News and Articles

Monthly Archives: September 2017

Barred Broker Charged in Real Estate Investment Scheme

Posted byDavid Weintraub

On September 29, 2017, the Securities and Exchange Commission charged a former broker, his company, and his business partner in an alleged real estate investment scheme utilizing high-pressure sales tactics to pilfer $6 million from retirees and other investors while using the proceeds to fund the broker’s lavish lifestyle and start e-cigarette businesses.

The SEC alleged that Leonard Vincent Lombardo, who once worked at Stratton Oakmont and has long since been barred from the brokerage industry by the Financial Industry Regulatory Authority for multiple violations, operated the scheme from behind the scenes at his Long Island-based company The Leonard Vincent Group (TLVG) with assistance from its CFO Brian Hudlin.

According to the complaint, more than 100 investors were defrauded with false claims that their money would be invested in distressed real estate, and some were told their investments had increased by more than 50 percent in a matter of months when in fact there were no actual earnings on their investments.  Lombardo allegedly invested only a small fraction of investor money in real estate and used the bulk of it for separate business ventures into the cigarette industry and personal expenses such as car payments on his BMW and Mercedes, marina fees on his boat, and visits to tanning salons.

TLVG, Lombardo, and Hudlin agreed to settlements that are subject to court approval.  TLVG and Lombardo agreed to pay disgorgement of $5,878,729.41.  Lombardo pled guilty in a parallel criminal case brought by the U.S. Attorney’s Office for the Eastern District of New York.  Without admitting or denying the SEC’s allegations, Hudlin agreed to pay a $40,000 penalty.

SEC Detects Brokers Defrauding Customers

Posted byDavid Weintraub

On September 28, 2017, the Securities and Exchange Commission charged three New York-based brokers with making unsuitable recommendations that resulted in substantial losses to customers and hefty commissions for the brokers.  One of the brokers agreed to pay more than $400,000 to settle the charges.

Brokers must make recommendations that are compatible with their customers’ financial needs, investment objectives, and risk tolerances.  An SEC examination of the firm Alexander Capital L.P. detected potential misconduct among certain brokers, and the ensuing investigation has led to the filing of an SEC complaint against William C. Gennity and Rocco Roveccio.  The SEC also issued an order against Laurence M. Torres.

The SEC’s complaint alleged that Gennity and Roveccio recommended investments that involved frequent buying and selling of securities without any reasonable basis to believe their customers would profit.  According to the complaint, since customers incur costs with every transaction, the price of the security must increase significantly during the brief period it is held in an account for even a minimal profit to be realized.

The SEC further claimed that Gennity and Roveccio churned customer accounts, engaged in unauthorized trading, and concealed material information from their customers – namely that the transaction costs associated with their recommendations (commissions, markups, markdowns, postage, fees, and margin interest) would almost certainly outstrip any potential monetary gains in the accounts.  According to the SEC’s complaint, customer losses totaled $683,038 while Gennity and Roveccio received approximately $280,000 and $206,000, respectively, in commissions and fees.

The SEC’s order against Torres found that he had no reasonable basis to believe it was suitable to recommend a high-cost pattern of frequent trading that gave his customers virtually no chance of making even a minimal profit.  Torres also engaged in churning and made unauthorized trades.  Without admitting or denying the findings, Torres agreed to be barred from the securities industry and penny stock trading, and he must pay $225,359.36 in disgorgement plus $25,748.02 in interest, and a $160,000 penalty.

Morgan Stanley Sanctioned $13 Million in Fines and Restitution for Failing to Supervise Sales of Unit Investment Trusts

Posted byDavid Weintraub

On September 25, 2017, FINRA announced that it had fined Morgan Stanley Smith Barney LLC $3.25 million and required the firm to pay approximately $9.78 million in restitution to more than 3,000 affected customers for failing to supervise its representatives’ short-term trades of unit investment trusts (UITs).

A UIT is an investment company that offers units in a portfolio of securities that terminates on a specific maturity date, often after 15 or 24 months. UITs impose a variety of charges, including a deferred sales charge and a creation and development fee, that can total approximately 3.95 percent for a typical 24-month UIT. A registered representative who repeatedly recommends that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes the customer to incur increased sale charges over time, raising suitability concerns.

FINRA found that from January 2012 through June 2015, hundreds of Morgan Stanley representatives executed short-term UIT rollovers, including UITs rolled over more than 100 days before maturity, in thousands of customer accounts. FINRA further found that Morgan Stanley failed to adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading, failing to implement an adequate system to detect short-term UIT rollovers, and failing to provide for supervisory review of rollovers prior to execution within the firm’s order entry system. Morgan Stanley also failed to conduct training for registered representatives specific to UITs.

In settling this matter, Morgan Stanley nether admitted or denied the charges, but consented to the entry of FINRA’s findings.

SunTrust Charged with Improperly Recommending Higher-Fee Mutual Funds

Posted byDavid Weintraub

On September 14, 2017, the Securities and Exchange Commission announced that it had charged the investment services subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.

SunTrust Investment Services agreed to pay a penalty of more than $1.1 million to settle the charges.  SunTrust separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation.  SEC examiners cited the practice during a compliance review of the firm in mid-2015.  More than 4,500 accounts were affected.

According to the SEC’s order, the Atlanta-based firm breached its fiduciary duty to act in its clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees.  Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees.  The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.

The SEC’s order found that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients.  The firm also agreed to be censured.