Category Archives: SEC Investigation

Already facing hundreds of arbitration claims and lawsuits over a group of collapsed mutual bond funds, Morgan Keegan & Company is now the subject of Well Notice by the Securities and Exchange Commission (SEC). The notice typically signals the likelihood that the SEC could file civil charges in the near future for possible violations of federal securities laws. 

As reported July 16 by the Memphis Daily News, Morgan Keegan’s parent company, Regions Financial Corp., disclosed in a regulatory filing on July 15 that its investment subsidiary, Morgan Asset Management and three unidentified employees received a Wells Notice from the SEC last week.

“We knew it was just a matter of time before the SEC and probably other state regulators (brought) the hammer down,” said Indianapolis attorney Mark Maddox, in the Memphis Daily News article. Maddox is one of dozens of attorneys across the country who has won arbitration cases against Morgan Keegan in the past year for investor losses connected to the mutual funds.

The claims against Morgan Keegan involve at least seven bond funds (collectively known as the “RMK Funds”) that the Memphis-based company formerly managed and which plummeted in value because of the underlying investments made by Morgan Keegan. The investments included untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments. Losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 2008.

Meanwhile, investors in the RMK funds say Morgan Keegan misrepresented the funds as corporate bonds and preferred stocks, giving them the illusion of diversification and low risk levels. 

Ameriprise Financial Services will pay $17.3 million to settle charges by the Securities and Exchange Commission (SEC) that it received undisclosed payments to sell real estate investment trusts (REITs) to customers.  According to the settlement with the SEC, which was announced July 10, sales of certain REITs provided the Minneapolis-based broker-dealer with $31 million in compensation.

“Few things are more important to investors than getting unbiased advice from their financial advisers,” SEC Enforcement Director Robert Khuzami said in a statement. “Ameriprise customers were not informed about the incentives its brokers had to sell these investments.”

REITs are entities that invest in different kinds of real estate or real estate-related assets, including office buildings, retail stores, and hotels. According to the SEC, neither Ameriprise nor the REITs disclosed to investors that additional payments were being made in connection with the sale of the REIT shares or about the conflicts of interest the additional payments created. 

In addition, the SEC found that Ameriprise issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue-sharing payments, making them appear as legitimate reimbursements for services provided by Ameriprise.

Birmingham-based investment firm Aura Financial Services and six of its employees face lawsuits by the U.S. Securities and Exchange Commission (SEC) and the Alabama Securities Commission (ASC) on charges of “rampant churning” of customer accounts,  supervisory failures and other securities violations.

The agencies allege that Aura Financial and its brokers used fraudulent and high-pressure sales tactics as a way to entice clients to open and invest money in brokerage accounts that were later churned by Aura brokers for their personal profit. 

Churning refers to when a broker engages in excessive trading of a customer’s account for the purpose of generating commissions or fees. 

According to a statement issued by the SEC, Aura and the brokers charged pocketed about $1 million in commissions and other fees while largely depleting the account balances of customers through trading losses and excessive transaction costs. 

In addition to the churning charges, the SEC and the ASC say Aura failed to properly supervise its brokers, several of whom had criminal or disciplinary backgrounds and multiple prior customer complaints. 

Aura has 28 days to prove to the ASC why its registration as a broker-dealer and agent in the state of Alabama should not be suspended or revoked.

Securities fraud. Stockbroker misconduct. Unsuitable investments. Churning. Unauthorized transactions. Investment scams. Did you ever wonder what happens to bad stockbrokers or negligent financial advisors who are charged by regulators of committing these acts against individual and institutional investors? If your guess is they find a new career outside the securities industry, think again. Case in point: California investment advisor Jeffrey Forrest.

Investment News wrote a lengthy article on May 24 about Forrest and how the current lack of information regarding rogue stockbrokers has become a growing disservice to the millions of investors who entrust them with their money.

Forrest’s story began in 2006, when he was asked to leave Associated Securities for making improper sales of a hedge fund called the Apex Hedge Fund. Two years later, the Securities and Exchange Commission (SEC) sued Forrest, accusing him of telling clients that the Apex Hedge Fund was designed to provide safety, security and liquidity of investor principal, while generating 3% monthly returns. In truth, the hedge fund was a highly speculative investment that engaged in risky options trading. 

In August 2007, the Apex Fund collapsed, causing investors to lose millions and millions of dollars.

In addition to levying fraud charges against Forrest, the SEC tried to permanently bar him from working in the investment advisory business altogether. 

That didn’t happen, however. Forrest continued to sell insurance in California, as well as run a registered investment advisory firm called WealthWise LLC in San Luis Obispo, California.

As the Investment News story points out, even though the SEC had initiated action against Forrest, he remained licensed by major insurance companies to sell life insurance.  In addition, in March 2009, a Financial Industry Regulatory Authority (FINRA) arbitration panel found Associated Securities and Forrest liable for their actions in connection to the Apex Hedge Fund and awarded $8.8 million to investors.

In June 2009, the SEC officially barred Forrest from acting as an investment adviser. According to its ruling, Forrest will not be allowed to associate with any broker-dealer or serve as investment adviser for five years. At the conclusion of the five years, Forrest can reapply with the SEC or FINRA to once again work for a broker-dealer or investment advisor.

Forrest’s story highlights the need for better transparency of public records on corrupt stockbrokers and investment advisors. Currently, such information typically is extracted from FINRA’s database two years after individuals leave the securities industry because of customer disputes or regulatory and disciplinary events. According to the Investment News story, records of more than 15,000 brokers who have left the securities business are not publicly available to investors. 

Making matters even worse: Some of these brokers have been involved in recent investment-related frauds that occurred during the market’s financial collapse, according to Investment News.

As for Forrest, his records are no where to be found on the BrokerCheck Reports section of FINRA’s Web site.

Tumultuous upheaval in the financial markets has led to a rash of arbitration claims from retail and institutional investors on charges their financial advisors and brokerages misrepresented the risk levels of certain investment products. Some of the central players in these claims: Morgan Keegan & Company and Charles Schwab.

In the case of Memphis-based brokerage Morgan Keegan, investor complaints involve a group high-yield bond funds that the company allegedly marketed and sold as conservative investment options – products designed to provide high yields without excessive credit risks. Instead, the RMK funds made large investments in illiquid and toxic securities, including asset- and mortgage-backed securities and collateral debt obligations (CDOs).

Other funds responsible for the influx of arbitration claims include Charles Schwab & Co.’s YieldPlus funds. 

For more than a year now, investors nationwide have complained to the Financial Industry Regulatory Authority (FINRA), as well as the Securities and Exchange Commission (SEC), that Charles Schwab represented the YieldPlus funds as investments similar to money-market funds, while failing to disclose the fact they held large concentrations of toxic products like mortgage-backed securities. Ultimately, these holdings caused the YieldPlus funds to lose up to 80% of their value.

As reported July 6 by the Wall Street Journal, aggrieved individuals who do file claims with FINRA for their investment losses are likely to experience a more “investor-friendly” process than in the past because of recent changes to how an arbitration hearing is conducted and the composition of the arbitration panel.

Specifically, FINRA launched a pilot program in October 2008 that allows 276 cases against 11 participating brokerage firms to be heard annually by an all-public, three-person panel versus having one of the panel members associated with the securities industry. The program is a win for investor advocates, who contend having an industry-affiliated arbitrator reside on an arbitration panel not only can create bias but also sway other panel members against the investor.

The concept behind target-date mutual funds is simple: Investors place their money in a fund that is managed around the holder’s intended retirement age. Over the years, target-date funds grew increasingly popular as a safe, conservative investment choice, becoming a staple in many 401K plans. 

Enter the financial crisis of 2008. As the stock market plummeted, older investors with 2010 target-date mutual funds found themselves facing losses of 40% or more.

The Securities and Exchange Commission (SEC) is now taking a hard look at target-date mutual funds and whether some companies and financial advisors misled investors about the risks associated with the investments.

As reported June 25 in the New York Times, disclosure policies and regulations overseeing target-date mutual funds are opaque at best. Investment risks vary widely from fund to fund. Adding to the confusion for investors is the fact that mutual fund companies often create target-date funds by bundling them together with existing mutual funds. In doing so, companies or financial advisors are able to collect more assets and fees, while investors are left to figure out what the funds actually contain and exactly how much they are being charged.

 “At the end of the day, consumers need to know what they’re getting into,” said Senator Herb Kohl, Democrat (Wisconsin) and chairman of the Special Committee on Aging, in the New York Times article. “We’d like to see regulation, whether it’s a standardization of target-date composition, or increased clarification of information made available about the plans.”

If you are an individual or institutional investor and have concerns about your investments, contact Maddox Hargett & Caruso at 800.505.5515. We can evaluate your situation to determine if you have a claim.

A group for attorneys representing individual and institutional investors in securities arbitration disputes has formally petitioned the Securities and Exchange Commission (SEC) to remove a requirement that allows representatives from the securities industry to serve as arbitrators on Financial Industry Regulatory Association (FINRA) panels. 

The Public Investors Arbitration Bar Association, or PIABA, filed its petition with the SEC on June 11. 

Currently, FINRA rules mandate that any investor case involving $100,000 or more in damages must be heard by a three-person FINRA arbitration panel, with one of the panelists affiliated with the securities industry. PIABA wants investors to have the right to strike industry representatives from hearing their cases. 

“Requiring customers who believe they have been wronged by the securities industry to have claims decided by panels that must include a representative of that securities industry creates at the least the appearance of bias, if not outright bias,” said PIABA in its petition to the SEC.

As reported June 21 by Investment News, PIABA essentially is asking FINRA to expand a two-year pilot program that it launched in October 2008. The program entails 11 major brokerage firms that agreed to allow up to 276 investor plaintiffs a year choose all-public arbitration panels. 

Year-to-date through May 2009, 3,163 arbitration cases have been filed with FINRA. That is up 85% from the same period last year.

If you are an individual or institutional investor and have concerns about your investments, contact Maddox Hargett & Caruso at 800-505.5515. We can evaluate your situation to determine if you have a claim.