Over-concentration is the opposite of diversification. An over-concentrated portfolio means too much of your money is tied up in one security or asset class, such as a single stock, bond, mutual fund, or other investment vehicle. Over-concentration happens if you buy or sell too many shares of a stock in one company. It also occurs when you invest too much in one market sector (remember the dot.com era?).

A more recent example of over-concentration occurred last year over sales of reverse convertible notes. In February 2010, the Financial Industry Regulatory Authority (FINRA) fined H&R Block Financial Advisors, Inc. (n/k/a Ameriprise Advisor Services, Inc.) $200,000 for failing to establish adequate supervisory systems and procedures for sales of the notes to retail customers. FINRA also fined and suspended H&R Block broker Andrew MacGill for making unsuitable sales of the investments to a retired couple. The firm was ordered to pay $75,000 in restitution to the couple for losses they incurred.

If a substantial portion of your money is tied up in one investment, you are taking on a considerable amount of risk. When it comes to investing, the rule of thumb is never to put all of your eggs - i.e. your money – in one basket. Diversification is key, something that a good stockbroker or investment advisor should know.

A good investment advisor also will take into consideration your risk tolerance levels, as well as your overall investing objectives. If a broker recommends an investment that falls outside of either of these two areas, you may have reason for concern. Most important, you could be setting yourself up for financial disaster.

Over-concentration complaints by investors are on rise. If you believe you or a family member suffered substantial investment losses as a result of over-concentration, please contact us.

For the third time in three years, Next Financial Group has been fined by the Financial Industry Regulatory Authority (FINRA). The latest is a $400,000 fine, plus $102,000 in restitution to clients.

According to FINRA’s Broker Check Web site, the action is attributed to Next Financial failing to “have a reasonable system for reviewing the transactions of its registered representatives for excessive trading.”

The allegations by FINRA go on to state that one representative was able to churn client accounts and that Next Financial’s lack of a reasonable supervisory system enabled the activity to go undetected.

In fact, FINRA says Next Financial failed to detect excessive trading by a registered representative in five accounts, resulting in about $102,376 in unnecessary sales charges.

As reported Nov. 30 by Investment News, FINRA also states that Next Financial failed to identify or follow up on other transactions that suggested excessive trading by 13 other reps in 39 additional client accounts.

Even when Next Financial did detect such trades, it took no action, according to FINRA.

Financial fraud is growing, and more broker/dealers are at the center of the scams. According to data from the Securities and Exchange Commission (SEC), the number of cases brought by the regulator involving broker/dealers rose significantly last year.

In 2009, 16% of the financial fraud cases generated by the SEC involved broker/dealers, compared with 9% in 2008. In 2007, 14% of cases involved broker/dealers.

The percentage of cases involving securities offerings also escalated last year – to 21% from 18% in 2008.

Financial reform is a hot topic on Capitol Hill, with legislation designed to rein in broker/dealers through new oversight measures currently being contested on the Senate floor. At the heart of the debate is a bill containing a provision to strengthen the protection of consumers by requiring stock brokers and insurance agents to act in the best interest of their clients. As it turns out, the provision may never see the light of day.

As reported March 8 by the Washington Post, certain Senators are in disagreement over the provision, prompting some insiders to predict that new legislative language will ultimately be inserted into the bill that directs the Securities and Exchange Commission (SEC) to study the rules currently governing brokers and registered investment advisers.

As it is, investment advisers operate under fiduciary standards. That means they are legally and ethically bound to put their clients’ interests ahead of their own. By comparison, brokers adhere to suitability standards, meaning they only need to have “reasonable grounds” to believe that the financial products they recommend to clients are suitable for their needs. In some instances, however, those investments could be lucrative for the broker at the expense of clients.

In addition, broker/dealers usually do not have to make as many disclosures regarding conflicts of interest, fees or previous infractions as investment advisers.

And therein is the problem. The services that broker/dealers and investment advisers provide are almost indistinguishable. Case in point: In 2008, the SEC commissioned a study by the Rand Corp., which showed that investors were equally confused about the differences between the two groups.

It would seem commonsense that investment advisers, broker/dealers and any and all financial professionals connected in some way to investment-related services and products should be subject to a consistent, uniform fiduciary standard. The operative word, however, is commonsense.

Two Virginia insurance agents – Julius Everett “Bud” Johnson and Walter Ray Reinhardt – face accusations by the Virginia State Corporation Commission (SCC) of misleading investors regarding $1.7 million in sales of promissory notes.

Last fall, the SCC ordered Johnson, Reinhardt and their companies to stop selling the notes for 120 days, alleging that they were illegal securities because neither the notes nor the sellers were registered with the state of Virginia. As for investors – many of whom were reportedly told that their money was guaranteed – they want answers.

“All I got was a runaround,” said James Kelley, a Chesterfield County, Virginia, man who invested $25,000 that was supposed to be repaid in January but wasn’t, according to a Feb. 3 article in the Richmond Times Dispatch.

Kelley said he went to speak with Johnson at his office, where he was told Johnson was out. When Kelley waited in the parking lot, however, he says he saw Johnson leave a few minutes later out of a back entrance of the building.

Gerald Crant is another investor who placed $100,000 with Johnson. He claims Johnson told him the promissory notes were insured by the Federal Deposit Insurance Corp. Now he’s worried because he hasn’t received his January interest payment.

According to the Times Dispatch article, Kelley says that Johnson told him he would get more information in the coming weeks, while Crant says he received a letter from Johnson’s lawyer stating that the slow economy was the reason he had to stop making interest payments.

The SCC, which regulates securities transactions in the state of Virginia, lists a litany of allegations against both Johnson and Reinhardt and the 12 companies they operate, including:

· Making material misrepresentations and material omissions;

· Failing to provide financial disclosures;

· Failing to provide investment-risk disclosures;

· Failing to provide a litigation or compliance disciplinary disclosure;

· Failing to disclose that the securities offered were not registered; and

· Falsely stating that the securities were exempt from registration.

In addition, the SCC’s records accuse Johnson and his companies of operating as a fraud. The allegations include issuing corporate promissory notes for one issuer then transferring the money to another entity and using new investors’ money to pay interest to previous investors – something typically associated with a Ponzi scheme.

In September 2009, SCC records show that Johnson and Reinhardt stated they had sold $1.7 million of notes to 38 Virginians, and that the notes were private offerings and complied with federal regulations. A senior investigator with the SCC says he found documents showing Johnson guaranteed $3.2 million of the companies’ debt, while Johnson declared he did not know the outstanding balance on the notes.

The companies that the SCC cites as those operated by Johnson are: Benefit Contract Administrators, MHC Linen Service LLC, River City Cleaners LLC, Roberts Awning Restoration and Renewal LLC (formerly known as Roberts Awning LLC).

Other defendants in the case include Benefit Contract Administrators LLC, Mid Atlantic Insurance Agencies, LivingWell Healthcare of Virginia LLC, Everett Awnings doing business as Roberts Awnings, and FIC Financial Group.

Reinhardt operates three businesses: First Fidelity Financial of Richmond LLC, Commonwealth Assurity LLC and Capital Investor Group.

Reinhardt is accused of selling illegal securities between 2005 and now. He also is accused of operating as the broker-dealer in offerings and selling the illegal promissory notes of Benefit Contract Administrators, MHC Linen Service, River City Cleaners, Mid Atlantic Insurance Agencies, LivingWell Healthcare of Virginia, Roberts Awning Restoration and Renewal and FIC Financial Group.

As an aside, if the securities in the Johnson and Reinhardt case had been registered, investors might have learned some important information about the people and companies behind their investments. Specifically, Reinhardt had previously been barred twice from selling securities in North Carolina.

If you suffered investment losses in connection to either Julius Everett Johnson or Walter Ray Reinhardt, contact us to tell your story.

Oren Eugene Sullivan is the disgraced South Carolina broker who recently pled guilty to mail fraud in connection to a multimillion dollar, decades-long Ponzi scheme. In January, Sullivan admitted in federal court that from 1995 through 2008 he ran the Ponzi scheme, selling fake investments to individuals and groups of investors, according to the U.S. Attorney’s Office in South Carolina.

So why does the Web site of the Certified Financial Planner Board of Standards still list Sullivan as a CFP in good standing, with no public disciplinary history? It’s a question that was first raised in a Feb. 14 article in Investment News.

As the story aptly points out, designating authorities are finding it more and more difficult to keep up with the bad deeds and misconduct of financial representatives like Sullivan.

Monitoring conduct is an arduous and difficult task. The CFA Institute, which says that 85% of its investigations begin as a result of self-disclosures and 10% from news reports and regulatory Web sites, has two investigators who monitor professional conduct. Most of that work is primarily done via the Internet, according to the Investment News article.

Other designation groups follow similar investigative routes, as well as perform internal investigations before deciding upon punishment. The process, however, can be a lengthy one, ranging from several weeks to a year or more.

Case in point: Oren Eugene Sullivan.

Records with the Financial Industry Regulatory Authority (FINRA) state that Sullivan sold clients nearly $4 million of fake promissory notes between 1995 and 2008. He repaid about $1.5 million before getting caught by authorities. In August 2009, Sullivan was barred by FINRA. In January 2010, he pled guilty to one fraud charge and faces a maximum of 20 years in prison and a fine of $250,000.

Somehow Sullivan’s actions didn’t mar his CFP designation with the CFP Board, however. Investment News did note that the CFP Board was aware of the allegations against Sullivan, but wouldn’t confirm whether they were actually investigating him.

Christopher Bass, an Albany investment broker and president and CEO of Swiss Capital Harbor/USA, was arrested Feb. 8 on federal criminal charges of securities fraud for an alleged scheme involving more than 200 investors and $5.5 million. 

According to the criminal complaint, Bass allegedly deceived investors with promises of high returns via investments in his company, which also operated under the name Revisco Finanz. Investigators say the alleged scheme dates back to January 2007. 

Investors’ funds were supposedly invested in several overseas projects, including power plants that authorities now believe may not exist. Court documents say that less than half of investors’ money was used for the purposes conveyed by Bass. Instead, the majority of money went to bankroll Bass’ personal expenses or to repay other investors. 

As reported Feb. 9 by Times Union.com, bank records show that Bass allegedly used $169,858 of investors’ deposits to finance the purchase of his upscale home in Menands, and that at least $700,000 of investors’ money was disbursed to Bass.  Another $550,000 of investors’ deposits was used for payroll expenses at Swiss Capital Harbor, including $200,000 in gross pay to Bass and at least $50,000 to his family members. 

The complaint also says that more than $1.25 million of investors’ deposits was used to repay investors who ultimately demanded to get their money back or income from their investments, which is indicative of a Ponzi scheme.

According to the Times Union.com article, several people who were solicited to invest money with Bass and Swiss Capital Harbor had previously warned state and local authorities more than two years ago that his company was “suspicious” and appeared to be inflating the rate of its returns to investors. 

Bass’ offices, as well as his Park Hill Lane home, were raided last August by U.S. Custom agents. 

Some investors now say they have lost their entire life savings because of Bass’ alleged scheme.

Bank of America execs, including former CEO Ken Lewis, are gearing up for a heated legal battle with New York Attorney General Andrew Cuomo. On Feb. 4, Cuomo charged Lewis of defrauding investors and the U.S. government when he helped put the wheels into motion for Bank of America to buy financially troubled Merrill Lynch & Co.

Specifically, Cuomo alleges that Lewis, as well as BofA’s former chief financial officer Joe Price, failed to tell shareholders about the $16 billion in losses that Merrill had incurred before it was bought by Bank of America. After shareholders approved the acquisition, Cuomo says Lewis then demanded government bailout funds to keep the deal afloat.

In total, the government injected $45 billion into Bank of America via the purchase of preferred shares, including $20 billion approved after the merger in January 2009.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Separately, the Securities and Exchange Commission (SEC) announced that it had reached an agreement with Bank of America over the company’s decision to pay $3.6 billion of bonuses to former Merrill employees for fiscal year 2008. BofA agreed to pay a $150 million fine to settle the matter.

David McFadden, a former broker for Securities America, has been sentenced to five years in prison for running a securities fraud scheme that cost at least 150 clients – many of whom were retired or living on a fixed income – tens of millions of dollars in losses.

McFadden headed a company called Diversified Financial Services and was a registered representative for Securities America. And while he touted himself as a certified public accountant, he neglected to tell clients that he hadn’t been a licensed CPA for more than two decades.

Most of McFadden’s victims were solicited via seminars that he held for longtime Exxon-Mobil employees. According to court documents, McFadden convinced investors to make early withdrawals from their retirement accounts and then deposit the money into stock accounts and/or risky securities. McFadden, meanwhile, would make commissions on the purchases, even though he knew such investments were unsuitable for those approaching retirement.

McFadden pled guilty on May 27, 2009, admitting that he conspired with others to commit a securities fraud scheme by falsely promoting his qualifications and credentials as a CPA and financial planner to obtain clients.

“He lied to them and told them they were going to have their nest eggs for the rest of their lives,” said Assistant U.S. Attorney Dorothy Manning Taylor.

If you have a story to tell involving Securities America and/or David McFadden, please contact our lawyers. After reviewing your situation, they will advise you of your options.

Oren Eugene Sullivan, a former broker with New York Life Securities, was a master at pulling the wool over investors’ eyes. For decades, the former South Carolina broker fleeced investors out of millions of dollars in an elaborate Ponzi scheme. What makes Sullivan’s case truly shocking, however, are the victims Sullivan allegedly preyed upon. Many were more than 80 years of age, mentally and physically impaired, widows, church members and/or long-time family friends. One investor who gave Sullivan $70,000 suffered from Alzheimer’s disease. Another investor was confined to a wheelchair, her legs amputated. She invested tens of thousands of dollars with Sullivan.

In August 2009, the Financial Industry Regulatory Authority (FINRA) permanently barred Sullivan for life from working in the securities industry. On Jan. 4, 2010, Sullivan pleaded guilty to one felony count of mail fraud in connection to operating a Ponzi scheme.

Sullivan apparently ran his scam from 1998 to October 2008, obtaining money from investors for his personal use while leading clients to believe they were investing in promissory notes or other legitimate financial products issued by New York Life and its affiliates.

The scheme came crashing down after one of Sullivan’s elderly customers and her daughter discovered that he had misappropriated $10,000 given to him for the purchase of variable annuities. Instead of investing the money as promised, Sullivan used the funds to pay for his son’s wedding. Over a period of approximately three years, the customer had never received a statement showing the purchase or the investment performance of the variable annuities.

Most of Sullivan’s victims had previously invested in one or more NYLife products sold by the former South Carolina broker. In exchange for the money he took from customers, Sullivan usually provided a one-page note that outlined the amount of principal and the promised annual interest rate. That rate ranged from 6% to 12%.

In total, federal authorities say Sullivan misappropriated $3.7 million from investors.

As for Sullivan, he faces a maximum fine of $250,000 and the possibility of up to 20 years in federal prison. Sentencing is scheduled for April 2010.