation received by its representatives that came in the form of direct sponsorship payments by product issuers to vendors/merchants. Emails of representatives reflected multiple occurrences of product issuers paying vendors/merchants for branch client events directly without the firm’s knowledge and approval of the non-cash compensation. If you believe that you have suffered losses as a result of Next Financial Group’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

FINRA Hearing Panel Bars Broker for Defrauding Elderly, Blind Customer

On November 9, 2017, FINRA announced an extended hearing panel barred broker Hank Mark Werner of Northport, New York, for fraudulently churning and excessively trading the accounts of his customer, a blind, elderly widow, and for making unsuitable recommendations. The hearing panel also ordered Werner to pay more than $155,000 in restitution to the widow, fined him $80,000 and ordered disgorgement of more than $10,000 representing commissions received for recommending the purchase of an unsuitable variable annuity.

Werner had been the elderly widow’s broker, and that of her blind husband until his 2012 death, since 1995. According to the hearing panel decision, Werner plundered his customer’s accounts by engaging in such an active trading strategy that, when the high commissions he charged were taken into account, it was impossible for the customer to make money. The panel found Werner frequently bought and sold a security within a week or two, and charged exorbitant commissions even though the blind widow’s financial circumstances required that Werner invest her assets with a minimum amount of risk. She was 77 and in ill health when Werner began churning her accounts. Werner engaged in more than 700 trades from October 2012 to December 2015, generating approximately $210,000 in commissions while the customer lost more than $175,000 as a result of his reckless trading. The decision also noted that it was apparent to the Hearing Panel that Werner took advantage of the customer’s vulnerability after her husband died in September 2012.

The hearing panel concluded that Werner engaged in egregious misconduct and is unfit to work in the securities industry.

Legend Securities, Inc., which was also named in an amended disciplinary complaint, failed to respond and accordingly was held in default. The complaint charged that Legend failed to reasonably supervise Werner, which allowed him to engage in churning his customer’s account, and failed to establish, maintain, and enforce an adequate supervisory system to ensure that Werner was subject to heightened supervision. The hearing officer issued a default decision censuring and fining the firm $200,000. Legend voluntarily paid $20,000 in partial restitution to the customer.

Evaluating professional designations utilized by financial advisors

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So, a local financial advisor hands you a business card identifying one or more of the following professional designations: CFP, CFPN, CPFA, CMA, CFMP, CDP, and/or CEA.  Should you be impressed?  What do the letters stand for?  Who are the issuing organizations?  Do the issuing organizations exist?  Were there prerequisites for obtaining the designations?  Were examinations required?  What types of examinations?  Was a college degree required?  Are there continuing education requirements?  Are the continuing education requirements meaningful?  Can you verify the authenticity of the designation?  Does the issuing organization address customer complaints?  Does the issuing organization publish a list of disciplined designees?

Confused?  You should be.  According to records maintained by FINRA, there are more than 150 known so called “professional designations” either in use today by financial advisors, or that have previously been used by financial advisors.  Some of those designations look, sound and feel remarkably similar to each other.  As an example, what is the difference between a CFP and a CFPN?  Are they issued by the same organization?  Are they connected with each other in any way?  They are not.  “CFP” is a designation known as “Certified Financial Planner.”  It is issued by the Certified Financial Planner Board of Standards, Inc.  “CFPN” is known as “Christian Financial Professionals Network Certified Member.”  Though the abbreviations are similar, that is where the similarities end.  The prerequisites for earning the Certified Financial Planner designation are indeed rigorous.  The prerequisites for the “CFPN” designation are less clear.  According to FINRA, one is eligible for the CFPN certification with 10 years of full-time financial experience, signing a “Statement of Faith”, taking three training sessions, and passing a closed-book exam.  Links on the FINRA website to the Christian Financial Professional Network take you to www.cfpn.org  It is unclear whether this organization still exists, notwithstanding the fact that FINRA’s website states that the designation is currently offered.  Web searches lead to an entity called Kingdom Advisors, which offers what it calls a Certified Kingdom Advisor designation.  According to its website, its designation “allows you to work with someone who has committed and been trained to be a person of character who, from a biblical worldview, serves you with biblical financial advice so that you can confidently navigate financial decisions as a faithful steward.”

It is up to each lawyer to diligently determine the value, if any, to place on certain designations.  Both the American National Standards Institute and the National Commission for Certifying Agencies accredit certain designations.  The following link lists the accredited designations:  https://www.finra.org/investors/accredited-designations .  FINRA also maintains a list of designations about which it is aware: https://www.finra.org/investors/professional-designations .  It behooves any attorney who is referring clients to financial advisors to investigate their backgrounds.  One piece of this investigation is verifying any claimed designation, and assessing its value.  The CFP Board’s website contains a section dedicated to verifying whether one’s CFP designation is in good standing.  It takes about 5 minutes to confirm this particular designation.  Time well spent.

Wells Fargo Broker-Dealers Ordered to Pay $3.4 Million in Restitution and Reminds Firms of Sales Practice Obligations for Volatility-Linked Products

On October 16, 2017, FINRA announced that it had ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures. FINRA found that between July 1, 2010, and May 1, 2012, certain Wells Fargo registered representatives recommended volatility-linked ETPs without fully understanding their risks and features.

Volatility-linked ETPs are complex products that could be misunderstood and improperly sold by registered representatives. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn. In fact, volatility-linked ETPs are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy.

FINRA found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs. In addition, Wells Fargo provided substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.

In settling with FINRA, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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