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Stockbrokers Dishonesty about Potential Red Flags

A Wall Street Journal analysis shows more than 1,600 stockbrokers have bankruptcies or criminal charges in their past that weren’t reported. Brokers and the firms that employ them are required to report these issues to the regulatory body commonly called FINRA. Investors can look up brokers on a FINRA website called “BrokerCheck” and discover a broker’s professional history. The Securities and Exchange Commission, oversees the Wall Street self-regulator, has said in rulings on disciplinary proceedings that FINRA, “must depend on its members to report to it accurately” because its membership of over 4,000 firms and 635,000 brokers means it “cannot investigate the veracity of every detail in each document filed with it.”

FINRA, the “first line of defense” to protect investors, can impose penalties including fines and exclusion from the industry for reporting failures. Last year FINRA took disciplinary action against 129 brokers and firms for “reporting and filing violations.” A FINRA spokeswoman said for the year 2014, “They will ensure the database is updated and will focus on bringing disciplinary actions where appropriate.” said a spokeswoman. Reporting gaps aren’t confined to brokers at small firms. The 10 largest brokerage firms in the Journal’s analysis employ at least 450 people with bankruptcy filings that should have been reported, but weren’t. P1-BP352A_BROKE_G_20140305180319[1]

FINRA fines Berthel Fisher $775,000 for compliance failures

Monday, FINRA fined broker-dealer Berthel Fisher & Co. Financial Services Inc. and an affiliate $775,000 for compliance failures, including nontraditional exchange –traded funds and inappropriate sales of alternative investments.

Berthel Fisher, is saying that “The investigation was a result of a sweep done by FINRA throughout the industry, and that the firm settled the case to eliminate any on-going legal expenses.” Securities regulators have fined many broker-dealers that allegedly failed to conduct due diligence to ensure proper training in selling complex products for their employees and investment offerings.

According to FINRA, Berthel Fisher exposed clients to overconcentration in the asset class and their reps recommended $49.4 million in nontraditional ETFs to more than 1,000 clients. Resulting in net loses, the products were sold to customers who preferred a conservative investment approach and sometimes the investments were held for years.

Generally not considered suitable for conservative investors, leveraged and inverse ETF’s can deviate greatly from their benchmark s over periods longer than a day and magnify exposure to market movements.

In addition to the FINRA fine, Berthel Fisher will have to pay nearly $13,293 in restitution to investors and retain a compliance consultant. Berthel Fisher stated, “That it has removed leveraged and inverse ETFs from its platform.”

Floating-Rate ETFs/Funds

A December 9, 2013 article in Fortune Magazine (“The Perils of Floating-Rate Funds”), once again illustrates that, while the allure of these investments may be appealing, their volatility and risks may outweigh their potential rewards which would have serious implications for scores of investors.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, many of these floating-rate ETFs and funds not only have a limited track record by which their performances can be evaluated, but some of their investment portfolios have focused on purchasing concentrated and/or leveraged positions in “speculative grade” debt that could potentially get “hammered” under certain economic scenarios.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, 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).

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A November 15, 2013 article in The Wall Street Journal (“Dangers in ‘Floating Rate’ Funds”), notes that some popular floating-rate funds might have to cut their dividends when interest rates start to rise because of their use of leverage or borrowed money to purchase securities in their portfolios which has been the mechanism that has enabled them to offer enhanced yields.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, the use of leverage by many of these floating-rate ETFs and funds means that, if and when interest rates rise, their cost of borrowing will similarly increase which could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, 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).

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A September 17, 2013 article posted on CNBC.com (“The Bond Market’s Ticking Time Bomb”), notes that despite their recent popularity, floating-rate funds have potential unknown minefields that do not adequately compensate investors for the risks that they are being exposed to.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, “taking on more credit risk to mitigate interest rate risk is not logical” and could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, 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).

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A September 13, 2013 article in The Wall Street Journal (“Floating-Rate Funds: Choose Them Wisely”), notes that while the growing popularity of floating-rate bond funds has led to a boom in the issuance of these short-term securities,” many financial advisors are cautioning investors to be more choosy before committing their financial assets to this category of investments which can involve risky levels of borrowing or leverage.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, “greater market turbulence is likely to leave floating-rate funds that hold below-investment grade bonds more vulnerable to increasing downward pressure on prices” which could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, 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).

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A September 2013 research report issued by The Vanguard Group, Inc. (“A Primer on Floating-Rate Bond Funds”), notes that while floating-rate funds can potentially reduce interest rate sensitivity, this potential advantage is often associated with investors having to incur “significant” credit risk which is much greater than that for money market and short-term bond funds.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, the “returns of floating-rate funds are inherently tied to the considerable credit risk associated with ‘junk’ rated loans” and may have “above-average liquidity risk” – both of which could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, 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).

IBJ Article: The ‘Wolf’ Is Still at Gramma’s Door

In the movie, “The Wolf of Wall Street,” disgraced broker Jordan Belfort and owner of the now-defunct brokerage firm, Stratton Oakmont, is portrayed by Oscar-nominated actor Leonardo DiCaprio. DiCaprio’s good looks and sharp wit create an image of Belfort that is both motivational and over the top. Belfort, if we are to believe what we see in the film, is a phenomenal salesman – a self-made man committed to making lots of money for himself and his friends.

What isn’t shown in the Hollywood movie is the carnage that Belfort and his minions unleashed on thousands of his unsuspecting investors. Belfort ultimately scammed these investors out of more than $100 million. My law firm represented many of Belfort’s victims. In 1999, Belfort pled guilty to charges of international securities fraud and money-laundering. Facing 20 to 30 years in jail, he cut a deal with federal authorities by agreeing to gather evidence against friends and colleagues in exchange for a much lighter sentence. When the case finally went to trial in 2004, Belfort was convicted and sentenced to four years in federal prison. In the end, he only served 22 months at a fairly cushy federal prison camp in California, sharing a cell with comedian Tommy Chong. It was Chong who encouraged Belfort to write his book. As is the case with most white-collar criminals, his penalty didn’t fit his crimes, as much more prison time was warranted.

Missing in the Hollywood screen version of Belfort’s life are the victims who became caught in his web of fraud and lies. Stratton Oakmont was a so-called “boiler room” operation; employees used their telephones and call lists to cold call potential investors and then push them into buying shares in companies that Stratton Oakmont held positions in. When the price of one of those stocks rose, Stratton would sell its own holdings at a huge profit, leaving thousands of smaller investors holding falling stocks – many of which became worthless.

The majority of Stratton Oakmont customers were unsophisticated investors who had little or no knowledge about the complicated world of Wall Street investing. They were hard-working individuals – people like Peter Springsteel, a Connecticut architect who was just starting a business, when he was contacted by a Stratton Oakmont broker in the early 1990s. Springsteel bought into the sales pitch and ended up losing about half of his life savings.

Belfort’s fraud is far from isolated. Similar investment schemes continue to be daily news fodder today. Only the ringleaders and companies have changed – Bernie Madoff, Tim Durham, Medical Capital Holdings, Provident Royalties. Indeed, the fraud itself is even bigger than Belfort’s swindle. Stratton Oakmont was a $100 million scam. Madoff’s Ponzi scheme produced $18 billion in losses for investors.

The fact that investment scams like Belfort’s continue to exist raises a number of questions, not the least of which is the relatively minor punishments given to those like Belfort who perpetuate these crimes of fraud. Another big issue is the safety of investors and the extent to which they are actually protected from bad brokers or firms by the various securities regulators who are supposed to be the cops on the beat. This is especially relevant given that fact that many brokers today are able to simply wipe their public records clean of any negative comments or regulatory citations by seeking “expungements” and thereby deleting the bad information against them.

In the end, the story of Jason Belfort and Stratton Oakmont may best serve as a reminder for all investors to take the time to investigate their broker’s professional background and, even more important, to try and thoroughly understand the investments in which they are putting their hard-earned money into. If the story or sales pitch sounds too good to be true, you may be dealing with a wolf in Gramma’s negligee.

Mark E. Maddox is the Managing Partner of  Maddox Hargett & Caruso, P.C. A former Indiana Securities commissioner, Maddox represents investors in securities litigation and arbitration matters.

Elder Fraud

Partner Mark Maddox participated in  the WFYI Public Radio’s weekly news and public affairs program, “No Limits”,  a discussion of fraud against the elderly with guests Indiana Secretary of State Connie Lawson, Nancy Stone of Senior Medicare Patrol and attorney Mark Maddox on January 23, 2014.

Wolf of Wall Street Speaking Engagement

Partner Steven B. Caruso participated in a panel, at the Benjamin N. Cardozo School of Law, titled “The Wolf of Wall Street: Behind the Scenes at Stratton-Oakmont”. Caruso was featured in the New York Law Journal for his participation in the program, January 2014. newyorklawjournal.com-Wolf_of_Wall_Street_Viewed_Through_a_Litigators_Lens

SEC Issues Risk Alert on Alternative Investments

Alternative investments can be risky, illiquid, and complicated and, as witnessed in a growing number of cases in the past few years, cost investors thousands of dollars in financial losses.

Last week, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) took up the subject of alternative investments by issuing a Risk Alert on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.

“Money continues to flow into alternative investments.  We thought it was important to assess advisers’ due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such investments or recommendations are consistent with client objectives,” said OCIE Director Drew Bowden.

The alert, which can be read here, describes current industry trends and practices regarding advisers’ due diligence. In particular, the alert notes that advisers are:

*Seeking more information and data directly from the managers of alternative investments

*Using third parties to supplement and validate information provided by managers of alternative investments

*Performing additional quantitative analysis and risk assessment of alternative investments and their managers.

However, SEC staff observed certain deficiencies in several of the advisory firms examined, including:

*Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients

*Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted

*Having due diligence practices that differed from those described in the advisers’ disclosures to clients.

 

Fraudulent Investment Clubs Among Latest Financial Scams

Despite warnings state and federal law enforcement and securities regulators, investment fraud schemes continue to grow across the country, damaging lives and producing thousands of dollars in financial losses for their unsuspecting victims.

One recent fraud scam involves so-called investment clubs.  In this case, the scam amounted to $36 million. One of the perpetrators, Christopher Jackson, 46, recently was convicted in a federal trial in Sacramento for his participation in the scheme known as Diversified Management Consultants, or DMC.

According to court documents, between 2003 and 2009, DMC purported to help people invest money in real estate development and save their homes from foreclosure. In reality, authorities said, DMC was an investment fraud scheme that defrauded at least 180 people out of approximately $36.9 million.

U.S. District Judge Troy L. Nunley ordered Jackson remanded into custody immediately after the jury’s verdict. Jackson is to be sentenced April 10.

Jackson’s accomplices, Michael Bolden; Victor Alvarado; Nicholo Arceo; Erica Arceo; and Garry Bradford – all of Sacramento – have pleaded guilty to charges of conspiracy, wire fraud and false statements. They are currently awaiting sentencing.

Court documents and evidence produced at the trial show that DMC was an umbrella for the various defendants’ investment clubs. The defendants induced people to invest their ordinary savings, tax-deferred retirement savings and proceeds of cash-out residential loan refinancing. They told investors that their money would be used to purchase property and buildings for a real estate venture. Instead, the victims’ money went to pay other investors’ fake returns on investments and to pay for the defendants’ personal expenses, including a luxury lifestyle, authorities contend.

As reported by the Sacramento Bee on Jan. 23, Jackson was the “closer” among the DMC participants. His investment club – Genesis Innovations – recruited approximately 80 investors and took in more than $10 million. Many of Jackson’s victims invested all of their retirement savings with him based on his promise of a high interest rate and very little risk. Out of the $10 million, Jackson invested no more than $2.5 million in developing real estate, authorities said.

The rest of the money was allegedly used by Jackson to pay false returns to other investors and to live in a way that Jackson himself compared to an entertainment or sports star. He used the Genesis Innovations account to drive a Lamborghini, a Rolls Royce, a BMW and a Land Rover. He also employed a personal chef and a bodyguard, who at times carried a metal briefcase in which Jackson carried cash.

In addition, Jackson took annual trips to Las Vegas, where he paid for an entourage of guests to join him at the finest hotels and restaurants, authorities said. He also spent more than $1 million on purchases, including jewelry and landscaping his house, with all the money coming out of the investment club account.

Is Inland American Going Liquid?

In 2012, one of the largest non-traded real estate investment trusts (REITs) – Inland American Real Estate – was the target of a Securities and Exchange (SEC) nonpublic, fact-finding investigation as part of an effort to determine whether it had violated certain federal securities laws. Now, Inland American could be in line for a merger or listing of its shares, according to a story reported last Friday in Investment News.

In a letter to shareholders, Inland American stated that, “In connection with our board’s review of an additional liquidity option for our stockholders, this letter serves as notice that we are suspending our current share repurchase program, which is available to stockholders in the event of death or for stockholders that have a ‘qualifying disability’ or are confined to a ‘long-term care facility…”

As reported in the Investment News story, Inland American has had its share of issues over the years, many of them tied to the 2008 financial crisis. Launched in 2005, Inland American was among a group of large non-traded REITs that suffered in the wake of fallen commercial real estate prices. Originally sold to investors by brokers at $10 per share, the REIT’s most recent estimated per share valuation at the end of December was $6.94 per share.

Stay tuned.

JP Morgan’s Jamie Dimon Gets a Big Raise

Despite the fact that JPMorgan Chase & Co. has recently been mired in regulatory and criminal probes – which ultimately cost the bank more than $23 billion in settlements – the person who oversaw the fiasco unfold is getting a big raise. As reported in the company’s public filing last week, JPMorgan’s board of directors opted to give CEO Jamie Dimon a 74% raise – or $20 million – last year, bringing his pay closer to where it stood before the board faulted his oversight of botched derivatives bets, reports a story in the Los Angeles Times.

Directors had previously cut Dimon’s 2012 pay after the company lost $6.25 billion on the so-called “London Whale” derivatives trade that Dimon once referred to as a “tempest in a teapot.”

Other tempests in the teapot that later proved noteworthy included a record settlement of $13 billion to resolve inquiries into mortgage-bond sales. The bank also paid $2.6 billion and avoided criminal prosecution while settling claims that it failed to stop disgraced broker Bernie Madoff’s Ponzi scheme.


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