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The Ten Hour Expungement

Posted byDavid Weintraub

What on earth is a ten hour expungement? It is the approximate number of hours it should take a competent attorney to expunge an auction rate complaint from a registered representative’s CRD. Contrary to popular belief, the CRD is not engraved in stone. Rather, the CRD is intended to be a document that accurately reflects a registered representative’s relevant personal history. It is not intended to be a wall upon which all mud sticks.

So why focus on auction rate complaints? Beginning in March 2008, the CRD system was flooded with U-4 and U-5 amendments reflecting customer complaints related to frozen auction rate positions. While the reporting of many of these customer complaints was appropriate, often it was not. In those instances where reporting may have been inappropriate, the complaining customer was generally happy with his or her registered representative(or “associated person”, as referred to in FINRA lingo), but unhappy with the registered representative’s firm, or the auction rate market in particular. Indeed, the customer whose complaint lead to a reportable event may still be doing business with the registered representative whose CRD reflects the same customer’s complaint. In those cases, it is more likely than not that the customer would agree that his or her complaint based on events from years ago was not about the registered representative, but rather, about the registered representative’s firm, the product, or some other event.

Where the complaining customer is still doing business with the selling registered representative, the likelihood of obtaining an expungement is significantly increased. Moreover, the value of a clean CRD cannot be overstated. Pursuant to FINRA Rule 2080, FINRA will expunge a CRD if:

(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false.

Demonstrating one of these factors is not especially challenging with the customer’s cooperation. If a customer is willing to sign an affidavit stating that the reportable event is “clearly erroneous”, or that the registered representative “was not involved in the alleged investment related sales practice violation”, obtaining a court order to this effect is realistic. All one needs to do is (1) obtain a customer affidavit; (2) file a complaint in court, naming FINRA as a party; and (3) schedule a hearing to have an Order directing an expungement entered into the public record. If the registered representative’s position regarding expungement is reasonable, and the customer’s affidavit is not contrived, there is a strong likelihood that FINRA will not contest the expungement. Once the Order directing the expungement is entered, the Order is forwarded to FINRA in order to effectuate the expungement. While this is not the only route leading to an expungement, it is the opinion of this lawyer that it is an efficient route.

FINRA’s website contains examples of expungement orders that FINRA finds acceptable for each of the three criteria provided above. Those orders can be found at:

http://www.finra.org/ArbitrationAndMediation/Arbitration/SpecialProcedures/Expungement/P126302
Assuming that the court Order contains the “magical” language that FINRA requires, expungements are clearly within reach.

So Why Bother to Spend Time and Money on Expungements?

There are several reasons one would want to clean up a CRD. First, not only is the CRD a matter of public record through FINRA’s broker check system, a more complete version of the CRD is a matter of public record through various state regulators. The more complete version of the CRD contains the names of complaining customers, whereas the broker check version does not. There are other differences as well. However, because the CRD is a matter of public record, the presence of a complaint on a CRD is information that is available to both current and prospective clients. That information may prove embarrassing, or even threaten an existing or prospective client relationship.

Second, the presence of customer complaints on a CRD may threaten a registered representative’s relationships with referral sources. Those referral sources, such as lawyers and CPA’s, may be reluctant to refer to registered representatives with complaints on their CRD.

Third, the presence of customer complaints on a CRD may impact a registered representative’s ability to find new employment. Prospective employers may have policies limiting new hires to those with clean CRD’s. Prospective employers may also be less inclined to offer transitional compensation (forgivable loans) to registered representatives with complaints. Alternatively, the loan amount may be less generous.

Finally, customer complaints may impact one’s ability to transfer state licenses. Various states routinely ask for additional information before approving the transfer of licenses from one firm to another. It is the registered representative’s responsibility to do everything within their power to maintain their ability to change firms, and in turn, transfer registrations.

Conclusion

Any registered representative interested in an expungement should not delay pursuing it. It is conceivable that FINRA’s rules could change at any time, thereby limiting the availability of expungements. Additionally, if a customer’s cooperation is needed for the expungement, it is better to seek that cooperation while the relationship with that customer is healthy.

21st Century Changes Needed for FINRA Form U4 – Part I

Posted byDavid Weintraub

The Form U4 is the basic application for any person seeking to become registered with a FINRA member firm. Although updated in 2009, the U4 is an antiquated document in need of overhaul. In order to consider revisions to the U4, it is important to understand its role in today’s financial services world. Historically, the U4 was an administrative document used by self-regulatory agencies and state agencies for determining whether to grant requests for securities licenses. While the U4 retains this original purpose, that purpose has evolved. All of the information contained within a U4 application is submitted to the Central Registration Depository system, operated by FINRA. According to FINRA, Web CRD® “contains the registration records of more than 4,015 registered broker-dealers, and the qualification, employment and disclosure histories of more than 642,980 active registered individuals.” All of the information contained on the U4 becomes public, but only some of that information is available through FINRA’s BrokerCheck® website (which obtains its information from Web CRD®). Prior to the advent of BrokerCheck®, it was very difficult for a consumer to review a broker’s background. BrokerCheck® changed that. BrokerCheck® serves as “a free tool which is part of FINRA’s ongoing efforts to help investors make informed choices about brokers and brokerage firms.”

Because the U4 serves as BrokerCheck’s template, the U4 must be evaluated in the context of one of its purposes, helping investors make informed choices about brokers. With this purpose in mind, the U4, as well as BrokerCheck®, are ripe for change.

So what information is missing from the U4 that investors would find helpful in making informed choices about brokers? The first glaring absence from the U4 is any question about the applicant’s education. The only context in which education is mentioned is in the instructions to question 12, in which an applicant is asked to provide his employment history for the past ten years. According to the instructions, if an applicant was engaged in “full time education” within the past 10 years, that information should be provided in the employment history section. The applicant is not asked whether he or she finished the sixth grade, graduated from high school or college, or has a graduate school degree. The reason this information is not requested is because the securities industry has no minimum education criteria for the various licenses that permit individuals to manage client assets. To the extent FINRA wants BrokerCheck® to help investors make informed choices, an Education History section needs to be added to the U4. How many people would knowingly trust the management of their life’s savings to a person who did not graduate from high school? Or only finished one year of college? The answer is few, if any. So why hide this information? In order for the U4, as the template for BrokerCheck®, to be relevant in the 21st century, it should be revised in order to require the disclosure of an applicant’s entire education history. Stay tuned for Part II!

FINRA Issues Guidance for Puerto Rico Bond Loss Claims

Posted byDavid Weintraub

Over the past several months, FINRA has received an influx of arbitration case filings related to Puerto Rico bonds. Most cases are filed by Puerto Rico residents. FINRA held various conversations and meetings concerning administration of these cases. After careful consideration, FINRA determined to issue the following guidance:

Venue:

FINRA will determine venue in the Puerto Rico bond cases in accordance with Rule 12213 of the Customer Code of Arbitration Procedure (the “Code”) which states in relevant part that “the Director will select the hearing location closest to the customer’s residence at the time of the events giving rise to the dispute . . . .” FINRA cases generally are venued where the customer resides, the transactions took place, and the witnesses are located. These criteria all point to Puerto Rico as the appropriate venue.
Accordingly, FINRA will not modify its existing venue rule and procedures absent the agreement of the parties.

FINRA will follow Rule 12213 in assigning venue for the following reasons:

• FINRA’s longstanding rule and policies, which were codified in 2007, were designed for the convenience and protection of customers;
• The solicitations and transactions in these cases took place in Puerto Rico;
• Many Claimants in these cases are elderly and travel to the continental United States would be difficult, burdensome and expensive;
• Many Claimants’ attorneys are located in Puerto Rico and requested venue in Puerto Rico;
• Many named individual associated person Respondents are located in Puerto Rico;
• Almost all potential witnesses are located in Puerto Rico, including non-party witnesses;
• Compelling non-party witnesses located in Puerto Rico to testify at arbitrations in the continental United States may be difficult;
• The total expenses, including Claimant and witness travel, of requiring individuals from Puerto Rico to travel to the United States would be substantial.

FINRA will continue to allow customers with more than one residence to choose venue based on the location of any of their residences. Further, if all parties in an arbitration case agree in writing to a hearing location other than one based on the customer’s residence, FINRA will select that hearing venue.

Arbitrator Pools:

FINRA will initially provide arbitrators for the cases venued in Puerto Rico from Puerto Rico and from other hearing locations within the Southeast Region and Texas. Counsel for Claimants and Respondents were in agreement that this was the area from which to seek arbitrators to expand the available roster in Puerto Rico.

FINRA has expanded the available pool of arbitrators to serve in Puerto Rico from these states and FINRA will pay their travel expenses. To date, approximately 700 currently eligible arbitrators on the FINRA roster have agreed to serve in Puerto Rico. FINRA continues to expand the available pool of Puerto Rico arbitrators willing to serve. Additionally, FINRA is actively recruiting and training arbitrators who reside in Puerto Rico. As a reminder, parties retain the option to agree to modify the provisions of Rule 12401 to have a sole public arbitrator decide their case, as opposed to a three arbitrator panel, even in cases in which the amount in controversy exceeds $100,000.00.

Interpreter Services:

FINRA arbitration hearings generally are conducted in English. However, FINRA recognizes that Spanish is the primary language in Puerto Rico and that many Claimants are not conversant in English. Therefore, at FINRA’s request, the following firms have agreed to bear the costs of consecutive translation services in the Puerto Rico bond fund cases venued in Puerto Rico in which these firms are a named Respondent and Claimant or Claimant’s witnesses are not fluent in English and translation is necessary: UBS, Merrill Lynch, Santander Securities and Popular Securities. In addition, Oriental Financial Services has agreed to consider bearing such costs on a case-by-case basis upon request. Customer-Claimants should make arrangements directly with counsel for these firms regarding translation services. Please note that the agreement is to bear costs of translation when it is necessary, and any disagreements between the parties regarding interpreter services shall be addressed by the arbitration panels.

The Customer Code of Arbitration, Code of Mediation, Uniform Forms Guide, Resources for Parties Representing Themselves and Filing a Claim–Frequently Asked Questions are available in Spanish on FINRA’s website.

FINRA is providing this information and the translation of the above-mentioned documents in Spanish as a service to the customers who use or would like to use its forum. If you have questions concerning the meaning or application of a particular rule or law, please consult with an attorney who specializes in securities law. The English versions of the FINRA Dispute Resolution Codes serve as the official versions of our rules.

Additional Information

Service of Arbitrators:

Counsel for Claimants and Respondents have agreed that FINRA should not limit the service of arbitrators who have previously served on a case involving Puerto Rico bonds through Award. Parties, of course, have available to them the FINRA rules on causal challenges and the Director’s authority to remove an arbitrator as set forth in Rule 12407.

Costs of Witnesses:
Witness costs will be minimized by setting venue in Puerto Rico, where almost all of the likely witnesses are located. Therefore, FINRA will follow its existing rules concerning witness costs.

Disclosures:
The arbitrators will be asked to answer an agreed upon set of disclosure questions submitted by the parties as part of the list selection process in order to alert the parties to possible conflicts.
Please also note that any party may request additional information from an arbitrator whose name appears on the arbitrator ranking form. If a party requests additional information about an arbitrator, FINRA will request the additional information from the arbitrator, and will send any response to all of the parties at the same time.

SEC Charges Clearing Firm Officials for Improper Margin Loans, Accounting and Disclosure Failures

Posted byDavid Weintraub

On September 17, 2015, the Securities and Exchange Commission announced that it was charging four former Penson Financial Services officials for their roles in a series of accounting and disclosure failures related to decisions to extend credit to certain customers beyond what is allowed under the federal securities laws.

Through the SEC’s investigation, it was found that Penson Financial Services provided customers nearly $100 million in margin loans secured mostly by risky, unrated municipal bonds, including some funding a horse racetrack in Texas. The loans to the customers, including the ones used to fund the racetrack’s operations, became impaired in the wake of the financial crisis. Instead of following industry standards and liquidating the collateral, accounting properly for the loan losses and disclosing the situation to its investors, Penson officials extended more loans to the same customers in hopes that their financial condition would improve and they could pay off the loans. By doing so, Penson violated the federal margin regulations. Penson’s eventual accounting and disclosures of the loan losses that reached $60 million contributed to the firm’s demise and bankruptcy filing in 2013.

The Director of the SEC’s Division of Enforcement said in a statement “Penson took on extraordinary risks as a broker-dealer by making margin loans to certain customers backed by speculative collateral…When these loans became impaired, Penson’s leadership improperly placed more of Penson’s critical capital at risk to bail out these customers instead of timely recording the losses and disclosing the truth about the loans to investors.” The Penson officials involved in the loans agreed to settle the charges in administrative proceedings without admitting or denying the SEC’s findings.

SEC Announces Fraud Charges Against Financial Adviser for Greatly Exaggerating Assets under Management and Investment Returns

Posted byDavid Weintraub

On September 9, 2015, the Securities and Exchange Commission announced that they were bringing fraud charges against a Maryland-based financial services firm and its founder/CEO. Dawn J. Bennett, personally, and as CEO of the Bennett Group Financial Services, allegedly made material misstatements and omissions between 2009–2011. In an effort to attract new clients to her fledgling investment advisory business, Bennett lured new clients with claims of industry success and impressive investment returns.

Bennett and her firm knowingly made misstatements about their managed assets to three media organizations. As a result, the media organizations ranked Bennett fifth in the category of “top 100 Women Financial Advisors” and second in its listing of the “2011 Top Advisor” in Washington DC. Bennett used these distinctions to publicize her success to existing and prospective clients. In 2010, the Bennett Group paid to appear in a weekly radio show on an AM radio station in the Washington D.C. area. Bennett hosted the radio show called Financial Myth Busting with Dawn Bennett. She also determined all of the show’s content. Bennett used this platform to falsely claim that she and the Bennett Group managed assets ranging from $1.5 billion to more than $2 billion. In reality Bennett and the Bennett Group did not provide any form of management for assets exceeding approximately $407 million. Additionally, Bennett touted the Bennett Group’s investment returns and performance during the radio show’s broadcast. However, she failed to disclose that the returns were calculated for a model portfolio, in which only a small portion of her customers participated. The same fraudulent claims were published on the radio show’s Facebook page.

During the SEC’s investigation, Bennett and her firm made additional false statements in an effort to substantiate their prior fraudulent claims about the amount of managed assets. Bennett and her firm falsely asserted that they gave advice about short term cash management to three corporate clients regarding more than $1.5 billion in corporate assets. In reality, they never provided such advice. The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate. The Director of the SEC’s Philadelphia Regional office said “The investing public is entitled to a level of confidence that information they receive about brokerage and advisory services is accurate, and this case shows that so-called financial experts on the radio are often merely advertisers who may not be doing so truthfully.”

Concentration Risk is Real

Posted byDavid Weintraub

According to FINRA, the Financial Industry Regulatory Authority, “Concentration risk is real. The sooner you give your portfolio a concentration checkup the better.” We are presently seeing portfolios constructed or managed by Raymond James and UBS Financial Services, concentrated in the precious metals sector or commodities sectors. Examples of the securities seen in these concentrated accounts include European Goldfields, LTD, Gold Resource Corp., Goldcorp Inc., Golden Queen Mining, Ltd., New Gold Inc., Silver Wheaton Corp., Yamana Gold Inc., Market Vectors Gold Miners ETF, Franklin Gold and Precious Metals, Van Eck International Gold Fund and Eldorado Gold. Investors, certified public accountants and estate planning attorneys should be especially concerned when seeing clients with concentrated positions in the precious metals sector or commodities sector, especially when any of these securities are part of the portfolio. Not only should your clients consider having a Certified Financial Planner review the portfolio, they should also consider having an experienced securities arbitration attorney review the portfolio.

David A. Weintraub, P.A. is interested in speaking with Raymond James and UBS clients with concentrated positions in the precious metals sector.

European Goldfields, now known as Eldorado Gold

Posted byDavid Weintraub

In its Annual Information Form dated March 31, 2011, European Goldfields stated with regard to Market Price Volatility, “The trading price of the Common Shares has been and may continue to be subject to large fluctuations….Ownership of the Common Shares is currently concentrated and sales of substantial amounts of Common Shares in the public market by the Company’s shareholders, or the perception that such sales might occur, could result in a material adverse effect on the market price of the Common shares….[t]he effect of these and other factors on the market price of the Common Shares on the exchanges in which the Company trades has historically made the Company’s share price volatile and suggests that the Company’s share price will continue to be volatile in the future.” Investors, certified public accountants and estate planning attorneys should be especially concerned when seeing this stock in an investment portfolio managed by Raymond James or UBS Financial Services if the portfolio was not supposed to be invested in high risk securities. Not only should your clients consider having a Certified Financial Planner review the portfolio, they should also consider having an experienced securities arbitration attorney review the portfolio.

David A. Weintraub, P.A. is interested in speaking with European Goldfields and Eldorado Gold investors who believe that their investments were supposed to be conservatively managed.

New Gold Inc.

Posted byDavid Weintraub

In its Annual Information Form dated March 31, 2011, New Gold stated with regard to Risk Factors, “The operations of the Company are speculative due to the high-risk nature of its business, which is the acquisition, financing, exploration, development and operation of mining properties. These risk factors could materially affect the Company’s future operating results….The Company’s earnings and cash flows are subject to price risk due to fluctuations in the market price of gold, silver and copper. World gold prices have historically fluctuated widely. World gold prices are affected by numerous factors beyond the Company’s control….” Investors, certified public accountants and estate planning attorneys should be especially concerned when seeing this stock in an investment portfolio managed by Raymond James or UBS Financial Services if the portfolio was not supposed to be invested in high risk securities. Not only should your clients consider having a Certified Financial Planner review the portfolio, they should also consider having an experienced securities arbitration attorney review the portfolio. David A. Weintraub, P.A. is interested in speaking with New Gold investors who believe that their investments were supposed to be conservatively managed.

Golden Queen Mining, Ltd.

Posted byDavid Weintraub

In its 10Q report for the first quarter of 2011, Golden Queen stated, “[t]he Company has had no revenues from operations since inception and as at March 31, 2011 has a deficit of $64,172,865 accumulated during the exploration stage. Management plans to control current costs and does not anticipate requiring additional financing to fund Company activities over the next twelve months. In addition, management plans to secure equity and/or debt or joint venture financing to fund construction of the operating facility at the Soledad property (“Soledad”) once a feasibility study has been concluded and a production decision has been made. The ability of the Company to obtain financing for its ongoing activities and thus maintain solvency, or to fund construction of the operating facility at Soledad, is dependent on equity market conditions, the market for precious metals, the willingness of other parties to lend the Company money or the ability to find a joint venture partner. While the Company has been successful at certain of these efforts in the past, there can be no assurance that future efforts will be successful. This raises substantial doubt about the Company’s ability to continue as a going concern.” Investors, certified public accountants and estate planning attorneys should be especially concerned when seeing this stock in an investment portfolio managed by Raymond James or UBS Financial Services if the portfolio was not supposed to be invested in high risk securities. Not only should your clients consider having a Certified Financial Planner review the portfolio, they should also consider having an experienced securities arbitration attorney review the portfolio. David A. Weintraub, P.A. is interested in speaking with Golden Queen Mining investors who believe that their investments were supposed to be conservatively managed.

Puerto Rico to Host North American Securities Administrators Conference, Regulation for the Ages

Posted byDavid Weintraub

It is ironic that Puerto Rico will serve as host for NASAA’s 2015 Annual Conference. Puerto Rico is ground zero since 2013 for claims of investor losses. Since 2013 hundreds of arbitration claims have been filed by investors in Puerto Rico municipal debt. Most of the claims have been brought by clients of UBS Financial Services. As of this date there have been three FINRA arbitration awards rendered against UBS Financial Services, all in favor of the investor Claimants. Puerto Rico bond investors have filed claims against other firms as well, including Merrill Lynch, Santander Securities, Popular Securities and Oriental Financial Services Corp.
Likewise, investors in the “upper 48 states” have also suffered significant losses investing in Puerto Rico debt. Those investors who have not already retained counsel should have their portfolios evaluated by an experienced Securities Arbitration Attorney. David A. Weintraub, Esq. spent the first
13 years of his career representing Wall Street. He now represents investors asserting claims against Wall Street’s largest firms. He is available to consult with you at your convenience.