Articles Posted in FINRA News

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Morgan Stanley & Co. lost a FINRA arbitration dispute last week to Banco Nacional de Mexico SA. A FINRA panel ordered Morgan Stanley to pay the Mexican bank, commonly referred to as Banamex, $4.5 million, finding Morgan Stanley liable for negligence and negligent supervision.

The case was filed by the bank against Morgan Stanley in 2012. The statement of claim alleged fraud and negligence among other allegations and asked the FINRA panel to order Morgan Stanley to pay over $5.2 million. The dispute centered on whether Morgan Stanley allowed funds in a family’s trust account to be used to repay third-party loans without its authorization.

The trust was established in 2007 with proceeds from the sale of property that a group of adult siblings and their mother had inherited. Banamex was the trustee to the family’s trust account and hired a broker at Morgan Stanley to manage the accounts that same year.

The trust accounts were held at a banking unit of Morgan Stanley & Co and managed by the brokerage unit. They were set up in a way that did not allow the assets to be used as guarantees to pay off third-party loans taken by another family member’s account. Banamex alleged that Morgan Stanley caused the trust accounts to guarantee payment of third-party loans of a family member without Banamex’s authorization.

Morgan Stanley spokeswoman Christine Jockle wrote, “We are disappointed in the arbitration panel’s award. We believe that the evidence showed that the patriarch of the family pledged the trust accounts as collateral for loans that benefited the family, and those accounts were treated that way for the two year period at issue.”

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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The SEC charged Donna Tucker, a former UBS Wealth Management Americas broker, with allegedly defrauding a number of elderly customers by running a Ponzi scheme for five years. One of the elderly couples was blind. According to the SEC, Tucker misappropriated over $730,000 from her clients from January 2008 to April 2013 while working at UBS. Tucker then allegedly used the money to pay for vacations, three cars, clothing and a country club membership, all while lying to her clients regarding the status of their funds.

The SEC’s complaint states that Tucker made unauthorized trades and other financial transactions, made misrepresentations to her customers regarding their investment accounts, and falsified brokerage banking and other documents. She allegedly stole almost $350,000 from the blind couple by persuading them to do their banking online and receive electronic statements, knowing that they would be unable to retrieve their statements online. Tucker acquired $730,000 from the clients by forging checks, falsifying brokerage statements, and taking out unauthorized margin loans on customer accounts to repay other accounts.

Tucker began her career with A.G. Edwards & Sons Inc. in 2003. UBS paid her an incentive to join them in 2007. Tucker resigned from UBS in April 2013 while the firm was investigating customer complaints of misappropriated funds. After an internal review, UBS reimbursed several customers. FINRA barred Ms. Tucker in September 2013. In May 2014, FINRA ordered Tucker to repay UBS the remaining balance on three loans, which totaled $52,375.

The Frankowski Firm is currently investigating yet another potential Ponzi scheme. If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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On Monday, FINRA charged a New York broker-dealer, as well as a number of current and past registered representatives, with churning customer accounts and other illicit actions the resulted in significant losses to retirees and other investors. According to FINRA enforcement attorneys, Newport Coast Securities Inc. and five of its current and past brokers knowingly engaged in a “manipulative, deceptive and fraudulent scheme” to churn the accounts of about twenty-four customers in order to receive higher commissions.

Newport Coast and three of its brokers are accused of making unsuitable sales of complicated securities to elders and other investors. Two of Newport Coast’s former supervisors are alleged to have ignored a number of warning signs regarding trading activity that led to the near disappearance of many people’s retirement savings. These included large numbers of riskless trades where commissions exceeded 3 percent, high levels of margining and concentration in accounts, and large losses in nearly all of the accounts.

FINRA believes Newport Coast’s managers knew what was happening but only took steps to rectify the situation after the firm’s representatives were placed under additional supervision following a FINRA examination. The misconduct, however, continued. FINRA further charged two of the brokers with obstruction when they allegedly attempted to dissuade certain customers from cooperating in the investigation.

With the exception of one, all of the people named in FINRA’s complaint have left Newport Coast and are now registered with other firms. Donald Wojnowski, who took over as Newport Coast’s chief executive in March 2013, said the firm has spent the past year overhauling its management, compliance and supervisory functions in response to the issues presented in FINRA’s complaint. Wojnowski further stated that Newport Coast has had ongoing discussions with FINRA about a potential settlement and the corrective actions it has been taking.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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The SEC approved a new FINRA rule that will make it hard for brokers to delete customer complaints from their records in arbitration cases. Rule 2081 will prevent brokers from making settlements with customers requiring the claimant to accept expungement of the case from the broker’s public record. The goal of the new rule is to ensure that brokers cannot conceal customer complaints in run-of-the-mill cases but only more extreme cases.

According to the Public Investors Arbitration Bar Association, expungement requests were granted in 89% of cases resolved by stipulated awards or settlement between 2007 and 2009. That number has since moved up to 96.9% from May 2009 to the end of 2011.

The SEC has stated that arbitrators have granted expungement too often and that it wants accurate and complete information to be available to the public.

Many people, however, believe that the rule is not strong enough, pointing out that brokers would still be able to expunge legitimate complaints once the rule was in place as clients typically do not return to oppose expungement because it’s an ordeal not worth their hassle.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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A federal judge in New York ruled this week that Citigroup would not have to face FINRA arbitration regarding claims that its stock dropped precipitously after it hid securitized-loan losses because an arbitration would violate an already existing $590 million dollar settlement over the same claims. An arbitration had been begun by Gary Burgess and Joseph Icon, two former Citigroup employees who claimed not to be included in the 670,000-person settlement class. Burgess argued that he should not have been included because he failed to opt out of the class, and Icon argued that he did not understand the release. U.S. District Judge Sidney Stein, however, was not swayed and held that Burgess and Icon were in fact included in the settlement class, thus blocking the FINRA arbitration. Stein wrote that the claims the two men were trying to bring were the exact same claims previously settled.

In August 2012, Citigroup agreed to pay $590 million to settle consolidated class claims asserting that Citigroup intentionally failed to warn investors of risky exposure to collateralized debt obligations. The settlement was one of the biggest that resulted from the banking industry’s subprime securities fiasco. The consolidated plaintiffs in the case accused the bank of committing securities fraud by making misrepresentations and omitting material facts from February 2007 to April 2008 pertaining to Citigroup’s debt obligation holdings.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Dean Mustaphalli, a former broker at Sterne Agee Financial Services Inc., is looking at a potential expulsion. According to FINRA, Mustaphalli ran a $6 million hedge fund, Mustaphalli Capital Partners, that he failed to disclose. FINRA charged Mustaphalli for creating the fund and receiving commissions without notifying the broker-dealer. He sought cash for the fund from more than 25 investors for more than half of 2011. Between April and August of 2011, Mustaphalli received about $41,800 in management fees.

The fund’s value has allegedly dropped by about 90% since then. To date, FINRA is unsure if any of Mustaphalli’s clients were customers of Sterne Agee, but a lawyer filing two arbitration claims against Mustaphalli claims that one of his clients was in fact a customer of Sterne Agee. FINRA states that Mustaphalli was not providing account statements for the hedge fund as requested.

Under FINRA’s rules, brokers are allowed to operate hedge funds as long as they are fully disclosed, approved by the FINRA member firm, and supervised by the firm. Mustaphalli managed the fund through Mustaphalli Advisory Group, and although he did disclose the existence of the RIA to Sterne Agee, he did not disclose that he was managing the hedge fund through the firm. He received performance fees, and his RIA received management fees through the hedge fund.

According to another attorney representing investors in the Mustaphalli hedge fund, Mustaphalli continued to seek clients for the fund through the investment adviser even after Sterne Agee fired him. Previously, Mustaphalli had been in the industry for fourteen years before being fired in 2011.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Last week, FINRA barred Kenneth Ronald Allen from the securities industry. Allen, who was once an equity trader at First New York Securities L.L.C., was found to be trading Japanese securities because of non-publicized, material information acquired from a corporate insider.

According to an investigation by FINRA, the Office of Fraud Detection and Market Intelligence, and the Department of Enforcement, Allen placed orders using a firm proprietary trading account from New York City to short sell shares of Tokyo Electric Power Company Inc. (TEPCO), a company listed on the Tokyo Stock Exchange, in September 2011. Having inside information that TEPCO was about to announce a secondary public offering of its securities, Allen generated a short position in TEPCO shares. Allen obtained the information from a consultant, who in turn obtained it from an employee at Nomura Securities Co. Ltd., a sizable Japanese broker-dealer out of Tokyo that underwrote the TEPCO offering.

Between September 15, 2010 and September 28, 2010, Allen traded in TEPCO shares having previously received the inside information. On September 29, 2010 TEPCO made a public announcement regarding the secondary offering. Subsequently, the market price for its shares fell. Having covered the short position following the announcement, Allen received a profit of about $206,000.

According to FINRA, Allen violated its Rules to observe high standards of commercial honor and just and equitable principles of trade. Cameron K. Funkhouser, Executive Vice President of FINRA’s Office of Fraud Detection and Market Intelligence, stated that “[i]ndividuals who are registered with FINRA are expected to observe high ethical standards and conduct themselves in accordance with just and equitable principles of trade regardless of where securities are listed.”

Allen consented to the entry of FINRA’s findings while neither admitting nor denying the charges.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Last week, the SEC issued an order requiring particular national security exchanges and FINRA to jointly develop and file with the SEC a national market system plan to install a 12-month pilot program directed at expanding minimum quoting and trading increments (i.e., tick sizes) for particular small capitalization stocks. The pilot program will target stocks with a market capitalization of $5 billion or less, a mean daily trading volume of one million shares or fewer, and a share price of $2 per share or more.

A control group and three test groups, each consisting of 300 securities, will be included in the program. Control group securities will be tested at the current tick size increment of $0.01 per share, trading exclusively at increments presently allowed. Securities in two of the test groups will be quoted in $0.05 minimum increments, but the increments in which the applicable securities trade will vary. The final test group will be subject to a “trade-at” requirement, designed to stop price matching by a trading center that does not show the best bid or offer. The SEC will use the third group’s trade-at requirement to ascertain if quoting and trading at expanded increments without a trade-at requirement will cause trading volume to move to “dark venues,” which do not provide public pre-trade price transparency.

The SEC’s order will require that all data collected be transferred to the SEC and made publicly available. The SEC will provide a plan with the details of the pilot program by August 25. At that time, the SEC will publish the plan for public comment and determine whether to approve it.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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FINRA fined Goldman Sachs Execution & Clearing, L.P. $800,000 for failing to have reasonably designed written policies and procedures established to stop trade-throughs of protected quotations in NMS stocks from November 2008 to August 2011 in connection with trading in its proprietary alternative trading system, SIGMA-X. As required by the Order Protection Rule, trading centers must trade at the best-quoted prices or route orders to the trading center quoting the best prices. FINRA found that between July 29 and August 9, 2011 there were more than 395,000 transactions executed in SIGMA-X where the execution traded through a protected quotation at a price inferior to the National Best Bid and Offer. During that eight-day window, Goldman Sachs did not realize that it was trading through a protected quotation. The trade-throughs were caused by market data latencies at SIGMA-X and were not discovered in a timely manner. Goldman-Sachs returned $1.67 million to disadvantaged customers.

FINRA found that between November 2008 and August 2011 Goldman Sachs failed to have reasonably designed written policies and procedures established to stop trade-throughs of protected quotations in NMS stocks and also failed to regularly monitor the effectiveness of its policies and procedures designed to prevent trade-throughs of protected quotations in NMS stocks.

Thomas Gira, Executive Vice President, FINRA Market Regulation, said, “It is imperative that firms take steps to ensure compliance with the SEC’s trade-through rule so that displayed trading interest is appropriately protected and customers do not receive executions at inferior prices. In today’s highly automated trading environment, FINRA has no tolerance for firms that fail to have robust policies and procedures to protect against trading through protected quotations.”

Goldman Sachs consented to the entry of FINRA’s findings while neither admitting nor denying the charges.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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A FINRA hearing panel expelled Success Trade Securities, Inc., which is based in Washington, D.C., from membership and barred Fuad Ahmed, the firm’s CEO and President, for the fraudulent sale of promissory notes and for creating a Ponzi scheme. The firm and Ahmed are also jointly and severally ordered to pay about $13.7 million in restitution to 59 investors, most of whom are current and former NFL and NBA players.

FINRA issued a complaint against Success Trade and Ahmed in April 2013, charging them with fraud in the sales of promissory notes issued by Success Trade, Inc., the firm’s parent company. Additionally, FINRA filed a Temporary Cease and Desist Order to immediately stop activities. The firm and Ahmed consented to the order.

The FINRA hearing panel found that Ahmed and Success Trade sold $19.4 million in Success Trade promissory notes to investors while misrepresenting or omitting material facts between February 2009 and March 2013. Ahmed and Success Trade omitted material facts from the offering documents that would have shown that the firm’s parent company was in a poor financial situation. Ahmed admitted that the parent company lost money every year for the last fourteen years with the exception of 2007. Success Trade and Ahmed further misrepresented that the proceeds would be used for business expenses to promote and build the parent company’s business. However, the proceeds were actually used to make unsecured loans to Ahmed for personal expenses and to make interest payments to existing noteholders. As a result, a Ponzi scheme was created that allowed the fraudulent scheme to continue.

As notes issued in 2009 and 2010 began to mature, Ahmed attempted to persuade investors to convert their notes to equity or to extend the term of the notes by leading them to believe that his business was succeeding and about to be listed on the European stock exchange, when in fact it was not. Ahmed additionally, falsely led investors to believe that he was about to make a $15 million acquisition of an Australian Company.

Success Trade and Ahmed were also sanctioned for selling unregistered securities. Given the expulsion and bar, however, these sanctions were not imposed. The hearing panel’s decision will become final in forty-five days unless it is appealed to FINRA’s National Adjudicatory Council or the Council calls for a review.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.