FinancialCounsel

FINRA To Get Tough On Reg D - Private Placement - Offerings Following Investor Complaints

According to InvestmentNews, FINRA is expected to get tough on Reg D offerings.  FINRA, the Financial Industry Regulatory Authority, expects to bring cases against brokerage firms involved in selling private-placement offerings next year, its head of enforcement said last week. "We have a number of investigations under way involving allegations of wrongdoing arising from the sales of these Regulation D private placements," James Shorris, executive vice president and executive director of enforcement at the Financial Industry Regulatory Authority said in an interview with InvestmentNews.  FINRA expects to bring enforcement cases on private placements next year, he said.

Reg D refers to the securities regulations that govern the sale of private-placement investments, which are generally exempt from having to be registered with regulators. The investments usually are made in small companies.  The self-regulatory organization has been receiving an increasing number of complaints from investors in recent months concerning sales of private placements, Mr. Shorris said. FINRA is looking at misrepresentations made by brokers in connection with the sale of the products, as well as whether sales made to customers were suitable. 

FINRA has been increasing the resources it devotes to investigations of private placements throughout this year, and it expects to begin bringing cases "soon," he said.

The industry regulator also is questioning whether brokerage firms and registered representatives who sold to private placements did due diligence on the products they sold, as well as whether some brokerage firms had a conflict of interest with the issuers, Mr. Shorris said.

Among the allegations FINRA is looking into is whether private-placement sales were made with only a single source of due-diligence information and whether the due-diligence provider was independent of the company issuing private-placement securities.

"If the due-diligence report was paid for by the issuer, there's clearly a potential conflict," Mr. Shorris said.

FINRA is also examining whether brokerage firms that sold the products were affiliated with companies that issued the securities, as opposed to sales made by brokerage firms that were independent of the issuers.

"If it turned out the issuer was engaged in wrongdoing or fraud and the firm had a captive entity wholesaling the product we have more questions about the access [the brokerage] firm may have had to information about potential wrongdoing about the issuer," Mr. Shorris said. 

Source:  InvestmentNews

Securities Regulator Provides Guidance As To Managing Investment Risk

FINRA (the Financial Industry Regulatory Authority) recently published, "Managing Investment Risk" as guidance for investors.  It contains helpful advice.  Let's overview the key advice contained in the publication. 

The publication begins with the simple notion that all investors, except those needing short term funds, need to take at least some risk in order to earn a return that will provide some protection against inflation.  With that notion in mind, FINRA proceeds to discuss the types of investment risks that investors face.

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Brookstreet Securities Corp And Stanley Brooks Charged With Defrauding Customers In Sales Of Risky Mortgage-Backed Securities (CMOs)

The Securities and Exchange Commission has charged Brookstreet Securities, its President and CEO Stanley Brooks with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals.  The fraud cost many Brookstreet investors their savings, homes, or retirement cushions, and eventually caused the firm to collapse. Previously, the SEC had charged 10 Brookstreet registered representatives with making misrepresentations to investors related to the sale of risky CMOs (Collateralized Mortgage Obligations).

The SEC alleges that Brookstreet and Brooks developed an internal program through which the firm's registered representatives sold particularly risky and illiquid types of CMOs to more than 1,000 seniors, retirees, and others for whom they were unsuitable.  The SEC further alleges that Brookstreet continued to promote and sell risky CMOs to retail investors even after Brooks received numerous indications and personal warnings that these were "dangerous" investments that could become worthless overnight. One trader even called Brookstreet's program a "scam." Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks allegedly directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses. 

The SEC's complaint specifically alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 thereunder.  The Commission seeks permanent injunctive relief against both defendants, and disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Brooks.

Source:  SEC Press Release 2009-260

Oppenheimer Pays $20 Million To Settle 529 Plan Lawsuit Over Oppenheimer Core Bond Fund

OppenheimerFunds has reached a $20 million settlement on a lawsuit over heavy losses in Oregon's 529 college savings plan. The New York-based fund company announced the agreement in principle to settle the lawsuit brought by Oregon.  The settlement will divide the $20 million among about 45,000 account holders based on how heavily individual accounts were invested in the OppenheimerFunds Core Bond Fund, according to The Wall Street Journal. The suit alleges that Oregon 529 plan college savers, primarily those invested in the Core Bond Fund, lost at least $36.2 million as a direct result of the company's negligence and breaches of contract and fiduciary duty.  Oppenheimer Core Bond Fund was part of five age-based portfolios in the Oregon College Savings Plan.  The character of the Core Bond Fund changed in 2007 and 2008, the lawsuit alleged, and yet neither the state nor investors were alerted that the fund had become significantly more aggressive and risky.

Source: fa-mag.com

Advisers Urged To Seek Legal Counsel To Negotiate Protections Associated With The Current 330% Trailing 12 Recruiting Packages Offered By Merrill Lynch And Morgan Stanley Smith Barney

As wirehouses fight to keep brokers from moving to the independent channels, warring wirehouses are adding fuel to the fire.  Morgan Stanley Smith Barney LLC and Merrill Lynch are going toe-to-toe by offering top reps a recruiting package of up to 330% of annual production.  Sources have said that those are the highest levels ever.  But be careful.  Attorneys at SNSFE negotiate these deals and these deals are complicated and tied to a rep's ability to increase business. It's impossible to know how much each broker will ultimately receive.  UBS, meanwhile, currently is offering deals in the range of 200% to 220% of trailing 12.  Regarding Merrill's and Morgan Stanley deals, it would take 5 years for the rep to reach the top compensation level, which would be paid out in the form of a forgivable loan over nine years.  In the case of Morgan Stanley Smith Barney, reps need to increase assets and production by 50% over the first five years, with specific growth targets set for each year.  These deals are complicated and risky for reps.  Reps absolutely must seek legal counsel to increase their level of protection in case the deals go south.

Source:  InvestmentNews

SNSFE Investigates John Leonard, High Net Worth Strategies And Workman Securities Corp.

Lawyers at SNSFE have commenced an investigation into the activities of John M. Leonard who has done business as High Net Worth Securities located in Illinois and Florida.  Mr. Leonard formerly was associated with Workman Securities Corp.  Specifically, SNSFE is investigating the propriety of investment recommendations for investors of Provident Royalties, Gulfstar, Mountain Energy, Naples Lubbock, and Advantage Office Suites, as well as any other limited partnership interest sold during the last five-year period.

SEC Chairman's Speech Highlights Key Securities Initiatives And Reforms

SEC Chairman Mary Schapiro's recent speech to the securities industry, entitled, "The Road to Investor Confidence," certainly was not designed to win over friends from Wall Street. Prefacing her remarks by blaming Wall Street for the "recent crisis" (it didn't understand or simply ignored the risks) and by blaming the SEC (for being asleep at the wheel), she described how the SEC is going about restoring investor confidence and protection.  Let's review the more important initiatives and reforms.

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SNSFE Investigates 2010 Glide Path Exchange-Traded Funds (ETFs) As Well As Inverse And Leveraged ETFs For Failure To Disclose Risks

SNSFE is investigating exchange-traded funds, known as ETFs.  Both the regulators and class action lawyers are paying close attention to that category of exchange-traded funds that are known as leveraged or inverse.  These funds made heavy bets either on the direction of an index or through the use of leverage and many have suffered dramatic losses.  To date, approximately nine class actions have been filed and SNSFE continues to investigate.  The defendants so far have included ProShares as well as Direxion.

On another front, exchange-traded funds that are so-called 2010 "glide-paths" also have experienced losses.  Indeed, in a recent Morningstar report, Morningstar pointed out that there is a great disparity in the glide-paths -- which is the ratio of stocks to bonds that is held by a target-date series as it changes over time -- between funds each labeled 2010.  The glide-paths for the 2010 funds have diverged sharply.  At the upper end, two fund families have more than 70% of their 2010 funds' assets placed in equities. Conversely, three families have fewer than 30% of their 2010 investments in stocks. This divergence in asset allocation resulted in a wide difference in performance during the dramatic 2008 market, when losses in the 2010 category ranged from a modest 9% to a breathtaking 41%.  Query whether investors in those funds, and unfortunately whether employees who held these funds in their 401(k) plans, adequately were disclosed the risk of holding such funds.

SNSFE continues to investigate this fund category and other later series.

Source:  Morningstar

FINRA Fines Scottrade $600,000 For Inadequate Surveillance System

The Financial Industry Regulatory Authority fined Scottrade $600,000 for failing to have adequate anti-money laundering procedures in place to detect and report suspicious transactions.  In a statement, FINRA noted that as an online brokerage executing more than 150,000 trades daily, Scottrade's business model makes it vulnerable to heightened risks of identity theft, unauthorized access to customer accounts, or even money laundering activities.  The Bank Secrecy Act of 1970 requires brokerages to have anti-money laundering programs tailored to their own unique business models.  "Despite the large volume of online trading at Scottrade, the firm failed to establish any systematic or automated surveillance until 2005," FINRA executive vice president and chief of enforcement Susan Merrill said in the  statement.  "Then the automated system the firm implemented remained inadequate because it focused only on suspicious trading that was accompanied by suspicious money movement." According to Scottrade, it is taking this matter very seriously and it has made enhancements to its anti-money laundering program.

Source: InvestmentNews

Stifel Financial Starting RIA Custody Business

Stifel Financial Corp., which has been expanding its Stifel Nicolaus & Co. retail-brokerage business, is about to make a push into serving registered investment advisers.  The firm has hired a veteran from Merrill Lynch and Pershing to run its Century Securities Associates independent broker-dealer affiliate and add a custodial unit for RIAs.  The venture, likely to be called Century Advisor Services, will be marketed to fee-only RIAs and "hybrid" advisers who want to supplement their fee-based practices with commissions.  A spokesman said that the new unit is focusing on RIAs with a minimum of about $50 million of client assets.

Lawyers at SNSFE frequently review brokerage and custodial agreements for firms.  Advisers should consider hiring competent counsel to review their agreements before signing on.

Source: InvestmentNews