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FINRA Fines Merrill Lynch $2.8 Million for Overcharging Customers

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $2.8 million for supervisory failures that caused the firm to overcharge fees over $32 million to nearly 95,000 customers.  FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents.

FINRA found that from July 2006 to November 2010, Merrill Lynch failed to send approximately 10,647,187 trade confirmations for 232,356 customers due to incorrect system coding.  FINRA’s investigation also discovered other violations such as failure to include or state whether the firm acted as an agent or a principal on trade confirmations and account statements, failure to provide margin risk disclosure statements as well as business continuity plans, and failure to deliver proxy materials to customers or to their designated investment advisers.

FINRA said, “Investors must be able to trust that the fees charged by their securities firm are, in fact, correct.  When this is not the case, investor confidence is threatened.”  In a statement, Merrill Lynch said, “Following Bank of America’s acquisition of Merrill Lynch, we identified operational issues that affected certain investment advisory accounts.  These were primarily the results of improper coding of accounts.”  Merrill Lynch has reimbursed $32 million, plus interest, to the affected customers.  In settling in this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the findings and the fine.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Merrill Lynch investors.  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.

OppenheimerFunds Fined $35 Million for Making Misleading Statements Regarding Two of Its Funds

The SEC charged OppenheimerFunds Inc. with making misleading statements about two of its mutual funds’ losses and recovery prospects.  According to the SEC, in the midst of the financial crisis, two fixed income retail mutual funds managed by Oppenheimer suffered losses greater than those experienced by similar funds.  The underperformance was mainly caused by the funds’ exposure to AAA-rated commercial mortgage-backed securities (“CMBS’) and total return swaps (“TRS”) contracts, which created substantial leverage in both funds.  When the CMBS market crashed, in late 2008, the funds’ net asset values plunged to unexpected levels, creating staggering cash liabilities for the funds.

The SEC alleged that Oppenheimer was forced to liquidate large portions of their portfolio to meet TRS contract payments and was diligently trying to reduce their CMBS exposure.  As the CMBS market continued to decline, Oppenheimer had to make a $150 million cash infusion into the funds to keep them from collapsing.  When Oppenheimer was questioned by financial advisors and shareholders about the funds’ condition, Oppenheimer represented that the funds had only incurred paper losses that could be reversed once the credit markets returned to normal.  These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which in turned diminished the possibility of recovering CMBS-induced losses.  Additionally, the funds were forced to sell significant portions of their holdings to raise cash to meet their TRS liabilities, resulting in realized investment losses and loss of future income from the bonds.  The SEC investigation also found that through 2008, Oppenheimer distributed a prospectus highlighting the funds’ cash investments without disclosing the funds’ practice  of assuming substantial leverage through its use of derivatives.

Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and pre-judgment interest of $1,487,190.  This money will be deposited into a fund for the benefit of investors.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Oppenheimer investors.  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 Disciplinary Panel Fines Brookstone Securities $1 Million for Fraudulent Sales of CMOs to Elderly Customers

A FINRA hearing panel ruled that Brookstone Securities of Lakeland, Florida, together with the firm’s Owner/CEO, Anthony Turbeville, and one of its brokers, Christopher Kline, made fraudulent misrepresentations and omissions of material fact in selling collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors.   The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers, with $440,600 of that amount imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline.

The FINRA hearing panel found that all of the customers involved in this matter were unsophisticated investors who relied on brokers to assist them with their investment needs.  The customers were looking for safer alternatives to equity investments.  Turbeville and Kline led the customers to believe that their portfolio consisted of government guaranteed bonds that preserved capital while at the same time generating 10% to 15% returns.  After a 16-day hearing, the panel found that between July 2005 and July 2007, Respondents made negligent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks of CMOs.  During this period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers while those same customers lost $1,620,100.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Brookstone clients.  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 Fines First Midwest Securities for Supervisory Deficiencies

FINRA fined First Midwest Securities, Inc. $75,000.00 for unsuitable recommendations, excessive trading and supervisory failures that caused customer losses of approximately $287,380.00.  According to FINRA, between January 2006 and December 2009, First Midwest failed to establish, maintain and enforce a supervisory system and written procedures to reasonably identify excessive trading of equities.   Due to the supervisory deficiencies, First Midwest failed to prevent excessive trading by one of its registered representatives.

FINRA’s investigation found that at various times from September 2006 through August 2008, one of First Midwest’s registered representatives recommended and engaged in excessive, unsuitable trading in the accounts of four customers.  The unsuitable practices included excessive, short-term trading, and excessive use of margin that resulted in $149,000 in commissions for the registered representative.

Without admitting or denying the allegations, First Midwest agreed to pay $75,000 to settle FINRA’s charges.  It is unclear from FINRA’s Letter of Acceptance, Waiver and Consent whether FINRA arbitration proceedings were initiated on behalf of the four customers whose accounts were churned, or whether the four customers were compensated.

SEC Approves Revised Definition of Sophisticated Municipal Market Professional

The SEC approved the Municipal Securities Rulemaking Board’s (“MSRB”) revised definition of a Sophisticated Municipal Market Professional, or SMMP, to include individuals and other investors with assets of at least $50 million.  Previously, SMMPs were limited to entities with at least $100 million invested in municipal securities.

The MSRB states that the new definition will maintain consistency with Financial Industry Regulatory Authority (“FINRA”) rules.  Pursuant to new Rule 2111, a FINRA member’s customer-specific suitability obligation to an institutional customer will be considered satisfied if the member has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies.  Members’ suitability obligations are not satisfied unless an investor “affirmatively indicates” independent judgment in evaluating recommendations.  The MSRB noted that investors have greater access to municipal market information, including disclosures, transaction data, market statistics, and educational material offered for free on its EMMA system, compared to 2002, when the initial definition was originated.  The Restated SMMP Notice and FINRA Rule 2111 will become effective on July 9, 2012.

According to the MSRB, SMMPs are experienced municipal bond investors who do not require the same protection as other investors.  The new definition exempts dealers from requirements to make certain disclosures to institutional customers that they must make to other investors.  The revised Notice states that a SMMP can be a customer with an “institutional account” which can include individuals, corporations, partnerships and trusts with total net assets of at least $50 million.  The assets do not need to be in municipal securities.  However, the dealer must have “a reasonable basis to believe [institutional investors are] capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities.”  The MSRB clarifies that when determining a “reasonable basis,” dealers should consider “the amount and type of municipal securities owned or under management by the institutional customer,” and that an SMMP must “affirmatively indicate,“ orally or in writing, to a dealer that they are exercising independent judgment in evaluating recommendations.

SEC Charges Investment Advisor with Running a Ponzi Scheme

The SEC charged John A. Geringer, a California investment advisor, who ran a private investment fund in a Ponzi-like manner.  According to the SEC, since 2005 Geringer raised over $60 million by misrepresenting the performance strategy of the GLR Growth Fund, L.P.  Geringer used false and misleading marketing materials to deceive investors into believing that his fund was successful when it was actually losing money.  To conceal his misrepresentations, Geringer used the money he raised from new investors to pay back earlier investors.

The SEC alleged that Geringer created and distributed marketing materials suggesting that the fund was able to achieve annual returns between 17 and 25 percent from 2001 to 2011, when in reality the fund was created in 2003 and experienced losses throughout.  Geringer claimed that in 2008, in the midst of the financial crisis that caused the S&P 500 to decrease almost 38.5%, the GLR fund had an annual return of nearly 24%.  Geringer deceived investors by falsifying documents such as brokerage account statements and year-end summaries, and misrepresenting the fund’s asset allocation.

The SEC stated, “Geringer painted the picture of a successful fund weathering America’s financial crisis through a diversified, conservative investment strategy… [t]he reality, however, was the complete opposite.  Geringer lost millions of dollars in the market, tied up remaining investor funds in a pair of illiquid private companies, and lied about it in phony account statements.”

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Geringer’s investors.  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 Fines Citigroup Global Markets $3.5 Million for Providing Inaccurate Information Related to Subprime Securitizations

FINRA fined Citigroup Global Markets Inc. (“Citigroup”) for providing inaccurate mortgage performance information, supervisory failures, and other violations relating to its residential mortgage-backed securitizations or RMBS.

According to FINRA, from January 2006 to October 2007 Citigroup posted inaccurate performance data and static pool information on its website.  The inaccurate performance information included RMBS data on delinquencies, bankruptcies, foreclosures, and real estate owned by securitization trusts.  In addition, Citigroup referred to inaccurate static pool information (how prior securitizations similar in collateral content and structure performed) in subsequent subprime and RMBS offerings.  The performance data and static pool data are used to determine the profitability of an RMBS investment and the probability of future returns on an RMBS investment that is currently disrupted as a result of mortgage holders failing to make loan payments as scheduled.  The performance data and static pool information contained material errors that affected investor’s evaluation of the fair market value, yield and anticipated holding period of an RMBS.  On multiple occasions Citigroup was informed that the information posted was inaccurate yet failed to correct the data until May 2012.

During the period of July – September 2007, Citigroup failed to establish and maintain sufficient supervisory policies and procedures addressing independent price verification for mortgage-backed Level 3 CDO’s.  FINRA’s investigation found that on certain occasions, when Citigroup re-priced mortgage-backed securities following a margin call, Citigroup did not maintain records of the original margin calls.

FINRA stated, “Citigroup posted data for its RMBS deals that it should have known was inaccurate; and even after they learned that the data was inaccurate, Citigroup did not correct the problem until years later.  Investors use this data to inform their decisions and in this case, for over six years, investors potentially used faulty data to assess the value of the RMBS.”  Citigroup neither admitted nor denied the charges, but consented to the findings and the fine.

SEC Charges Two South Florida Men Who Provided Investors to Scott Rothstein’s Ponzi Scheme

The SEC charged George G. Levin and Frank J. Preve with inducing investors to purchase fraudulent legal settlements from now-convicted Ponzi schemer, Scott Rothstein.   The SEC alleged that from July 2008 to October 2009, Levin and Preve raised more than $157 million from 173 investors to fund the Ponzi scheme, becoming Rothstein’s largest source of capital.   The Rothstein Ponzi Scheme, one of South-Florida’s largest ever, began in 2005 with Rothstein offering others the opportunity to purchase legal settlements at a discount.  Rothstein falsely claimed to represent plaintiffs who had reached confidential settlements in different actions and were willing to assign their structured-settlement payments from Rothstein, Rosenfeldt and Adler trust accounts in exchange for a discounted, immediate cash payment.  In reality, there were never any legal settlements and the plaintiffs and defendants did not exist.

According to the SEC, after personally investing more than $1.7 million in Rothstein’s settlements, Levin used one of his dormant legal entities, Banyon 1030-32 to offer investors promissory notes with the stated purpose of purchasing discounted legal settlements from Rothstein.  Preve handled the paperwork related to these purchases.  Levin and Preve marketed the notes to investors as a minimal risk investment promising large returns.  Levin and Preve distributed to investors offering materials which stated that Banyon 1030-32 had procedural safeguards to ensure the safety of the investments.  Despite their representations, Preve often purchased settlements from Rothstein prior to receiving confirmation that the settlement funds had been wired into an RRA trust account.

The SEC stated, “Levin and Preve fueled Rothstein’s Ponzi Scheme with the false sense of security they gave investors.”  Scott Rothstein is currently serving a 50-year prison sentence.  In a joint statement, attorneys for Levin and Preve said that their clients were “two of the biggest victims of the Rothstein Ponzi scheme.”  They noted that Levin was “the person who first” reported Rothstein’s suspected crime to authorities in October 2009.  The defense attorneys added that Levin and Preve have been “cooperating with the SEC” since December 2009, including testifying and providing documents

SEC Charges Former Ameriprise Manager and Former Yahoo Executive with Insider Trading

The SEC charged Robert W. Kwok, Yahoo’s former Senior Director of Business Management, and Reema D. Shah, a former mutual fund manager at a subsidiary of Ameriprise Financial Inc., with insider trading.  The SEC alleged that Kwok provided Shah with information about Yahoo, including whether Yahoo’s quarterly financial performance was expected to be in line with market estimates, and confirming a partnership between Yahoo and Microsoft Corporation.  In turn, Shah provided Kwok with information she learned through the course of her work, and he used it to help make personal investment decisions.

In January 2008, Shah and Kwok began discussing their respective lines of work.  Shortly thereafter, Shah told Kwok that she had learned of the acquisition of Moldflow Corporation by Autodesk, Inc.  Based on this confidential non-public information, Kwok purchased 1,500 shares of Moldflow in his personal account.  Autodesk and Moldflow announced the acquisition on May 1, preceding Moldflow’s 11% stock increase.  Kwok sold his position for a profit of $4,754.  The SEC alleged that in July 2009, Shah reached out to Kwok seeking material non-public information about a reported partnership between Yahoo and Microsoft.  Kwok breached his fiduciary duty to Yahoo when he tipped Shah about Yahoo and Microsoft’s announcement.   Consequently, Shah prompted certain funds she helped manage to purchase 700,300 shares of Yahoo.  The shares were sold twelve days later, for a profit of approximately $389,000.

The SEC stated, “[w]hen corporate executives and mutual fund professionals misuse their access to confidential information, they undermine the integrity of our markets and violate the trust placed in them by investors.”  In a parallel criminal case, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against Kwok and Shah.  Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charges.

FINRA Arbitration Panel Awards $500,000 in Punitive Damages and $3.4 Million Compensatory

In an arbitration that lasted 38 hearing sessions, a Chicago panel awarded damages to a former employee of Advanced Equities, Inc. for injuries suffered as a result of the Respondents allegedly failing to pay him commissions for his efforts in raising capital for Advanced Equities funded transactions.  The arbitrators also awarded interest and expert witness fees.  This case represents a rare example of punitive damages being awarded in an employment context.  DAW did not represent the Claimants.  FINRA Arbitration No. 10-00048.