Investors filing claims of misrepresentation, churning, omission of facts, failure to supervise and stockbroker fraud are growing in number. According to the latest statistics released by the Financial Regulatory Authority (FINRA), new case filings through June 2009 were 3,875, compared to 2,129 cases in same period of 2008 and 1,656 in 2007. 

The type of controversy most frequently cited in FINRA’s June 2009 statistics was breach of fiduciary duty, followed by misrepresentation and negligence.  In comparison to 2008, the breakdown is as follows: 

• Margin calls: 64 in 2008; 128 in June 2009.
• Churning: 212 in 2008; 206 in June 2009.
• Unauthorized trading: 248 in 2008; 440 in June 2009.
• Failure to supervise: 1,029 in 2008; 2,552 in June 2009.
• Negligence: 1,602 in 2008; 3,404 in June 2009.
• Omission of facts: 1,201 in 2008; 2,436 in June 2009.
• Breach of fiduciary duty: 2,836 in 2008; 4,432 in June 2009.
• Unsuitability: 1,181 in 2008; 2,508 in June 2009.
• Misrepresentation: 2,005 in 2008; 3,530 in June 2009. 

In addition to an influx of new arbitration claims filed, more investors are coming up victorious. Through June 2009, FINRA arbitration panels ruled in favor of investors 46% of the time, compared to 42% for the same period in 2008. 

The continued surge of arbitration claims is attributed to several factors, including the ongoing turmoil in the nation’s financial markets. Other reasons concern specific investment products such as variable annuities and credit derivatives. A proliferation of several high-profile Ponzi schemes and other investment frauds also has spurred a rise in claims by investors.

At least 440 investors, many of whom were elderly individuals and retirees, found themselves duped in a $50 million real estate investment deal that turned out to be a Ponzi scheme. On July 28, the Securities and Exchange Commission (SEC) obtained a court order to halt the alleged scam, freezing the assets of the alleged perpetrators – John J. Bravata and Richard J. Trabulsy of Michigan – as well as the companies they formed, own, and control: BBC Equities LLC and Bravata Financial Group, Inc. 

According to the SEC, the two men raised more than $50 million from investors by offering them membership interests in a purported real estate investment fund with promised annual returns of 8 to 12%.  However, less than half of the money raised was actually spent acquiring real estate. Instead, Bravata and Trabulsy used money from new investors to make Ponzi-like payments to earlier investors. They also spent several million dollars of investors’ money on themselves, financing exotic vacations, gambling debts and other extravagant items. 

The SEC’s complaint, filed in U.S. District Court for the Eastern District of Michigan, also charges Bravata’s son, Antonio Bravata of Brighton, of selling the unregistered securities and acting as an unregistered broker.

A Portland, Oregon, Financial Industry Regulatory (FINRA) arbitration panel has found Morgan Stanley liable regarding an investor’s claims of making unsuitable investments, misrepresentation and omissions.  

The award, which was rendered on July 24, included nearly $40,000 in compensatory damages plus 9% interest, $39,000 in claimant’s attorney fees and $4,200 in arbitration filing and hearing fees. 

The case is Arbitration No. 08-03307.

Rural farmers in central Missouri have their own version of a Midwest Bernie Madoff. Cathy Gieseker, a long-time Missouri grain dealer and owner of T.J. Gieseker Farms and Trucking, has been charged with running a pyramid scheme built on grain purchases that allegedly swindled hundreds of farmers out of as much as $50 million. 

The July 20 indictment alleges that between October 2002 and February 2009 Gieseker began to market grain on behalf of farmers, promising them that she could sell their grain for higher-than-market prices because of supposed contracts secured from Archer Daniels Midland Company (ADM). During the course of the reported Ponzi scheme, Gieseker delivered and sold virtually all of the grain at ADM. 

In reality, however, Gieseker did not have access to any of the contracts that guaranteed the above-market prices quoted to farmers from ADM. Instead, Gieseker sold the grain at the “spot price” (the local cash price for immediate settlement and delivery) and used the proceeds from subsequent grain transactions to pay the above-market prices previously promised to other farmers.

Farmers who agreed to have Gieseker sell their grain toward the end of the scheme didn’t get paid at all, according to the indictment. 

Missouri Attorney General Chris Koster has charged Gieseker with 12 felony counts, including federal charges of mail and wire fraud and interstate transportation of stolen property. She also faces state charges of unlawful merchandising, filing false financial statements and stealing.

Silence is the voice of complicity. And in the case of Fiserv, the silence is deafening. A former leader in the I.R.A. service industry before selling its business to TD Ameritrade in February 2008, Fiserv is making news for its role as an I.R.A. custodian to hundreds of self-directed individual retirement accounts (I.R.A.s) that lost more than $1 billion of investors’ money to high-profile Ponzi schemes. 

All of the Ponzi scheme victims were steered solely to Fiserv as the account custodian. As for the scams, one included Bernie Madoff’s. Another was orchestrated by Louis J. Pearlman, former manager of the Backstreet Boys and N’Sync. A third Ponzi scheme was conducted by Daniel Heath, who was convicted last year of defrauding hundreds of elderly churchgoers.

All three con artists focused on the self-directed I.R.A., and all three apparently told their victims to only use Fiserv as their I.R.A. service firm. 

That edict would prove costly. More than $1 billion has been erased from I.R.A. accounts that were set up through various units of Fiserv, according to a July 24 story in the New York Times. 

Now investors are suing not only the masterminds of the Ponzi schemes – i.e. Madoff, Heath and Pearlman – but also companies like Fiserv that acted as custodians for individuals with self-directed I.R.A.s. 

Unlike traditional IRAs that invest in stocks, bonds or mutual funds, self-directed IRAs allow investors to put money into alternative investments. Those investments can range from real estate to hedge funds. The investor then relies on a support firm – the I.R.A. custodian – to make the purchases and perform various administrative functions. 

“From the beginning, [Fiserv] was the only firm that Madoff recommended,” said Peter Moskowitz of Corona, Calif., in the New York Times story. Moskowitz is one of dozens of Madoff victims who said they were directed to a Fiserv unit called Retirement Accounts. 

“Once, when I wanted to change, they told me ‘absolutely not’ – they would only deal with Fiserv,” Moskowitz said.

Last year, Fiserv paid $8.5 million to settle a California class-action lawsuit involving elderly victims who were snared in a long-running Ponzi scheme that made investments through self-directed IRAs administered by Heath. The investors lost about $100 million. A separate lawsuit against Fiserv, brought by about 40 investors in the same scam, is ongoing. Fiserv also faces two lawsuits by Pearlman’s victims in a federal court in Florida, as well as two Colorado lawsuits involving Madoff’s victims.

All of the lawsuits agree that Fiserv did not steer customers into the actual investments. Instead, they argue that Fiserv failed to perform its contractual and fiduciary duties as an I.R.A. custodian and, as a result, failed to protect the accounts from fraud. 

According to the New York Times, Heath’s victims say Fiserv issued inaccurate account statements that concealed repeated defaults on the promissory notes that Heath sold them. In the lawsuit involving Pearlman, documents say the securities were “completely mystifying,” with Fiserv describing them as mutual funds, assets, shares, nonstandard assets and brokerage accounts, all within the same account statements. 

Meanwhile, victims of Madoff are asking how Fiserv, as the custodian of the I.R.A. accounts, could fail to notice that no stocks were ever purchased for those accounts. 

In June, regulators shut down yet another Ponzi scheme, which claimed $30 million in I.R.A. savings. This one was run Edward Stein. As for the I.R.A. custodian who handled the account for Stein? It was none other than Fiserv.

The bottom line: Stricter regulations, supervision and oversight are desperately needed when it comes to monitoring the actions of I.R.A. custodians. Had custodians like Fiserv performed the most basic due diligence – doing record-keeping duties, for example – it would have been very difficult for scam artists like Bernie Madoff to steal investors’ I.R.A. savings. Fiserv’s failure to fulfill its obligations makes it, at the very least, an accomplice in the latest Ponzi schemes that have come to light. 

Five broker/dealers, all dealing in variable annuities, mutual funds and other types of securities, are facing fines of $1.7 million by the Financial Industry Regulatory Authority (FINRA) for failing to properly supervise sales to customers, many of whom were elderly and retirees. 

The five firms, along with their respective fines, include:

• McDonald Investments (now KeyBanc Capital Markets, Inc.) – $425,000
• IFMG Securities – $450,000
• Wells Fargo Investments, LLC – $275,000
• PNC Investments – $250,000
• WM Financial Services, Inc. (now Chase Investment Services Corp.) – $250,000

According to FINRA, brokers at each of the firms operated out of branches of affiliated banks, selling the investments to bank customers. The brokerage customers were referred by bank personnel, and sales of these financial products represented a significant portion of each firm’s business.

 “Today’s actions underscore the need for firms operating bank branches to have effective systems and procedures in place to monitor sales of variable annuities, mutual funds, and UITs,” said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement, in a press statement. 

“Bank broker-dealers have access to a broad customer base through their retail bank branches. Proper care must be taken to appropriately supervise sales to those customers, particularly the elderly who can be unfamiliar with securities products as they seek alternatives to certificates of deposit and other bank offerings.”

McDonald Investments also was charged with selling variable annuities with enhanced death benefit riders to 25 customers aged 78 or older. The customers were either too old to be eligible for the rider or very close to the ineligible age and would have received little or no benefit from the rider despite paying higher fees for it over the life of the annuity. 

The customers will be given the opportunity to get their money back plus interest, according to FINRA.

Region Financial Corp.’s brokerage arm, Morgan Keegan, was sued on July 21 by the Securities and Exchange Commission (SEC) on charges that the Memphis-based firm left clients stranded with more than $1 billion in auction rate securities.

According to the SEC, Morgan Keegan failed to tell customers about the growing risks associated with auction rate securities. Instead, it reportedly encouraged brokers to ramp up their efforts to sell the instruments prior to the market’s collapse in February 2008.

The SEC is demanding that Morgan Keegan buy back any auction rate securities sold before March 2008 from retail investors and small businesses, as well as pay fines. In addition, the regulator wants Morgan Keegan to forfeit any proceeds from its auction-rate business. From June 2007 to February 2008, the SEC says Morgan Keegan earned more than $4 million in underwriting, brokerage and distribution fees.

 “Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said SEC Enforcement Director Robert Khuzami in a statement.

Linsco Private Ledger, which now goes by the name of LPL Financial Services, is at the center of a growing list of arbitration claims and lawsuits in connection to one of its former brokers, Raymond Londo. LPL is accused of failing to supervise Londo, who allegedly scammed millions of dollars from investors in an elaborate Ponzi scheme. Londo’s victims include friends, neighbors and even his own family.

Londo was fired from LPL on March 6, 2008. During his lengthy tenure with the company, however, there was an abundance of customer complaints and red flags regarding Londo’s service and investing strategies. Complaints about Londo’s sales practices also occurred at his former place of employment, Edward Jones.

Despite these warning signs, LPL not only hired Londo but chose to forego taking any action against the financial advisor until his termination in March 2008. By that time, investors in Illinois, Iowa and Wisconsin, as well as elsewhere, had lost millions and millions of dollars to Londo. 

Specifically, Londo is accused of borrowing money from the accounts of investors and then promising them a certain rate of return. Under FINRA Rule 2370, it is illegal for registered representatives to borrow funds from their clients. Investors now contend if LPL had exerted proper supervision of Londo, the abuses would never have occurred.

LPL was formed in 1989 through the merger of Linsco Financial Group and Private Ledger Financial Services. Today, the company is considered the fifth-largest brokerage firm in the United States, with nearly 13,000 financial advisors.

Investors are continuing to sue LPL by filing arbitration claims with the Financial Industry Regulatory Authority (FINRA) for the financial losses they incurred in Londo’s Ponzi scheme.

In an agreement with the Securities and Exchange Commission (SEC), Morgan Stanley will pay a $500,000 penalty to settle charges that it misled customers in its Nashville office about various money management firms recommended to clients and from which Morgan Stanley later profited via large commissions. 

Contrary to its disclosures and corporate policies, Morgan Stanley recommended some money managers who were not approved for participation in the firm’s advisory programs and therefore had not been subject to the firm’s due diligence review.

The SEC also charged William Keith Phillips, a former Morgan Stanley investment advisor in Nashville, of steering investors to the unapproved money managers so that he could receive financial kickbacks. The SEC says Phillips’ use of unapproved money managers earned Morgan Stanley at least $3.3 million in extra commissions.

The SEC’s case with Phillips is still pending. 

This isn’t the first time complaints have been lodged against Phillips. As reported July 21 in The Tennessean, Phillips apparently has a lengthy history of previous misconduct accusations, including those from the Chattanooga Pension Fund, the Nashville Electric Service and Metro Nashville Pension Plan. In 2004, the Chattanooga Pension Fund accused him of costing the fund $20 million in losses, undisclosed commissions and fees.

Ultimately, UBS Financial Services, which acquired Phillips’ employer PaineWebber, paid $675,000 to settle the case in 2006, according to the Financial Industry Regulatory Authority (FINRA), according to the article. A much larger payout was made by the Swiss-based bank in 2002 after Metro Nashville complained about the way in which Phillips handled its pension.

UBS paid more than $10 million to settle those issues. UBS also settled with the Nashville Electric Service, agreeing to pay $440,000 for similar accusations levied against Phillips.

TD Ameritrade has become the latest brokerage firm to repurchase auction rate securities (ARS) from retail investors as part of a settlement agreement with state and federal regulators. New York Attorney General Andrew Cuomo announced the deal with Ameritrade yesterday, stating the online brokerage would buy back $456 million of auction rate securities from about 4,000 customers.

The announcement with TD Ameritrade comes on the heels of Cuomo’s plans to sue Charles Schwab for allegedly misrepresenting the safety of auction rate securities to clients.

TD Ameritrade’s settlement, which was jointly made with the New York Attorney General, the Pennsylvania Securities Commission and the Securities and Exchange Commission (SEC), requires the company to repurchase any auction rate securities bought before February 2008 from individual investors, charities and small businesses. 

The company has until March 2010 to return the money to customers, although it could take until late June to fully complete the buybacks. For clients with accounts under $250,000, TD Ameritrade says the buybacks will be done within 75 days.

In addition, TD Ameritrade must reimburse investors who sold their auction rate investments at a discount following the market’s collapse in February.

Thousands of investors across the country initially bought auction rate securities on the basis that the instruments were safe, cash-like investment products. In February 2008, however, the Wall Street firms that once supported the auction market suddenly pulled out, leaving retail and institutional investors holding an illiquid investment.

Over the past year, New York Attorney General Cuomo has spearheaded settlements with more than 20 investment firms and banks to buy back more than $60 billion of auction rate securities from investors. Those institutions include the majority of Wall Street’s biggest firms, including Citigroup, Merrill Lynch, Wachovia, Morgan Stanley and JPMorgan.