Articles Posted in FINRA News

Published on:

FINRA issued a new investors alert, this time warning investors considering funds that invest in frontier markets to take note of the large risk associated with these markets. Although no set definition of frontier markets exists, such frontier funds typically invest in companies in countries with developing securities markets, including Argentina, Lebanon, Nigeria, Slovenia, and Vietnam.

Gerri Walsh, FINRA’s Senior Vice President for Investor Education cautions that “[i]nvestors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk—and the past performance of any fund is never a guarantee of future results.”

FINRA’s alert warns that any investment has its pros and cons and provides investors with tips to avoid problems:

  • Know which frontier markets the fund invests in. Risk factors vary by country—and no two countries share identical risk elements.
  • Monitor changes in index components. If you are investing in a frontier ETF or index mutual fund, make sure you know and understand the index that the fund tracks and also the components of that index. The countries included in a frontier index can change over time.
  • Geopolitical and currency risks are real. Be aware that some frontier markets are located in parts of the world with unstable political or market environments.
  • Factor in costs and fees. Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds.
  • Consider Performance History. Frontier funds are relatively new, and most have limited performance histories.

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 or visit frankowskifirm.com.

Published on:

The United States Court of Appeals for the second circuit ruled this week that a forum-selection clause in Goldman Sachs and Citigroup contracts preempts their responsibility under FINRA rules to arbitrate disputes with a customer. The Appellate Court had consolidated two separate cases brought by Golden Empire Schools Financing Authority and North Carolina Eastern Municipal Power Agency against Goldman Sachs and Citigroup respectively.

The plaintiffs in both cases assert that the firms fraudulently induced them to issue millions of auction rate securities in the years prior to the 2008 financial crisis, during which the auction rate securities market imploded. But as the Second Circuit ruled, the plaintiffs cannot compel arbitration against the financial firms because their broker-dealer contracts included forum selection clauses requiring all disputes to be brought in federal court.

The ruling brings to light a circuit split on the issue. The 4th Circuit reached the opposite conclusion last year in UBS Financial Services v. Carilion Clinic, but a 9th Circuit April precedent conforms to this ruling.

FINRA, of which Goldman Sachs and Citigroup are both members, requires members to arbitrate a dispute if requested to do so by the customer and “the dispute arises in connection with the business activities of the member.” But “[b]ased on this Circuit’s precedent, we hold that a forum selection clause requiring ‘all actions and proceedings’ to be brought in federal court supersedes an earlier agreement to arbitrate,” U.S. Circuit Judge John Walker wrote on behalf of the three-judge panel.

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 or visit frankowskifirm.com.

Published on:

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 or visit frankowskifirm.com.

Published on:

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 or visit frankowskifirm.com.

Published on:

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 or visit frankowskifirm.com.

Published on:

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 or visit frankowskifirm.com.

Published on:

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 or visit frankowskifirm.com.

Published on:

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.

Published on:

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.

Published on:

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.