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Monthly Archives: May 2013

SEC Charges Dallas-Based Trader With Front Running

Posted byDavid Weintraub

On May 24, 2013, the SEC announced fraud charges and an asset freeze against a trader at a Dallas-based investment advisory firm who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock’s price.

The SEC alleged that Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, secretly executed hundreds of trades through his wife’s accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife’s accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife’s accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife’s accounts from SEC examiners.

According to the SEC’s complaint filed in federal court in Dallas, many investment advisers to institutions employ traders to manage their exposure to market price risks and place these large client orders in advantageous market centers with sufficient trading quantities that minimize unfavorable price movements against client interests. Bergin was the trader primarily responsible for managing price exposures related to client orders for equity trades.

The filed complaint states that Bergin realized at least $1.7 million in profits in his wife’s accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife’s account ahead of clients’ trades. Also, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin’s wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account.

In order to halt Bergin’s ongoing scheme, the SEC requested and U.S. District Court Judge Barbara Lynn granted an emergency court order freezing the assets of Bergin and his wife.

LPL to Pay $9 Million for Systemic Email Failures and for Making Misstatements to FINRA

Posted byDavid Weintraub

On May 21, 2013, FINRA announced that it fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm’s email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.

As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL’s numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.

Some examples of LPL’s 35 email failures include the following:

  • Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
  • LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
  • For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
  • LPL failed to archive emails sent to customers through third-party email-based advertising platforms.

In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren’t any “red flags” suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.

In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.

In concluding this settlement, LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.

Use Care When Referring Clients to Professionals – The Elder Law Advocate

Posted byDavid Weintraub

Hypothetical 1

You have just referred one of your elderly clients to a local accountant.  The accountant is in his 40’s.  You have seen him around town for years.  He regularly eats breakfast at an expensive local restaurant.  He appears to be popular at the restaurant.  His office is located in a good part of town.  He is a nice guy.  You have heard that in addition to being an accountant, he also advises his clients about investments.  So, what can possibly go wrong with referring one of your elderly clients, for accounting purposes, to this gentleman?  Well, lots can go wrong.

As it turns out, for years this accountant, while being registered as a stockbroker/financial advisor, was alleged to have been soliciting his clients to co-invest in various internet businesses operated by another accountant’s son.  The accountant was further alleged to have signed promissory notes in favor of his customers, for an aggregate amount in excess of $1 million.  When his former broker-dealer employer learned of his conduct, he was fired.  His former employer, the broker-dealer, has paid settlements in excess of $500,000 to several investors.  As the results of an investigation initiated by FINRA, the Financial Industry Regulatory Authority, the accountant was suspended for two years from acting in any capacity with a FINRA member firm.  That suspension ends in December 2013.  The accountant’s Florida accounting license remains in good standing.

Use care when referring clients to Professionals

SEC Charges Chicago-Area Father and Son for Conducting Cherry-Picking Scheme at Investment Firm

Posted byDavid Weintraub

On May 16, 2013, the SEC charged a father and son and their Chicago-area investment advisory firm with defrauding clients through a cherry-picking scheme that garnered them nearly $2 million in illicit profits, which they spent on luxury homes, vehicles, and vacations.

The SEC alleged that Charles J. Dushek and his son Charles S. Dushek placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). Lisle, Illinois-based CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.

According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day, and often several days, by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.

The Dusheks’ extraordinary trading success reflects the breadth of their scheme. For 17 consecutive quarters, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns. One of Dushek Sr.’s personal accounts increased in value by almost 25,000 percent from 2008 to 2011 while many of his clients’ accounts decreased in value.

The illicit trading profits from his personal accounts were Dushek Sr.’s only source of regular income outside of Social Security, according to the SEC. It alleged that he drew no salary or other compensation as president of CMA and relied on profits from the scheme to make mortgage payments on his 6,500 square foot luxury home featuring separate equestrian facilities. He also spent the money on luxury vehicles, membership in a luxury vacation resort, and vacations abroad. Dushek Jr. is alleged to have used trading profits to pay for a boat slip and vacations to ski resorts and Hawaii.

The SEC’s complaint charged the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.

FINRA and SEC Issue Investor Alert On Pension or Settlement Income Streams

Posted byDavid Weintraub

On May 9, 2013, FINRA and the SEC issued an investor alert entitled, “Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them.”

The alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

The alert contains a checklist of questions before selling away an income stream:

  • Is the transaction legal?
  • Is the transaction worth the cost?
  • What is the reputation of the company offering the lump sum?
  • Will the factoring company require life insurance?
  • What are the tax consequences?
  • Does the sale fit your longer-term financial goals?

The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

  • Investors may encounter commissions of seven percent or higher.
  • Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.
  • These products are illiquid, which means they can be difficult to sell. In the event you need money and want to sell the product you may not be able to do so or you may only be able to do so at a loss.
  • Your “rights” to the income steam you purchased could face legal challenges.

A direct link to the alert can be found here.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.