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A “Small” Claims Avenue of Redress for Investors

When investors have been mistreated by their stock broker, they often wonder about their options for recourse.  Among other options, investors can file an arbitration case with the Financial Industry Regulatory Authority (FINRA).  If an investor decides to file a FINRA arbitration case, however, most arbitration cases can last up to 18 months and will usually conclude with an in-person arbitration hearing in front of one or more arbitrators.

However, FINRA has another option for investors: filing a “simplified arbitration” case.  Simplified arbitration cases allow investors with damages of $50,000 or less the choice of having their case heard without a formal arbitration hearing.  Because simplified cases can be decided based on the paper submissions sent to the arbitrator, investors do not have to sit through a multi-day hearing or be cross-examined by the other side’s attorney.  Additionally, simplified arbitrations are usually decided in six to nine months, much quicker than formal arbitration cases.  While simplified arbitrations may not provide a good forum for all types of cases, they can be a good choice for some investors because they are significantly less burdensome (both in time and costs) than typical arbitration cases.

Maddox Hargett & Caruso has filed a number of simplified arbitrations on behalf of aggrieved investors.  If you have been wronged by your stock broker and are considering bring an arbitration case, please give us a call.

Variable Universal & Indexed Universal Life Insurance Policies

In an April 4, 2014 article in The Wall Street Journal (“The Great Life-Insurance Temptation”), customers are warned that they “could be in for a shock” as a result of the correlation between specific life insurance policies and the stock market.

The life insurance policies that are the focus of this article are the “variable universal life insurance” policy and the “indexed universal life insurance” policy.

A variable universal life insurance policy, often shortened to VUL, is a type of life insurance policy that purports to build cash value for the customer. Insurers typically offer a menu of investment options for these policies that often focus on stock and bond mutual-fund investments which, in a declining investment market, may not generate enough income to cover the annual fees.

A indexed universal life insurance policy is also a type of life insurance policy that is typically linked to stock market indexes such as the S&P 500 benchmark index. Insurers typically offer a cap on the maximum returns that can be earned through such policies while, at the same time, limiting their downside. Unfortunately, the value of these policies can still decline in value because of the fees and insurance charges that are associated with them.

As noted in the article, insurance agents and brokers can collect “rich commissions” for selling both types of policies which may provide a “powerful incentive” for the inappropriate promotion of both products. Furthermore, the marketing materials for these policies may “feature rosy projections of potential gains” that, based on historical stock market returns, do not “match reality.”

If you are an institutional or retail investor and believe you may have been misled regarding either a variable universal life or indexed universal life insurance policy, please contact us. 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 Is Probing Dealings by Banks and Companies in Loan Securities

The Securities and Exchange Commission is investigating a Wall Street boom in complicated bond deals. SEC investigators are looking at whether banks and companies are using the bond deals to hide certain risks illegally, said the people close to the probes. The probes could pose a new legal headache for banks, which have faced years of government investigations and large financial settlements involving their conduct leading up to the financial crisis. In previous investigations, the SEC primarily explored how the banks put the deals together. The new probes look at how these complex securities are being used and traded.

SEC Is Probing Dealings by Banks and Companies in Loan Securities

On March 24, 2014, an article in The Wall Street Journal (“SEC is Probing Dealings by Banks and Companies in Loan Securities”), disclosed that the Securities and Exchange Commission is investigating whether a Wall Street boom in complicated bond deals is creating new avenues for fraud.

According to the article, the SEC investigators are reportedly looking at whether banks and companies are using the bond deals to hide certain risks illegally and a parallel probe is focusing on how Wall Street banks sell the deals.

Both of these SEC investigations are homing in on a post-crisis resurgence in a type of deal called a collateralized loan obligation, or CLO, which is an investment based on pools of loans that financial firms make to companies with lower credit ratings that are sliced up, packaged and sold to deep-pocketed (and often unsuspecting) investors on the premise that they offer higher yields than other fixed-income investments tied to highly rated companies.

Sales of CLOs, which screeched to a halt in 2009, bounced back to $83 billion in the U.S. last year, according to S&P Capital IQ Leveraged Commentary & Data. So far this year, CLO issuance has reached $20.5 billion.

The probe is reportedly being led the “complex financial instruments” unit of the SEC which is the same SEC enforcement unit that spearheaded the agency’s financial-crisis CDO cases.

The SEC is also reportedly expanding its investigation into whether a number of Wall Street banks are cheating clients by mispricing certain bond deals, including bonds backed by residential mortgages, which often do not trade on a transparent market. The investment banks under scrutiny in that portion of the SEC’s investigation have been identified by The Wall Street Journal to include Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Royal Bank of Scotland Group PLC and UBS AG.


BOFA Pays Over $9 Billion to Settle Fannie Mae and Freddie Mac Claims

In late March, Bank of America corp.  agreed to pay $9.5 Billion to settle claims that it issued bad loans to Fannie and Freddie during the housing boom, which contributed to the country’s financial crisis. Many investors were sold Fannie Mae preferred stock and/or Freddie Mac preferred stock in 2008 by many brokerage firms without realizing the precarious financial position of both companies. The Federal Housing Finance Agency, the agency that regulates both Fannie and Freddie, brought litigation against many of America’s largest banks, seeking compensation for the bad loans they originated. Many investors are pursuing their claims for losses in the Fannie and Freddie preferreds through FINRA arbitration.

Buyer Beware – Retail Mutual Funds Replicating Hedge Fund Strategies

A March 21, 2014 article in The Wall Street Journal (“The New Hedge-Fund-Like Retail Funds”) both highlights the expanding array of mutual funds that are offering hedge-fund like strategies to the investing masses and the risks that may make these investments unsuitable for retail investors.

In fact, this article notes that assets invested in these alternative funds, which are being managed by both Wall Street firms (including Morgan Stanley and Goldman Sachs) and independent investment advisors, have increased from $41 billion at the end of 2008 to $286 billion in 2013.

But while the marketing of these funds may tout their purported ability to “re-create the secret sauce of hedge-fund investing” and to offer that “secret sauce” to ordinary investors with their minimal entry level of as low as $1,000 per investment, investors are cautioned that they should not “rush to join the club.”

In the words of Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his research on how investors should allocate their assets to get the best balance between risk and reward, “I wouldn’t touch it with a 10-foot pole.”

These alternative funds are often complicated to understand, are commonly unclear as to their holdings and the conflicts/fees that may be associated with them and, of equal if not greater importance, may be forced to liquidate their assets at unfavorable prices in order to meet investor redemption requests.

When you add in the reality that the performance of alternative funds has often lagged the market in general and that their returns have not yet been “tested” in a declining market environment, the “secret-sauce” being touted brings with it the caution, as noted in this article, that while “it’s getting easier to invest like a hedge fund, that doesn’t necessarily mean you should.”

FINRA Fines LPL Financial LLC $950,000 for Supervisory Failures

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined LPL Financial LLC $950,000 for supervisory deficits related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “In order to sell alternative investments, a broker-dealer must tailor its supervisory system to these products. LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complies with suitability requirements imposed by the states, the product issuers and the firm itself – and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”

As part of the sanction, LPL must also conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures.

FINRA Arbitrator Booted for False Claim of Being a Lawyer

On Monday, FINRA confirmed that it had removed a Santa Barbara, CA arbitrator  James H. Frank from its roster of arbitrators. Arbitrator Frank had sat on nearly 40 arbitrations in California over the past 15 years. A FINRA spokeswoman confirmed that Frank claimed to be a lawyer and member of the bar in several states, when in reality he was not. It is unlikely that Frank’s revelation will have any effect on the many cases in which he presided, as parties have only 90 days after an arbitration award is issued to appeal such results to a court.

Madoff’s former employees found guilty

Five of Bernie Madoff’s former employees have been found guilty of aiding and profiting from the largest Ponzi scheme in American history, estimated at $20 Billion. A New York City jury rejected their defenses that they were duped by Bernie Madoff and didn’t know about the scam. As the clerk read the 31-count indictment, the jury foreman replied with “guilty” 59 times. The sentencing hearing has been scheduled for the week of July 28th, where these 5 could face sentences of decades in prison.

Attracting Tomorrow’s Brokers

A one in five ratio, is today’s survival rate for trainees across financial firms. They quickly eliminate candidates from their large pool of trainees who can’t keep up the pace. With these facts, the long term does not look appealing to most candidates. So how does the Financial Industry identify and attract the next generation of advisers?

With the ever changing role of the financial adviser, it is hard to specifically define the skill set and behaviors of the ideal adviser candidate. Important traits such as hunger, drive, resilience are traditionally used, but new terms are developing. Candidates should be able to collaborate, problem solve, and provide a new level of customer service. Successful brokers come from varying employment and educational backgrounds and there hasn’t seemed to be a specific source of talent.

To narrow the field, firms should start looking at a new breed of advisers developing in over 200 colleges, who offer degrees or certification programs in personal financial planning. These students upon graduation should have several career options and the high risk, high reward potential model that exists at many firms could be a deterrent. During the hiring process firms will need to understand the appeal of the positions they offer over other choices.

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