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Merrill Lynch Slammed by FINRA over Loan Management Account Deficiencies

On November 30, 2016, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Merrill Lynch, Pierce, Fenner & Smith Inc. $6.25 million and ordered the firm to pay approximately $780,000 in restitution for inadequately supervising its customers’ use of leverage in their Merrill brokerage accounts.

According to the FINRA press release, Merrill “loan management accounts” (LMAs) are lines of credit that allow the firm’s customers to borrow money from an affiliated bank using the securities held in their brokerage accounts as collateral. FINRA found that from January 2010 through November 2014, Merrill lacked adequate supervisory systems and procedures regarding its customers’ use of proceeds from these LMAs. More specifically, FINRA found that although both Merrill policy and the terms of the non-purpose LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, the firm’s supervisory systems and procedures were not reasonably designed to detect or prevent such use. FINRA further found that during the relevant period, on thousands of occasions, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days after receiving incoming transfers of LMA proceeds.

FINRA separately found that from January 2010 through July 2013, Merrill lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed-end funds, where customers’ holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin. FINRA further found that during the relevant period, 25 leveraged customers with modest net worths and conservative or moderate investment objectives, and with 75 percent or more of their account assets invested in Puerto Rican securities, suffered aggregate losses of nearly $1.2 million as a result of liquidating those securities to meet margin calls. Merrill has already reimbursed some customers and, as part of the settlement, will pay approximately $780,000 in restitution to the remaining 22 customers affected.

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with Merrill Lynch, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Attorney Mark Maddox quoted in IBJ article in Veros Case

Click the link to view the article

http://www.ibj.com/articles/60826-victims-to-collect-money-soon-in-veros-case

Morgan Stanley – Dishonest & Unethical Conduct Harms its Customers

As reported this week in The Wall Street Journal (“Massachusetts Charges Morgan Stanley Over High-Pressure Sales Contest”), Massachusetts officials have charged Morgan Stanley with dishonest and unethical conduct for running high-pressure sales contests between September 1, 2013 and August 20, 2015.

This latest complaint – which alleges that “Morgan Stanley’s firm-wide culture emphasizes the aggressive cross-selling of banking and lending products to wealth management clients,” comes on the heels of a cross-selling scandal at Wells Fargo & Co., where employees opened as many as two million unwanted accounts for unsuspecting customers.

As alleged in the Massachusetts regulatory complaint, “Financial Advisors, often owing a fiduciary duty to their clients, were now in the business of recommending that their clients burden themselves with debt. Financial Advisors responded to the incentives by nearly tripling their banking and lending production during the Sales Contest. The Sales Contest generated new loan balances totaling nearly $24 million.”

Morgan Stanley Financial Advisors, working with Private Bankers, purportedly began actively pushing banking and lending products, including Morgan Stanley’s Portfolio Loan Accounts (“PLAs”), on clients.

PLAs are securities-based loans that allow customers to borrow money against the value of the securities in their investment accounts, with the customer’s securities serving as collateral for the loan.

The risks associated with securities-based loans are material. For example, in the event that the value of a client’s securities pledged as collateral should decline significantly, Morgan Stanley may liquidate those securities if the client is unable to post additional collateral – liquidations that may be effectuated without prior notice to customers.

The complaint further alleges that “Morgan Stanley provided Financial Advisors with dozens of triggers for Financial Advisors to use as catalysts to cross-sell PLAs, such as mortgage funding, tax liabilities or obligations, weddings, and graduations. In addition, Morgan Stanley’s internal-use materials also offered suggestions on how to overcome client objections to borrowing against their portfolios.”

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with Morgan Stanley, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Breitburn Energy Partners LP Filed for Chapter 11 Bankruptcy Protection

This past May, 2016, Breitburn Energy Partners LP filed for chapter 11 bankruptcy protection, another casualty of plunging oil prices. Many investors were sold this investment by their brokerage firms and financial advisors who failed to properly disclose all the risks associated with an investment in this risky energy company. Our firm is investigating cases against brokerage firms where investors were improperly sold this investment. Please contact us if you were an investor in Breitburn Energy Partners LP and have any questions about how this investment was sold to you.

Reverse Convertible Notes – UBS Financial Once Again Violates its Customers’ Trust

On September 28, 2016, the U.S. Securities & Exchange Commission announced that it had imposed severe monetary penalties on UBS Financial Services in connection with the firm’s activities involving nearly $10.7 billion of stock-linked reverse convertible notes (“RCNs”) that had been sold to approximately 44,000 customer accounts between 2011 and 2014. (“In the Matter of UBS Financial Services Inc., Exchange Act Release No. 34-78958”)

The penalties, which included more than $9 million in disgorgement and a civil penalty of $6 million, were based on UBS having failed to develop and implement policies and procedures reasonably designed to educate and train its registered representatives in connection with RCNs so that they could adequately understand the risks and rewards of the product and could form a reasonable basis to make suitable recommendations to their customers.

Without adequate education and training, certain registered representatives made unsuitable recommendations in relation to the offer and sale of approximately 2,500 different RCNs to certain customers – many of whom had little or no relevant investing experience and had identified to UBS modest reported income and net worth, primarily moderate or conservative investment objectives, and some of whom were retired.

RCNs are a type of structured product issued by a financial institution as an unsecured debt obligation that is linked to the performance of an underlying single stock. RCNs are structured to pay a higher interest rate than conventional debt of the same issuer because of the inclusion of the embedded derivative that provides essentially a synthetic put on the underlying stock.

The UBS single stock-linked RCNs at issue in the SEC enforcement action involved certain complex structures, including: (1) Trigger Yield Optimization Notes; (2) Trigger Autocall Optimization Securities; (3) Trigger Phoenix Autocall Optimization Securities; (4) Airbag
Yield Optimization Notes; and (5) Airbag Autocallable Yield Optimization Notes.

As noted in the SEC’s Enforcement Order, “UBS’s internal education and training primarily focused on describing the payouts for the various products and . . . it did not provide adequate training on certain important aspects of RCNs. For example, although the Structured Solutions Desk provided potential issuers with information regarding the RCN option features from the ‘investor’s perspective,’ internal educational materials lacked similar information. In addition, UBS’s internal educational materials did not describe sufficiently the role of implied volatility and the potential for breach in the selection of the equity securities underlying the RCNs. As a result, UBS registered representatives were not adequately educated and trained to understand adequately the risk and characteristics of the product, including relevant volatility concepts and the role that volatility played in the selection of the equity securities underlying the RCNs.”

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with UBS Financial Services Inc., please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Brokerages not Paying out Arbitration Awards

Aware of this issue for many years, FINRA has made little progress in finding a way to ensure investors get what they are owed. Back in 2000, a report was issued by the U.S. Government Accountability Office that stated, the industry needed to address the problem of unpaid arbitration awards. With the decline of the broker dealer industry and many firms shutting down the last few years, this issue on unpaid awards to investors is more demanding.

Some experts believe the solution is requiring firms to carry insurance to cover the payment of arbitration awards, but broker dealers who have carried insurance for these investor claims, have proven to be limiting resulting in low payouts or the specific types of claims not being covered.

With new FINRA CEO, Robert Cook, it is being suggested he start off his new role fixing this issue and making his mark for retail investors. The latest industry talk is the idea of establishing a fund for investors of unpaid arbitration awards, but with the long history of no solutions for this growing problem who knows what will happen.

Federal Prosecutors Target Wells Fargo

An article this week in The Wall Street Journal (“Federal Prosecutors Investigating Wells Fargo Over Sales Tactics”) stated that federal prosecutors are in the early stages of an investigation into sales practices at Wells Fargo & Co. – the same sales practices that led to Wells Fargo being slammed with a $185 million fine last week in an enforcement action that was filed by the Office of the Comptroller of the Currency, Consumer Financial Protection Bureau and Los Angeles City Attorney.

The investigation, which is reportedly being conducted by the U.S. Attorney’s Offices for the Southern District of New York and the Northern District of California, could potentially lead to civil or criminal charges being filed against Wells Fargo and/or its executives.

At the center of this new federal investigation are the same allegations that led to last week’s enforcement action which asserted that Wells Fargo had engaged in “widespread illegal” activity which included employees having falsified documents in connection with as many as 2 million accounts having been opened without customers’ knowledge, consent or permission.

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with Wells Fargo, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

FINRA Targets Business Development Companies (BDCs)

The Financial Industry Regulatory Authority (“FINRA”) has launched an examination sweep of non-traded business development companies (“BDCs”), the latest alternative investment product to receive increased scrutiny from the broker-dealer regulator.

An examination letter, posted on FINRA’s website on August 4, 2016, stated that “FINRA is conducting an inquiry with respect to non-traded Business Development Companies (BDCs)” and it requests that brokerage firms provide documents and information to the regulator “by no later than September 9, 2016.”

Non-traded BDCs are investment vehicles that typically make loans to small and medium-size companies with less than stellar credit. They reportedly attracted $22 billion from investors over the past several years, as interest rates near zero sent investors in search of higher yields.

Many of the brokerage firms that are selling non-traded BDCs to their retail clients had previously been involved with the marketing of non-traded Real Estate Investment Trusts (“REITS”) – another high commission alternative product with a questionable track record and limited liquidity.

Among the documents and information that brokerage firms have to provide to FINRA in response to this examination sweep are “the firm’s due diligence procedures and, if not already included in the due diligence procedures, a written description of the due diligence that the firm conducts of the BDC initially and on an ongoing basis as well as a written description of the due diligence that the firm conducts of participating broker-dealers with which the firm has a selling agreement.”

An article in the Investment News (“FINRA Launches Exam Sweep of Business Development Companies”), quoting a high-ranking FINRA official, indicates that “the regulator is targeting the increasingly popular BDCs to assess how they’re marketed and sold” and that “given the complexity and high-risk nature of this product, there is concern that retail customers may not fully understand the risks and the potential impact on their portfolios” of this investment product.

A copy of the firm’s due diligence procedures and, if not already included in the due diligence procedures, a written description of the due diligence that the firm conducts of the BDC initially and on an ongoing basis as well as a written description of the due diligence that the firm conducts of participating broker-dealers with which the firm has a selling agreement.

If you are an individual or institutional investor who has any concerns about your investment in any Business Development Company investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Merrill Lynch Market-Linked Notes: Investor Beware?

Merrill Lynch underwrites, manages and markets the sale of Market-Linked Notes issued by its parent company, Bank of America Corporation, and numerous other unaffiliated banks.

Market-Linked Notes were purportedly recommended by Merrill Lynch financial advisors to customers as a stable source of income. Many investors did not adequately understand or comprehend the extreme risks associated with Market-Linked Notes or how they worked. In many instances, Market-Linked Note investments tracked oil prices, energy pipelines, or commodity baskets and have resulted in significant investor losses.

How do Market-Linked Notes Work?

Merrill Lynch managed Market-Linked Notes to generate greater returns through the use of embedded derivatives designed to track the performance of volatile securities, indices, commodities or currencies. In many instances Market-Linked Notes offered little if any principal protection. Merrill Lynch financial advisors purportedly recommended and/or solicited investments based on the potential returns without properly disclosing the risks associated with Market-Linked Notes.

Merrill Lynch purportedly provides incentives to its financial advisors for the sale of proprietary products, such as Market-Linked Notes issued by affiliated banks. Market-Linked Notes may have substantial fees and/or commissions paid to affiliated companies for banking, underwriting and asset management. Merrill Lynch may have failed to properly explain the risks associated with Market-Linked Notes to investors whose performance and interest crediting is tied to specific securities, commodities, indices or currencies, sometimes with leverage up to 200%.

In June 2016, Merrill Lynch agreed to pay a $10 million penalty to the U.S. Securities & Exchange Commission to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.

In June 2012, the Financial Industry Regulatory Authority (FINRA) censured and fined Merrill Lynch $450,000 for sales practice violations related to the sale of Structured Securities Products, referred to as Market-Linked Notes. According to FINRA’s findings in the Letter of Acceptance Wavier and Consent, more than 50% of the 650,000 Structured Securities Product transactions were issued by the parent of Merrill Lynch. FINRA regulators found that there was inadequate supervision of customer accounts to determine whether there were unsuitable levels of concentration in Market-Linked Notes.

Merrill Lynch has underwritten, managed and marketed to its customers billions of dollars in Market-Linked Notes including, for example, the following:

Bank of America – Autocallable Market-Linked Step Up Notes Linked to the S&P Oil & Gas Exploration and Production Select Industry Index Bank of America – Strategic Return Notes
Bank of America – Accelerated Return Notes® Linked to the Merrill Lynch Commodity Index eXtra Precious Metals Plus – Excess Return
Credit Suisse – Accelerated Return Notes®
HSBC USA – Market Index Target Term Securities®
HSBC USA – Capped Leveraged Index Return Notes®

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with Merrill Lynch & Co., Inc., please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

SEC Places Merrill Lynch in its Crosshairs over Sales of Structured Notes

A recent article in The Wall Street Journal (“SEC Readies Case Against Merrill Lynch Over Notes That Lost 95%”) stated that the Securities and Exchange Commission is preparing a civil enforcement case against Merrill Lynch over a structured note investment that fell as much as 95% in value and was marketed in a way that one of the firm’s financial advisers called “borderline crooked.”

“The probe involves a product called Strategic Return Notes that Merrill sold over a number of months in 2010, raising about $150 million. Linked to a Merrill Lynch index tracking the volatility of the S&P 500 stock index, the five-year notes lost value rapidly after they were issued, as market volatility fell and the cost of buying the options upon which the notes were based rose sharply.”

Structured notes are extremely complex securities that are custom-built by banks out of options and other derivatives and are often sold to retail investors.

Wall Street investment banks sell an estimated $40 billion to $50 billion of structured notes each year and they rank among the most common types of securities in arbitration claims filed with the Financial Industry Regulatory Authority (FINRA).

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with Merrill Lynch & Co., Inc., please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).


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