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Home > Blog > Monthly Archives: November 2014

Monthly Archives: November 2014

2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program Released

Maddox Hargett & Caruso is currently assisting whistleblowers. If you believe your company might be participating in securities fraud, please contact us. We will keep your information confidential and protected.

Download the 2013 Annual Report findings here:


Apparent theft of $1 million in office supplies leads to Ex-Schwab Broker

Starting in February of this year and lasting an additional 7 months, Jeffrey Brian Grove, a FINRA permanently barred former Charles Schwab & Co. Inc. Broker, allegedly stole around $1 million in office equipment from his former firm. FINRA says, “Grove purchased items through the firm’s order system and then sold them to individuals”.

According to a report from Schwab on Grove’s public BrokerCheck, he was charged with two felony counts in August at the Circuit Court of the Ninth Judicial Circuit. Also according to the BrokerCheck report the specific charges were: conspiracy to traffic in oxycodone and “unlawful use of a two-way communication device to commit a crime. Grove pleaded not guilty, according to court documents.

Grove had spent his 17-year career in financial services with Schwab and serviced approximately 250 accounts.

Sarah Bulgatz, Schwab spokeswoman, said in an e-mailed statement that the firm had cooperated with law enforcement in the investigation and that there is “no evidence of any client impact as a result of Mr. Grove’s illegal activities.”

Military Pensions Target of Lending Scheme

Concern about a new lending practice targeting the military is worrying federal auditors and veterans. Military pensioners are offered money up front in exchange for signing over monthly benefits for a period of time, with few strings attached. After the time period ends, they’re told, they’ll get their monthly payments back.

The Government Accountability Office found that the terms of these financial deals are often unclear and sometimes conceal interest rates that are “significantly higher than equivalent regulated interest rates” from banks and other financial services companies.

18 of 38 companies offering pension advances to veterans and other federal retirees, are located in California, according to a recent federal audit. At least one class action suit has been filed by a Marine Corps veteran from San Diego County.

Jack Harkins, a Marine Corps veteran and past chairman of the United Veterans Council of San Diego County says, “He and other veterans are troubled that their comrades could find themselves in a financial situation in which they borrowed money from companies that didn’t have their best interest in mind.”

Without particular regulations for pension advance companies, they continue to flourish. Another issue identified by federal auditors is the network of companies offering pension advances.

“We found that at least 30 out of 38 companies that we identified had a relationship or affiliation with each other, including working as a subsidiary or broker, or the companies were the same entity operating with more than one name,” the federal auditors wrote.

So far there has been little movement to regulate the new loan products, said Scott Silver, managing partner of the Silver Law Group, which is attempting to file class action lawsuits against pension advance companies across the country. Silver said he gets three to four calls a week from retirees who signed up for pension advances that they now regret. He said the cases are difficult to take to court because the contracts include clauses that prevent veterans from participating in class-action suits and lock them into arbitration.

Emerging Investor Threats for 2015

New products in classic schemes such as, binary options, marijuana-related businesses, stream-of-income investments, and digital currency sure to face investors this coming year.

William Beatty, NASAA President and Washington Securities Director says “Regulators are seeing classic threats to investors morph into new or altered dangers, many fueled by the Internet. Overarching all of these threats are unlicensed agents selling unregistered products to unsuspecting investors.”

The following list of top threats facing unwary investors throughout North America was compiled by the securities regulators in NASAA’s Enforcement Section:

Emerging Threats:

  • Binary Options
  • Marijuana Industry Investments
  • Stream-of-Income Investments
  • Digital Currency & Cybersecurity Risks

Persistent Threats:

  • Reg D/Rule 506 Private Offerings
  • Pyramid and Other Ponzi Schemes
  • Real Estate Schemes, Including Those Using Promissory Notes Affinity Fraud
  • Internet Fraud (including Social Media and Crowdfunding)
  • Oil & Gas Investments in the Fracking Era

State and provincial securities regulators can provide detailed background information about those who are registered to sell securities or provide investment advice, and about the products being offered. Unregistered individuals continue to be the most common subject of enforcement actions by state securities regulators. “It pays to investigate before you invest,” Beatty says.

Top Emerging Investor Threats Closer Look, Courtesy of the Securities Regulator NASAA.

Binary Options: Binary options are securities in the form of options contracts that have a payout that depends on whether the underlying asset – for example, a company’s stock or a stock index – increases or decreases in value. In such an all-or nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased. Unlike a traditional option, a binary option will pay a fixed sum at expiration regardless of the magnitude of the difference between the settlement value and the option’s exercise price. A call binary index option would pay out if the settlement value of the underlying index were at or above the option’s exercise price at expiration, and a put binary index option would pay out if the underlying index were below the option’s exercise price at expiration. Binary option risks include: illegal distributions- trading of binary options without complying with applicable registration and distribution requirements; potential for fraud – fraudulent promotion schemes (with misleading average returns on investment); identity theft (collecting customer information such as credit card and driver’s license data for unspecified uses); refusals to return, or pay out, investor funds; potential for abusive trading: manipulation of the binary options trading software to generate losing trades. Particular investor risks are that the option is an all-or-nothing payout structure and investors can easily lose their entire investment. In addition, much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable local regulatory requirements.

Marijuana Industry Investments: Medical marijuana is legal in 23 states and the District of Columbia, and recreational use is legal in four states and the District of Columbia. The legalization of this once prohibited substance is generating headlines, which, in turn, has grabbed the attention of investors looking to capitalize on the high potential of this new legal market. Many promoters have seized upon this to market and sell investments in the marijuana industry, including investments in companies that provide products and services to the marijuana industry such as vaporizers, hydroponic supplies, lighting systems, and security systems. But as is the case with any headline-generating topic, scam artists also recognize an opportunity to capitalize. Many of these companies are micro-cap companies selling low-priced securities which typically are highly speculative and carry a high degree of risk for investors. Securities regulators are seeing “pump and dump” scams, typical of micro-cap offerings. Fraudsters lure investors with aggressive, optimistic, and potentially false or misleading information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success (the “pump”). Once share prices and volumes peak, scammers behind the ploy sell their shares at a profit, leaving investors with worthless stock (the “dump”). Investors should think carefully and do their due diligence before jumping into marijuana-related investments.

Stream-of-Income Investments: Investors looking for monthly returns are being enticed to invest by companies that introduce investors to individuals selling a stream of income, such as pension payments or government disability payments. These investments can carry significant risks as laws may prohibit the assignment of the stream of income/benefits, the seller typically maintains the legal right to redirect the payment, and if the seller does redirect the payment, the investor may be left with an unenforceable contract right. In addition, the benefits are contingent on the life of the seller, and even life insurance policies on the seller’s life may be cancelled and do not protect an investor if a seller simply redirects the income stream. Sales of these investments are of concern to state regulators because often veterans and disabled persons are preyed upon to assign their benefits when they experience financially stressful times, selling much needed future benefit payments at a significant reduction. Investors should consider obtaining independent legal advice before investing in the purchase of another person’s income stream and also check with their local securities regulator to confirm that the investment and those selling it are exempt from registration or are properly registered.

Digital Currency & Cybersecurity Risks: Digital currencies are emerging as trendy way to pay for goods and services. Bitcoin, perhaps the most popular digital currency, was priced at around $10 per unit in early 2013 but peaked at around $1,200 per unit later that year. The rapid price increase sparked considerable public interest and media attention, creating a fresh market for securities offerings tied to digital currencies. Unfortunately, unscrupulous promoters may be attempting to capitalize on this popularity by illegally offering securities tied to digital currencies. Even legitimate securities offerings tied to digital currencies may present considerable risks to the investing public, including risks associated with volatility and demand for the units, the anonymity associated with the use of certain digital currencies, and the threats posed by hackers using malicious software to compromise network security systems. These risks were highlighted earlier this year when Mt. Gox, once the world’s largest Bitcoin exchange, filed for bankruptcy amid reports that hackers may have stolen around 850,000 Bitcoins worth as much as $500 million.


Are you in a “Hot Spot” for Troubled-Brokers?

Last week we posted a blog titled Elderly Primary Target for Troubled Brokers. Within that blog it discussed parts of the United States that are “Hot Spots”, where these brokers with troubled regulatory records tend to cluster, often among people 65 and older. A good place to check and see if your broker is troubled is by visiting the BrokerCheck website run by FINRA. This site shows if your broker has any red flags, such as complaints, regulatory actions, or even recent bankruptcies. FINRA’s BrokerCheck sometimes has brokers fall through the cracks though, so make sure you investigate your broker before trusting them with you hard earned money. If you’ve been invited to a FREE meal by a broker, they may give good advice. FINRA warns investors to be careful if attending these events, because you may face a hard sell and be bullied into a  follow-up meetings with the broker.

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Elderly Primary Target for Troubled Brokers

The Wall Street Journal has identified 16 hot spots across the country where troubled brokers are going after their elderly targets. Investigating around 550,000 stockbrokers, the WSJ found parts of New York’s Long Island, South Florida, Detroit, Las Vegas and California cities where these brokers are targeting the elderly.

One such troubled broker is, Rafael Golan, who knows all too well of taking advantage of the elderly. Working in Florida, he would invite potential clients to a financial seminar with the incentive of a FREE meal. Dinners like this landed him clients, some have now lodged complaints against him. Golan is now part of a group of brokers with a troubled regulatory record and 5 disciplinary red flags.

BLOG PIC Courtesy: Wall Street Journal

FINRA’s Susan Axelrod, who serves as executive vice president of regulatory operations says, “FINRA has offices in the hot spots identified by the Wall Street Journal, which means we have dedicated significant regulatory resources in these geographic locations.”

Please don’t let yourself or someone you love get taken advantage of by these troubled brokers. Avoid the temptations of a FREE meal offer, if something seems too good to be true, it’s too good to be true. Our law firm is here to help if you have become a target of troubled brokers, contact us today to discuss your claim.


13 firms are accused of failing to protect retail investors in sales of high-risk bonds issued by Puerto Rico’s debt-strapped government. The SEC’s first actions under a rule designed to protect municipal-bond investors from high-risk debt. Under settlement, the 13 firms have neither admitted nor denied their wrongdoing. With the possibility of stiffer sanctions if the alleged violation is repeated and firms agreeing to review policies and procedures and changing them to comply with the rule on minimum amounts.

In addition to Hapoalim Securities and Riedl First Securities, the firms and the amounts they were fined: Charles Schwab & Co., $61,800; Interactive Brokers LLC, $56,000; Investment Professionals Inc., $67,800; JPMorgan Securities, $54,000; Lebenthal & Co., $54,000; National Securities Corp., $60,000; Oppenheimer & Co., $61,200; Stifel Nicolaus & Co., $60,000; TD Ameritrade, $100,800; UBS Financial Services, $56,400; and Wedbush Securities Inc., $67,200.

Unregistered Broker Fraud on the Rise

In 2013 state securities regulators received 9,693 complaints from investors and conducted 5,302 investigations on unlicensed brokers ripping off investors. Ponzi schemes remain the most reported problem and then real estate investment scams. The North American Securities Administrators Association says the internet is making it easier for prey to connect with their victims. If you or someone you now is looking to invest make sure it is with a reputable broker.

FINRA Highlights Risks of Complex Financial Products

In a speech given at the SIFMA Complex Products Forum in New York City on October 29, 2014, Susan F. Axelrod, Executive Vice President of FINRA’s Regulatory Operations, once again emphasized the regulatory concerns over the influx of money into riskier products as investors continued to search for income on their assets, assets that were becoming more complex and moving further out on the risk curve in the quest for yield.

With current yields on money market funds remaining near zero, Ms. Axelrod noted that FINRA continues to see assets moving into complex financial products and longer-duration or high-yield bond products as the average daily trades in investment-grade corporate bonds by retail investors have declined each year, while average daily trades in junk bonds continue to increase.

Among the issues that are at the forefront of regulatory concerns are whether investors are sufficiently prepared for rising interest rates and whether they fully understand how the value of their investments may change when the Federal Reserve Bank begins to raise interest rates as well as whether market professionals and their systems are prepared to maintain orderly trade amid a possible increase – potentially significant increase – in trading-environment volatility?

FINRA and other regulators remain especially concerned that investors are taking on risks that they either don’t understand or cannot afford – especially with respect to interest rate-sensitive products, as well as structured products that embed fixed income securities or fixed income features.

One of the structured retail products of particular concern is “steepeners” which are principal-protected, longer-term notes that generally have fixed-to-floating coupons, with an initial, attractive rate followed by floating rates based on the spread between long- and short-term interest rates. The higher the spread, the steeper the yield curve. Issuers are adding a “trigger” linked to an equity index. The trigger serves as a downside buffer but once the buffer is breached, the investor could potentially lose principal.

”Range accrual notes” are another popular structured retail product which offer potentially attractive yields that are linked to the performance of one or more market reference points, such as the S&P 500 Index or three-month LIBOR. The coupon on the range accrual is determined by the extent to which the reference point value stays in a fixed range during a given period. The greater the percentage of time it meets the criterion, the higher the coupon payment to the investor. Historically, these products offered full principal protection, but as with “steepeners,” FINRA is seeing increased issuance of range accrual notes with principal at risk.

A third product that continues to cause regulatory concern is alternative mutual funds, or Alt Funds, which are marketed to investors as a way to invest in complex, actively managed strategies that will perform in any number of market environments, but may be sold by financial advisors who do not understand the underlying strategies or holdings.

The fourth product highlighted by Ms. Axelrod in her comments was unconstrained bond funds which, given the the complexity of the funds’ strategies, may make it difficult for investors and registered representatives to understand how the funds may perform in various market conditions and may complicate representatives’ suitability determinations.

Finally, FINRA remains concerned about the products that primarily invest in floating-rate bank loans which, due to their high yields and the floating rate, are products that invest in leveraged loans that may be attractive to investors chasing yield and looking to protect their portfolios from rising interest rates. Despite the lower interest-rate risk, these loans carry significant credit and call risk. These loans are also relatively illiquid, trade over the counter and can be difficult to value.

As noted by Ms. Axelrod, complex products continue to present a number of challenges to firms, brokers and clients. In this environment, firms that are going to make complex products available to customers have a duty to make sure investors fully understand how the products operate and the risks of each product which begins with brokers having a full understanding of the products they sell and receiving training on the features of the product as well as their firm’s own suitability guidelines for the products.

Richard Berry Named to be the Next Director of Dispute Resolution by FINRA

Berry will be starting his new position as Executive Vice President and Director of Dispute Resolution starting December 1st. Replacing Linda Fienberg who is set to retire November 30th.  He reports directly to FINRA’s Chairman and CEO, Richard Ketchum.

Ketchum said, “Rick is an effective and thoughtful leader who brings a fresh perspective at a crucial time as we build the future of the forum. We are fortunate to have someone who throughout his career with FINRA has demonstrated an unwavering commitment to ensuring that our forum provides the highest level of service to the investors and other parties who use it. I would also like to thank Linda for the exceptional contributions she has made to FINRA’s Dispute Resolution Forum over the past 18 years.”

Berry graduated from the University of California at Santa Barbara and Hastings College of Law. Beginning his career as a member of the California Bar and practicing in San Francisco. He joined NASD in 1995 as the head of Dispute Resolution’s Los Angeles satellite office, later being promoted to Director of Case Administration in NASD’s New York office in 2001. Berry currently serves as Senior Vice President and oversees FINRA Dispute Resolutions, four regional offices.

For the original press release:

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