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Home > Blog > Category Archives: Stockbroker Misconduct

Category Archives: Stockbroker Misconduct

Tom Buck Update

The latest on broker Tom Buck, is a settlement has been made costing $4.1 Million for Merrill Lynch. For the all the details visit

Citigroup Global Markets Inc. Fined $15 Million by FINRA for Supervisory Failures

FINRA announced on November 24th that it fined Citigroup Global Markets, Inc. $15 million for supervisory failure in communications between its equity research analysts and its clients and Citigroup sales and trading staff, and for permitting one of its analysts to participate indirectly in two road shows promoting IPOs to investors. Department of Enforcement and the Office of Fraud Detection and Market Intelligence conducted this investigation for FINRA.

FINRA Executive Vice President and Chief of Enforcement, Brad Bennett said, “The frequent interactions between Citigroup analysts and clients at events like ‘idea dinners’ created a heightened risk that views inconsistent with research would selectively be disclosed to clients. Citigroup failed to successfully police these risks.”

Citigroup’s failure to supervise definite communications by its equity research analysts at “idea dinners” hosted by Citigroup equity research analysts that were also attended by some of Citigroup’s institutional clients and sales and trading personnel. At these dinners, Citigroup research analysts discussed stock picks, which, in some instances, were inconsistent with the analysts’ published research. Despite the risk of inappropriate communications at these events, Citigroup did not effectively monitor analyst communications or provide analysts with adequate management concerning the boundaries of permissible communications.

FINRA found that from January 2005 to February 2014, Citigroup failed to meet its supervisory obligations regarding the potential selective distribution of non-public research to clients and sales and trading staff. During this period, Citigroup issued approximately 100 internal cautions concerning communications by equity research analysts. However, when Citigroup discovered violations involving selective dissemination and client communications, there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the strictness necessary to deter repeat violations of Citigroup policies.

In 2011, FINRA found that, a Citigroup senior equity research analyst helped two companies in preparing presentations for investment banking road shows. Between 2011 and 2013, Citigroup did not particularly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials. Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, in settling this matter.

For more information, please visit



BrokerCheck a Good Line of Defense for Investors

Failed deals involving private placements, non-traded REITs and high-risk investments like inverse and leveraged exchange-traded funds (ETFs) shed new light on why investors need to be as informed as possible about their financial investments. And the Financial Industry Regulatory Authority’s BrokerCheck database is a good place to start.

BrokerCheck is designed to help investors quickly and easily search the professional backgrounds of brokers and investment firms. This month – partly in response to address recommendations made in a January 2011 study by the Securities and Exchange Commission (SEC) – FINRA announced the addition of several new features to its BrokerCheck system.

With the latest improvements, investors and others now have:

  • Access to more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm. In addition, new Help icons are designed to clarify commonly referenced terms throughout the system and within BrokerCheck reports.
  • Centralized access to licensing and registration information on current and former brokers and brokerage firms, and investment adviser representatives and investment adviser firms.
  • The ability to search for and locate a financial services professional based on main office and branch locations, as well as the ability to conduct ZIP code radius searches in increments of five, 15 or 25 miles.

In 2011, individuals used BrokerCheck to conduct 14.2 million reviews of broker or firm records. Investors can access BrokerCheck here.


Investors Need More Protection

It’s an idea that may be long overdue following the recent rash of Ponzi schemes and failed private placement deals: Revisiting the protections afforded to investors by the Securities Investor Protection Corporation (SIPC).

The SIPC, which is the public corporation charged with aiding victims when their brokerages fail or file bankruptcy, took center stage on March 7 at a Congressional hearing titled The Securities Investor Protection Corporation: Past, Present, and Future.

Steven Caruso, a partner with Maddox, Hargett and Caruso, P.C. testified at the hearing. His recommendations for improving the SIPC include increasing investor protection from $500,000 to $1.3 million and indexing that amount to the rate of inflation moving forward.

Currently, brokers pay an annual premium to fund the SIPC. Should SIPC coverage be expanded in the future, however, these same brokers may be tapped for additional funds.

Proponents of the idea say it enhances accountability, forcing brokers to improve their due diligence of the products and investments they market and sell to clients.

During the March 7 hearing, Caruso also suggested that investment advisers and brokers/dealers be required to purchase insurance given that they are entrusted with billions of dollars in investment funds.

“There is no free lunch in this world,” Caruso said in a March 7 Investment News article.

“When we have a fiduciary who is out there as an investment professional, requiring insurance will go a long way to helping potential [fraud] victims.”

FINRA Issues Investor Alert On Account Statements

Investors whose portfolios have taken a hit recently might not be too keen to open their account statements. Bad move, according to the Financial Industry Regulatory Authority (FINRA). Instead, the self-regulator cautions investors to review their statements carefully and immediately contact the firm issuing their account statement about any unexplained fees, overcharges or unauthorized transactions.

“A single keystroke can make the difference between 100 and 1,000 shares,” says Gerri Walsh, FINRA’s Vice President for Investor Education.

On Feb. 23, FINRA issued a new Investor Alert titled It Pays to Understand Your Brokerage Account Statements and Trade Confirmations that details in plain language key elements of customer account statements, plus “red flags” that can help investors spot and avert problems.

The Securities and Exchange Commission (SEC) also is taking up the subject of unauthorized trading. On Feb. 27, it issued a risk alert outlining preventative measures to help brokerages improve their policing of authorized trades.

Over-Concentration: A Growing Concern For Investors

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 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.

Next Financial Hit With $400K Fine By FINRA

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 Cases Against Broker/Dealers On The Rise

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.

Debate Over Fiduciary, Suitability Standards Heats Up

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 Face Charges Over Promissory Notes

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.

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