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SEC Fined MassMutual $1.625 Million for Insufficient Disclosures about Certain Annuities

The SEC charged Massachusetts Mutual Life Insurance Company with securities law violations for failing to sufficiently disclose the potential negative effect of a “cap” included on certain annuity products.  According to the SEC Order Instituting Administrative and Cease-and-Desist Proceedings, MassMutual included a “cap” feature in around $2.5 billion of its variable annuities.  From September 2007 to March 2009, MassMutual offered a “Guaranteed Minimum Income Benefit (GMIB)” rider as an optional feature on some of its variable annuity products.  The products’ prospectuses failed to sufficiently explain that once the GMIB value reached a cap, it would no longer earn interest and withdrawals would cause pro-rata reductions to the GMIB value.  The firm’s failure to sufficiently explain the effect of the cap on withdrawals confused sales agents and others.

According to the SEC’s Order, a variable annuity with a GMIB rider reflects two values, the contract value and the GMIB value.  The contract value fluctuates with market performance.  The GMIB value automatically increases on the contract issue date and each contract anniversary thereafter by 5 or 6% (depending on the product.)   MassMutual refered to the annual increases as interest credits.  GMIB riders were advertised to provide “Income Now” and “Income Later” features to investors.  In the Income Now feature, MassMutual GMIB riders have a “dollar-for-dollar” withdrawal characteristic, meaning that the GMIB value will decline only by the dollar amount of any withdrawal, so long as the withdrawal does not exceed the annual interest credit (of5 or 6%, depending on the product.)  In the Income Later feature, MassMutual’s sales literature stated that “[e]ven if your contract value drops to zero, you can apply your GMIB value to a fixed or variable annuity.”  MassMutual failed to specifically disclose the effect of taking withdrawals after the GMIB value reached the cap, including that: 1) after reaching the cap, MassMutual would no longer apply an interest credit for purposes of taking withdrawals; and that 2) at that point, MassMutual would deem all withdrawals to be excess withdrawals that would reduce the GMIB value in direct proportion to the contract value reduction.  As a result of the improper disclosures, a number of MassMutual sales agents, wholesalers, and at least one annuity specialist at another insurance sales agency did not understand the negative impact the cap feature had on the contracts.

During the GMIB riders offering periods, MassMutual had indications that sales agents and others did not understand the effect of post-cap withdrawals on the GMIB value, which should have alerted it to the fact that its disclosures were inadequate.  MassMutual removed the cap after the SEC’s investigation to ensure that no investors would be harmed.  Without admitting or denying the allegations, MassMutual has agreed to settle the charges and pay a $1.625 million penalty.

FINRA Disciplinary Proceeding against Todd Lloyd Goedeke

On November 7, 2012, FINRA’s Department of Enforcement initiated a Disciplinary Proceeding against Todd Lloyd Goedeke for allegedly misappropriating a customer’s funds and failing to respond to FINRA’s requests for information with respect to the referenced investigation.  Mr. Goedeke entered the securities industry in 1983 and joined Cantella & Co., Inc. in 2004.  He remained with Cantella until his termination on June 18, 2010.

According to the Complaint, on September 14, 2009, at Mr. Goedeke’s directions, one of his customers gave him a check in the amount of $4,800 payable to an entity controlled by Mr.  Goedeke.   Later the same day, Mr. Goedeke deposited the funds into one of his accounts.   In March 2011, the customer accepted a settlement with Cantella in the amount of $4,825.  FINRA Enforcement made several attempts to contact Mr. Goedeke for an explanation and requested information in reference to this investigation.  As of the date of this Complaint, Mr. Goedeke had not responded to FINRA Enforcement’s requests.

FINRA Disciplinary Proceeding against Annie O. Kim

On November 6, 2012, FINRA’s Department of Enforcement initiated a Disciplinary Proceeding against Annie O. Kim for alleged use of unauthorized discretion in a customer’s account, and for failing to appear for an on-the-record interview.  Ms. Kim entered the securities industry in 2004 and remained registered until April 2, 2010.  According to the Amended Complaint, from January 11, 2010 through January 26, 2010, while registered with Wells Fargo Advisors, LLC, Ms. Kim exercised discretion in at least eleven transactions in the securities account of one customer.  The transactions were effected at Ms. Kim’s discretion without written authorization.  According to FINRA, between May 3, 2011 and June 30, 2011, FINRA made several failed attempts to contact Ms. Kim for an on-the-record interview.  FINRA is seeking sanctions, including monetary sanctions.

FINRA Disciplinary Proceeding against Mark C. Hotton

On November 5, 2012, FINRA’s Department of Enforcement initiated a Disciplinary Proceeding against Mark C. Hotton for allegedly funneling over $5,932,000 from his clients for his personal use, or to pay other investors.   Mr. Hotton entered the securities industry in 1993 and joined Oppenheimer in 2005.  He left Oppenheimer in 2009.

According to the Complaint, since at least July 24, 2006, Mr. Hotton engaged in numerous, varied and interrelated schemes to steal his clients’ money.  He diverted funds to various entities he controlled, while his clients believed they were being invested in legitimate businesses.  In other instances, he convinced his clients to invest in securities that did not exist.  FINRA alleged that Mr. Hotton used numerous forged, fabricated and false documents, fictitious transactions, fictitious securities, false statements, and false and misleading account summaries to perpetuate his scheme.

The primary subject of FINRA’s Complaint is Mr. Hotton’s misappropriation of $5,932,000.  In addition, Mr. Hotton caused millions of dollars in clients’ losses resulting from churning and excessive trading, exercising discretion without authorization, and recommending unsuitable transactions.  Furthermore, Mr. Hotton also caused at least an additional $2,584,078 to be wired from his clients’ accounts at Oppenheimer, to his outside business activities and other entities and individuals with whom he was affiliated.

During FINRA’s investigation, Mr. Hotton is alleged to have repeatedly lied under oath, provided false written statements, and forged and fabricated documents.  Furthermore, Mr. Hotton willfully failed to disclose and/or misleadingly described a customer arbitration, settlements, and civil actions on his Uniform Application for Securities Industry Registration or Transfer (Form U-4).  Mr. Hotton’s registrations were terminated on May 31, 2012.  Mr. Hotton is currently not associated with any FINRA member firm.

FINRA Ordered David Lerner Associates To Pay Approximately $12 Million in Restitution to Customers

FINRA ordered David Lerner Associates, Inc. to pay approximately $12 million in restitution to customers who purchased shares in Apple REIT Ten and to customers who were charged excessive markups.  David Lerner Associates, Inc. (“DLA”) is a privately-held broker dealer that operates six branches in the New York tri-state area and Florida.  FINRA found that DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT investment without performing adequate due diligence to determine that there was a reasonable basis to recommend the investment.  In addition to paying restitution to affected customers, DLA was fined $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) and for related supervisory violations.

According to FINRA’s investigation, between January 2011 and at least December 2011, DLA recommended and sold over $442 million of a $2 billion non-traded real estate investment trust (REIT) without performing adequate due diligence in violation of its suitability obligations.  In addition, DLA used misleading marketing materials that presented performance results for the REIT without disclosing to customers that the income portrayed was insufficient to support the distributions to unit owners.  FINRA found that many of DLA’s customers were senior and/or unsophisticated investors and a substantial number of them owned two or more of the Apple REITs.  DLA solicited customers by general means such as the internet, radio, cold calling, mailings, and open-invitation seminars at senior centers, restaurants and country clubs.  According to FINRA’s investigation, between 60% to 70% of DLA’s business came from Apple REIT sales.  DLA earned over $42 million in commissions and marketing allowances related to sales of Apple REIT Ten shares.

FINRA also fined David Lerner, DLA’s founder, President & CEO, and DLA’s Head Trader, William Mason.  David Lerner was fined $250,000 and suspended for one year from the securities industry, and for 2 years from acting as a principal.  The fine was imposed in connection with the false, misleading statements regarding the REIT.  David Lerner personally made false claims regarding the investment returns, market values and performance in at least four DLA seminars, held in New York and Florida, and in letters to customers.  William Mason was fined $200,000 and suspended for six months from the securities industry for his role in charging excessive muni and CMO markups.

In concluding this settlement, DLA and David Lerner 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.

 

FINRA Department of Enforcement v. Wade H. Bradley

Disciplinary Proceeding No. 2011025780101, October 19, 2012, Los Angeles, California

The FINRA Department of Enforcement filed a complaint against Wade H. Bradley related to the financing of the film, “Knights of Badassdom.”  Bradley, who was the President and Chief Compliance Officer of IndieVest Securities, sold membership units in Knights of Badassdom Production, LLC (KOB), and its successor, Knights of Badassdom Production 1, LLC (KOB1), which produced the film.  These offerings were made pursuant to Rule 506 and Regulation D.  The funds that were collected were supposed to be kept in escrow until a minimum of $4.5 million was raised, or if the minimum was not reached by a certain date, the funds would be returned to investors.  On July 2, 2010 Bradley signed a letter that purported to confirm that IndieVest had agreed to lend KOB1 $1.6 million.  However, there was no evidence of such a loan having been made.  The complaint alleged that Bradley knew that IndieVest never deposited the funds into the escrow account, the escrow account had less than $4.5 million when the escrow broke, and Bradley continued to sell the securities after escrow broke.  FINRA’s Department of Enforcement filed this complaint, alleging violations of Exchange Act section 10(b), Rule10b-9, and FINRA Rules 3010 and 2010.

FINRA Fines Merrill Lynch for Failure to File Required Reports

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $500,000 for supervisory failures that caused deficiencies in filing hundreds of required reports.  FINRA alleged that Merrill Lynch failed to report approximately 1,200 required filings of customer complaints, certain arbitration proceedings, and related U-4 and U-5 filings.  FINRA found that Merrill Lynch failed to adequately train and supervise personnel responsible for customer complaint tracking and reporting.

Under FINRA rules, securities firms must ensure that information on a broker’s registration application (Form U-4) is updated and kept current on the Central Registration Depository (CRD) system.  In addition, firms are required to update that information whenever a reportable event occurs.  A reportable event includes any regulatory investigation against the broker, specific customer complaints, settlements involving the broker, and certain felony charges and convictions.  Reportable events must be filed within 30 days of the event.  A firm is also required to notify to FINRA within 30 days of the termination of a registered person’s association with a member firm by filing a notice known as Form U-5.  Furthermore, the firm must notify FINRA within 30 days if the firm learns that the information disclosed on a Form U-5 becomes inaccurate.

FINRA’s investigation found that from 2005 until August 2011, between 23% and 63% of customer complaints and related Form U-4 and U-5 filings were either untimely or not reported at all.  In addition, from 2007 until 2011, Merrill Lynch failed to file or timely file more than 650 required reports, including customer complaints and customer settlements.  Lastly, FINRA found that the firm failed to file or timely file approximately 300 non-NASD/FINRA arbitrations, criminal, and civil complaints that it received from on or about July 2007 through 2009.

FINRA found that the firm failed to establish and implement supervisory systems and procedures to adequately review, monitor and ensure compliance with its obligations to timely file required reports and timely acknowledge customer complaints.   Merrill Lynch’s failures may have concealed significant risks and potential investor harm.  The firm’s violations, which went undetected for several years, may have hampered investors’ ability to access the background of certain brokers via FINRA’s Broker’s Check, a public disclosed program.  Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Firms that fail to file important regulatory information on a timely manner can compromise the integrity of CRD and BrokerCheck.  In this instance, Merrill Lynch failed to report critical information that regulators and investors rely upon.  Without timely and accurate reporting by firms, investors only have part of the picture when researching and making decision about their brokers.”

 

SEC Charges Florida Brokers with Defrauding Brazilian Public Pension Funds in Markup Scheme

The SEC charged Fabrizio Neves and Jose Luna, former brokers in Miami, with fraud for overcharging customers approximately $36 million by using undisclosed, excessive fees on structured notes transactions.  The SEC alleged that Neves conducted the scheme while working at LatAm Investments, LLC, a broker-dealer that is no longer in business.  The affected customers were two Brazilian public pension funds, and a Colombian institutional investor.

According to the complaint, from November 2006 to September 2009, Neves negotiated with several U.S. and European commercial banks to structure 12 notes on his customers’ behalf.  Neves, as the funds’ portfolio manager, was authorized to make all trading decisions on the funds’ behalf.  Instead of purchasing structured notes worth approximately $70 million, Neves engaged in a scheme that included trading the notes with one or more accounts in the names of offshore nominee entities that he and Luna controlled, to later buy the same notes at an excessive, baseless mark up price for their customers.  Respondents also altered the structured notes’ term sheets by whiting out or electronically cutting and pasting the markup amounts, over the actual price and trade information, and providing the forged documents to clients.  As a result, the Brazilian funds and the Colombian investor were charged markups as high as 67%, totaling approximately $36 million in overpaid, undisclosed, excessive fees.  Both Neves and Luna enjoyed inflated salaries and commissions stemming from their scheme.

The SEC also instituted an administrative proceeding against LatAm’s former president, Angelica Aguilera, alleging that she failed to reasonably supervise Neves and Luna.  The SEC said, “Neves lined his pockets with millions of dollars by charging customers exorbitant, fraudulent markups…Neves and Luna thought they could hide their scheme and evade regulators by using offshore nominee companies and forged documents, but they thought wrong.”

Without admitting or denying the charges, Luna has agreed to pay disgorgement of $923,704.85, prejudgment interest of $241,643.51, plus a penalty amount to be determined.

FINRA Fines Rodman & Renshaw for Supervisory & Information Barrier Violations

FINRA fined Rodman & Renshaw LLC $315,000 for supervisory and other violations related to the interaction between the firm’s research and investment banking functions.  Rodman is a New York based broker-dealer that provides investment banking services to private and public companies, as well as research, sales, and trading services to institutional investors.  FINRA also sanctioned Rodman’s former COO, William A. Iommi, Sr., with a fine of $15,000 and a suspension from acting in a principal capacity for 90 days.  Two research analysts were fined $10,000 respectively, for participating in efforts to solicit investment banking business.

According to FINRA, from January 2008 through March 15, 2012, Rodman failed to establish, maintain, and enforce supervisory and compliance procedures to monitor potential conflicts of interest between research and investment banking.  As a result of these deficiencies, Rodman failed to prevent research analysts from engaging in the solicitation of investment banking business, and failed to prevent a member engaged in investment banking activities from having influence or control over research analysts’ evaluations or compensation.  Furthermore, FINRA found that a research analyst was compensated for his contribution to Rodman’s investment banking business.

FINRA stated, “The deficiencies in Rodman’s supervisory system created an environment in which the conflict of interest between research and investment banking was left unmanaged.  FINRA will continue to ensure that firms have adequate supervisory systems tailored to the firm’s business and we will continue to sanction firms that demonstrate a weak culture of compliance and internal controls.”

Without admitting or denying the allegations, Rodman, Iommi, and the two research analysts agreed to the sanctions and consented to the entry of FINRA’s findings.

FINRA Department of Enforcement v. Rodolfo Alvarez

Letter of Acceptance, Waiver and Consent, No. 2011026804401, August 17, 2012, Los Angeles, California

After FINRA opened an investigation into Mr. Alvarez’s alleged borrowing and/or misusing of client funds, he failed to respond to the FINRA staff’s letters requesting information or an on-the-record interview.  Mr. Alvarez responded to a later communication regarding another on-the-record hearing by email.  However, he stated that he no longer resided in the United States and did not plan on returning to provide testimony.  Mr. Alvarez agreed to a letter of acceptance, waiver, and consent, barring him from associating with any FINRA member as a result of his violations of FINRA Rules 8210 and 2010.