News and Articles

Monthly Archives: August 2013

FINRA Disciplinary Action Against McAdams Wright Ragen, Inc.

In August 2013,  FINRA announced that McAdams Wright Ragen, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $30,000 and required to revise its Written Supervisory Procedures regarding the detection of excessive markups/markdowns, best execution violations and improper commissions charged. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it failed to show the correct execution time on brokerage order memoranda, failed to show the correct order receipt time on the memoranda and incorrectly marked some orders as solicited when they were in fact unsolicited.

The findings stated that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules concerning the detection of excessive markups/markdowns, best execution violations and improper commissions charged.  It is unclear from the FINRA announcement whether customers have initiated FINRA arbitrations or any other securities arbitrations.  Any customer who believes that they may have paid excessive markups or markdowns can contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422

SEC Charges San Diego-Based Investment Adviser in Cherry-Picking and Soft Dollar Schemes

On August 30, 2013, the SEC announced charges against a San Diego-based investment advisory firm and its president for allegedly steering winning trades to favored clients and lying about how certain money was being spent.

The SEC’s Enforcement Division alleged that J.S. Oliver Capital Management and Ian O. Mausner engaged in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested.  Meanwhile they doled out less profitable trades to other clients, including a widow and a charitable foundation.  The disfavored clients suffered approximately $10.7 million in harm.

The SEC also alleged that Mausner and J.S. Oliver misused soft dollars, which are credits or rebates from a brokerage firm on commissions paid by clients for trades executed in the investment adviser’s client accounts.  If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for expenses, including a limited category of brokerage and research services that benefit clients.  However, Mausner and J.S. Oliver misappropriated more than $1.1 million in soft dollars for undisclosed purposes that in no way benefited clients, such as a payment to Mausner’s ex-wife related to their divorce.

According to the SEC’s order instituting administrative proceedings, Mausner engaged in the cherry-picking scheme from June 2008 to November 2009 by generally waiting to allocate trades until after the close of trading or the next day.  This allowed Mausner to see which securities had appreciated or declined in value, and he gave the more favorably priced securities to the accounts of four J.S. Oliver hedge funds that contained investments from Mausner and his family.  Mausner profited by more than $200,000 in fees earned from one of the hedge funds based on the boost in its performance from the winning trades he allocated.  Mausner also marketed that same hedge fund to investors by touting the fund’s positive returns when in reality those returns merely resulted from the cherry-picking scheme.

The SEC’s order alleged that J.S. Oliver and Mausner willfully violated the antifraud provisions of the federal securities laws and asserts disclosure, compliance, and recordkeeping violations against them.  The order also alleged that Drennan willfully aided, abetted, and caused J.S. Oliver’s fraud violations in the soft dollar scheme.  It was unclear from the SEC’s announcement whether customers initiated FINRA arbitrations, or any other type of securities arbitrations.

FINRA Disciplinary Action Against Michael Anthony Gigante

In August 2013, FINRA announced that New York Registered Representative Michael Anthony Gigante submitted a Letter of Acceptance, Waiver and Consent in which he was fined $15,000 and suspended from association with any FINRA member in any capacity for 60 days. Without admitting or denying the findings, Gigante, who had been registered with MML Investor Services, LLC and MetLife Securities, consented to the described sanctions and to the entry of findings that he engaged in an undisclosed business activity by referring member firm customers to a mortgage broker associated with an entity that offered mortgage brokerage services and investment opportunities.

FINRA’s findings stated that Gigante’s firm’s written policies and procedures prohibited registered representatives from engaging in any new or previously undisclosed outside business activity with or without compensation, until the firm had formally approved the activity. Gigante did not receive any monetary compensation from referring customers to the mortgage broker. Gigante made the referrals hoping that the mortgage broker would reciprocate by referring clients to Gigante at his firm. Gigante did not report to his firm that he was referring potential investors to the mortgage broker, nor did he seek the firm’s permission to make these referrals. The findings also stated that on firm compliance questionnaires, for two years, Gigante failed to disclose that he was referring customers to the mortgage broker and represented that he was not engaging in any outside business activities. Unbeknownst to Gigante, the mortgage broker’s operation was a Ponzi scheme that eventually unraveled, causing the participants to lose all of their investments without seeing any return.

The findings reflected that after the firm conducted an internal investigation, it became aware of Gigante’s unapproved outside business activity and terminated his employment. It was unclear whether customers initiated FINRA arbitrations, or any other type of securities arbitration.  However, it appears from Gigante’s CRD that MetLife settled one customer complaint for $168,500.00.

SEC Charges Indiana Resident With Conducting Ponzi Scheme Targeting Retirement Savings of Investors

On August 26, 2013, the SEC announced that it had charged a Noblesville, Indiana resident and his company with defrauding investors in a Ponzi scheme that targeted retirement savings.   The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

The SEC alleged that John K. Marcum touted himself as a successful trader and asset manager to raise more than $6 million through promissory notes issued by his company Guaranty Reserves Trust.  Marcum helped investors set up self-directed IRA accounts and gained control over their retirement assets, saying he would earn them strong returns on the promissory notes by day-trading in stocks while guaranteeing the safety of their principal investment.  Yet Marcum did little actual trading and almost always lost money when he did.  Throughout his scheme, Marcum provided investors with false account statements showing annual returns of more than 20 percent.  Meanwhile, he used investor funds to pay for his luxurious personal lifestyle and finance several start-up companies.

According to the SEC’s complaint filed in federal court in Indianapolis, Marcum began his scheme in 2010.  Investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts or by transferring their taxable assets directly to brokerage accounts that Marcum controlled.  Marcum and certain investors co-signed the promissory notes, and Marcum then placed them in the IRA accounts.

The SEC alleged that Marcum assured investors he could safely grow their money through investments in widely-held publicly-traded stocks, and he promised annual returns between 10 percent and 20 percent.  Marcum also told a number of investors that their principal was “guaranteed” and would never be at risk.  He falsely told at least one investor that her principal would be federally insured.  In the little trading he has done, Marcum has suffered losses amounting to more than $900,000.  He has misappropriated the remaining investor funds for various unauthorized uses.

According to the SEC’s complaint, Marcum used investor money as collateral for a $3 million line of credit at the brokerage firm where he used to work.  He took frequent and regular advances from the line of credit to fund such start-up ventures as a bridal store, a bounty hunter reality television show, and a soul food restaurant owned and operated by the bounty hunters.  None of these businesses appear to be profitable, and Marcum’s investors were not aware that their money was being used for these purposes.  Marcum used nearly $1.4 million of investor money to make payments directly to the start-up ventures and other companies.  He also used more than a half-million dollars to pay personal expenses accrued on credit card bills, including airline tickets, luxury car payments, hotel stays, sports and event tickets, and tabs at a Hollywood nightclub.

The SEC alleged that Marcum did not have the funds needed to honor investor redemption requests.  So he provided certain investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.  Marcum had a phone conversation with three investors in June 2013 and admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money.  He offered to name them as beneficiaries on his life insurance policies, which he claimed include a “suicide clause” imposing a two-year waiting period for benefits.  He suggested that if he is unsuccessful in returning their money, he would commit suicide to guarantee that they would eventually be repaid.

The SEC’s complaint alleged that Marcum and Guaranty Reserves Trust violated the antifraud provisions of the federal securities laws.  The SEC sought and obtained emergency relief including a temporary restraining order and asset freeze.  The SEC additionally seeks permanent injunctions, disgorgement of ill-gotten gains and financial penalties from Marcum and Guaranty Reserves Trust, and disgorgement of ill-gotten gains from Marcum Companies LLC, which is named as a relief defendant.  It was unclear from the announcement whether customers initiated FINRA arbitrations, or any other type of securities arbitration. 

FINRA Disciplinary Action Against Hunter Scott Financial, LLC

In August 2013, FINRA announced that Hunter Scott Financial, LLC submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $25,000.  Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it charged its customers a handling fee, in addition to a commission, on securities transactions.

The findings stated that the handling fee was fixed at $50 per transaction and a substantial portion was not attributable to any specific cost or expense incurred by the firm in executing the trade, or determined by any formula applicable to all customers.  The handling fee was determined by the firm, not by the individual representative executing the order.  Although reflected on customer trade confirmations as a charge for handling, a substantial portion of the fee actually served as a source of additional transaction-based remuneration or revenue to the firm, in the same manner as a commission, and was not directly related to any specific handling services the firm performed, or handling-related expenses the firm incurred, in processing the transaction.  The firm’s characterization of the charge as being for handling was therefore improper.  The finding also stated that by designating the charge as a handling fee on customer trade confirmations, the firm understated the amount of the total the firm commissions charged and misstated the purpose of the handling fee.  It is unclear from the FINRA announcement whether customers have initiated FINRA arbitrations or any other securities arbitrations.

FINRA Disciplinary Action Against Giancarlo Ciocca

In August 2013, FINRA announced that Giancarlo Ciocca, who was a Registered Representative with Merrill Lynch, Pierce, Fenner & Smith in Coral Gables, Florida, submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Ciocca consented to the described sanction and to the entry of findings that he impersonated one of his customers at his member firm during a telephone call with a firm call center employee.

FINRA’s findings stated that Ciocca impersonated one of his customers in order to obtain online access to the customer’s account. The customer was not on the call; instead Ciocca, impersonating the customer, was on the call with his sales assistant. After Ciocca obtained online access to the account, he used that access to change account preferences so his firm would no longer send hard-copy statements to the customer and to change the email address associated with the account to one Ciocca controlled. The findings also stated that the customer had sustained market losses in his account and Ciocca undertook these activities to prevent the customer from learning of those losses. Ciocca created and sent the customer inaccurate account performance reports, which listed transactions that had not occurred and did not reflect the actual losses that had been incurred in the account. Ciocca misrepresented to his firm that he was in compliance with firm policies prohibiting the creation of performance reports. The customer complained to Ciocca, who then attempted to settle the customer’s complaint. This firm did not authorize the settlement offer, which was made without the firm’s knowledge.

The findings also included that Ciocca failed to respond to a request for information and documents. FINRA also issued a request to Ciocca for an on-the-record interview. After being warned that a failure to appear would be a violation of FINRA Rule 8210, Ciocca’s counsel informed FINRA that Ciocca would not appear for the interview as requested or at any other time.  According to Mr. Ciocca’s CRD, Merrill Lynch has paid $7,977,000 in settlements to Mr. Ciocca’s former clients.

FINRA Fines Morgan Stanley $1 Million and Orders Restitution of $188,000 for Best Execution and Fair Pricing Violations in Customer Bond Transactions

On August 22, 2013, FINRA announced that it had fined Morgan Stanley Smith Barney LLC and Morgan Stanley & Co. LLC $1 million and ordered $188,000 in restitution plus interest for failing to provide best execution in certain customer transactions involving corporate and agency bonds, and failing to provide a fair and reasonable price in certain customer transactions involving municipal bonds. The requirement to pay restitution is in addition to restitution that Morgan Stanley paid previously to customers for transactions covered by this settlement.

FINRA found that Morgan Stanley failed to use reasonable diligence to ensure that the purchase or sale price to its customers was as favorable as possible under current market conditions in 116 customer transactions involving corporate and agency bonds. Additionally, in 165 transactions involving municipal bonds, Morgan Stanley failed to purchase or sell bonds at prices reasonably related to the fair market value of the subject security.  FINRA cited its October 2011 Letter of Acceptance, Waiver and Consent with Morgan Stanley in which the firm was fined $1 million for unfair markups and markdowns.  Because the evidence suggested that Morgan Stanley had improved its supervisory procedures since 2011, FINRA did not pursue formal charges against the firm for supervision of the activity cited in this latest AWC.

In concluding this settlement, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.  Unfortunately for the investing public, FINRA did not disclose in the AWC the percentage markups or markdowns that it found offensive.  It was unclear from the announcement whether customers initiated FINRA arbitrations, or any other type of securities arbitration.  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 Warns Investors of Marijuana Stock Scams

On August 20, 2013, FINRA issued a new Investor Alert called “Marijuana Stock Scams” to warn investors about potential related scams. Medical marijuana is legal in almost 20 states, and recreational use of the drug was recently legalized in two states. As a result, the cannabis business has been getting a lot of attention – including the attention of scammers. Like many investment scams, pitches for marijuana stocks may arrive in a variety of ways – from faxes to email or text message invitations, to webinars, infomercials, tweets or blog posts.

The con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success. The scammers behind these “pump and dump” scams can then sell off their shares, leaving investors with worthless stock.

One company highlighted in “Marijuana Stock Scams” was touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock “could double its price SOON.” Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.

“Marijuana Stock Scams” also includes smart tips to help investors spot and avoid these potential scams.

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

FINRA Disciplinary Action Against Edward Arthur Rademaker Jr.

In August 2013, FINRA announced that New York Registered Representative Edward Arthur Rademaker Jr. submitted a  Letter of Acceptance, Waiver and Consent in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for six months. The fine must be paid either immediately upon Rademaker’s re-association 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, Rademaker consented to the described sanctions and to the entry of findings that he improperly borrowed money from an elderly, disabled customer at his member firm. The findings stated that Rademaker did not provide notice to, or receive permission from, his firm to borrow from the customer, and the firm’s Written Supervisory Procedures prohibited borrowing from customers. The customer orally complained to the firm about Rademaker and the outstanding money owed to her on the loan. After conducting an internal review into Rademaker’s activities, the firm discharged him.  It was unclear from FINRA’s announcement whether the customer initiated a FINRA arbitration or any other type of securities arbitration, or whether the customer was reimbursed for the $8,000 loan.  Mr. Rademaker was most recently registered with Chase Investment Services Corp.

FINRA Disciplinary Action Against Edward D. Jones & Co., L.P.

In August 2013, FINRA announced that Edward D. Jones & Co., L.P. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $160,000. No restitution payment was provided for in light of the fact that the firm previously provided restitution to its customers, which it commenced paying as early as December 31, 2008.

Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it purchased municipal securities for its own account from customers and/or sold municipal securities for its own account to customers at an aggregate price (including any markdown or markup) that was not fair and reasonable, taking into consideration all relevant facts, including the best judgment of the broker, dealer or municipal securities dealer as to the fair market value of the securities at the time of the transaction and of any securities exchanged or traded in connection with the transaction, the expense involved in effecting the transaction, the fact that the broker, dealer, or municipal securities dealer is entitled to a profit, and the total dollar amount of the transaction.  It is unclear from the FINRA announcement whether customers have initiated FINRA arbitrations or any other securities arbitration.  Any customer who believes that they may have paid excessive markups can contact David A. Weintraub, P.A., 7805 SW 6 Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.