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On June 8, 2015, Stifel Financial Corp. (“Stifel”) announced that it is set to acquire Barclays’s Wealth and Investment Management, Americas business (“Barclays Wealth Management”) through a definitive purchase agreement.

Barclays Wealth Management has approximately 180 financial advisors managing near $56 billion in client assets.  Barclays Wealth Management’s business is centered in New York, but it also operates out of 11 other branch offices nationwide.

Stifel is a financial services holding company with its headquarters located in St. Louis, Missouri.  In the United States, Stifel’s broker-dealer clients are currently served through Stifel, Nicolaus & Company, Inc., Keefe Bruyette & Woods, Inc., Miller Buckfire & Co., LLC, and Century Securities Associates, Inc.

On May 18, 2015, The Supreme Court of the United States (“Supreme Court”) reversed the 9^th Circuit Court of Appeals’ (“9^th Circuit”) ruling in Tibble et al. v. Edison International et al., wherein the 9^th Circuit affirmed the District Court’s decision to declare a portion of the Petitioners’ claims as untimely.  The question certified to the Supreme Court on writ of certiorari was: “whether a fiduciary’s allegedly imprudent retention of an investment in an “action” or “omission” that triggers the running of the 6-year limitations period.”

In Tibble, the Petitioners were several individual beneficiaries acting on behalf of the participants in the Edison 401(k) Savings Plan (“Plan”), who sought to recover damages for alleged losses suffered by the plan arising from Respondents’ alleged a breach of its fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”).  88 Stat. 829 et seq.  The Plan is a defined contribution plan, meaning that the participants’ retirement benefits are limited to the value of their individual accounts. The value of such account is determined by the market performance of the account, less expenses, such as management fees.  Petitioners argued that Respondents breached their fiduciary duty by offering six higher priced retail-class mutual funds as Plan investments when materially identical, lower priced institutional-class mutual funds were available.  Three of the six mutual funds in question were added to the Plan in 1999 and the remaining three were added in 2002.

The District Court concluded that Respondents failed to exercise “the care, skill, prudence and diligence” that ERISA requires with respect to including the 2002 mutual funds in the plan.  See 29 U.S.C § 1104(a)(1) However, the District Court found that Petitioners’ claims regarding the 1999 mutual funds were untimely under 29 U.S.C § 1113, which states, in relevant part that “[n]o action may be commenced with respect to a fiduciary’s breach of any responsibility, duty, or obligation” after the earlier of six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.”

On May 14, 2015, the Department of Enforcement for the Financial Industry Regulatory Authority (“FINRA”) filed a complaint (the “Complaint”) against ARI Financial Services, Inc. (“CRD No. 137608) (“ARI”) and William Brian Candler (CRD No. 2802438) (“Candler”).  The FINRA Complaint alleged that ARI failed to establish and maintain a supervisory system reasonably designed to ensure that delegated supervisory responsibilities were properly exercised by employees of private placement issuers employed as independent contractors of ARI.  Additionally, Candler, as the person responsible for establishing and maintaining ARI’s written supervisory policies and procedures, also failed to conduct reasonable due diligence regarding a private placement that ARI sold to its retail investors, which ultimately turned out to be a Ponzi-scheme.  A complete copy of the FINRA complaint may be found here.

Established in 2005, ARI is a wholesaler of private placements that it markets to retail broker-dealers, who in turn, sell these investments to retail investors.  Candler is the sole, full-time registered employee of ARI.  However, FINRA alleges that ARI recommended and sold interests in a real estate based private placement called the Bridgeport Oaks Fund directly to retail investors through a separate branch office staffed by independent contractors who were also employed by the issuer of the Bridgeport Oaks Fund.  The FINRA Complaint alleged that ARI marketed the Bridgeport Oaks Fund private placements without properly conducting its due diligence.  In fact, what third-party due diligence ARI and Candler had on file should have raised red flags about the Bridgeport Oaks Fund private placement.  However, neither Candler nor ARI followed up or investigated the Bridgeport Oaks Fund private placements further.

Furthermore, in 2009 the Illinois Securities Department issued a Temporary Order of Prohibition against the Bridgeport Oaks Fund, prohibiting them from selling securities in the state because of previous unlawful sales practices.  This should have been a red flag for Candler and ARI requiring further investigation and inquiry, but neither took any action.  Nonetheless, from 2009 through 2010, ARI through Bridgeport Oaks Fund personnel employed as issuer representatives at ARI sold over $500,000 of private placements in the Bridgeport Oaks Fund to retail investors.

On May 7, 2015, a Financial Industry Regulatory Authority (“FINRA”) arbitration panel (the “Panel”) awarded (the “Award”) $500,000 to Respondent, John Offenburger (“Offenburger”), against the Claimants Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings, LLC (collectively “Morgan Stanley” and/or “Claimants”), regarding a promissory note dispute.

Morgan Stanley filed a Statement of Claim on or about December 26, 2012, asserting that Offenburger breached the terms of a promissory note when he failed to pay the outstanding balance upon his termination on October 5, 2012.  Morgan Stanley sought to recover $519,131.98 in compensatory damages, as well as unspecified interest, attorneys’ fees, and other costs.  Offenburger filed a Statement of Answer and Counterclaim on or about April 1, 2013, asserting that Morgan Stanley breached their contract with Offenburger and breached the covenant of good faith and fair dealing by making various misrepresentations to induce Offenburger to join Morgan Stanley.  Offenburger sought $1,395,000 in compensatory damages, unspecified punitive damages, attorneys’ fees, other costs and other monetary relief.  Offenburger also alleged that Morgan Stanley committed fraud/fraudulent or negligent misrepresentation, defamation/slander, tortious interference with business relations, violation of Section 4115.15 of the Ohio Revised Code, and was unjustly enriched. Morgan Stanley subsequently filed a Response and Affirmative Defenses to the Counterclaim on or about May 7, 2013.

Upon consideration of all the evidence and pleadings, the Panel decided to deny all of Morgan Stanley’s claims, determining that “the promissory note was unenforceable and no fraud was proven.”  The Panel also awarded Offenburger $500,000 for his claim of lost income, but the panel determined that amount owed to Offenburger was “already […] fully satisfied by Claimant pursuant to the promissory note” and was thus “paid in full.”

On April 16, 2015, the Securities and Exchange Commission (“SEC”) filed a complaint (“Complaint”) in the United States District Court for the Southern District of New York against former J.P. Morgan Securities, LLC (J.P. Morgan”) broker Michael J. Oppenheim (“Oppenheim”).  The Complaint alleges that Oppenheim, together with his wife, a relief defendant, executed a fraudulent scheme to convert approximately $20 million worth of customer funds, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule l0b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”), 15 U.S.C. §§ 80b-6(1) and 80b-6(2).

Specifically, the Complaint alleges that from March 2011 through October 2014, Oppenheim, while employed as a “Private Client Advisor” at J.P. Morgan, stole at least $20 million from his customers.  According to the SEC, two of Oppenheim’s clients approached him looking for safe and conservative investments and in response to their request, Oppenheim made the recommendation to invest in J.P. Morgan’s New York municipal bond mutual fund.  Oppenheim then obtained these customers’ written approval to withdraw funds from the customers’ accounts for purchase of the New York municipal bond mutual fund shares.  However, instead of purchasing these shares, Oppenheim converted the customer funds into cashier’s checks and then deposited those checks into his own brokerage accounts.  The Complaint further alleges that Oppenheim used those funds to engage in speculative options trading in companies like Tesla, Apple, Google, and Netflix, which resulted in significant losses that occurred almost immediately after the funds were deposited in Oppenheim’s accounts.  The Complaint also alleges that when Oppenheim’s brokerage accounts showed positive cash balances, he wired funds to his personal account or accounts held jointly with his wife.  Additionally, some of the funds were used to pay off the mortgage on Oppenheim’s wife’s home.

Oppenheim was able to avoid detection by replenishing victims, depleted account balances with money he transferred, without authorization, from other victims’ accounts.  Additionally, when customers sought their balance statements, Oppenheim would transmit fabricated account statements that contained the customer’s information and account number, but actually reflected the holdings of another customer.  Additionally, when a customer’s accountant asked for a 1099 tax form reflecting his alleged mutual fund holdings, Oppenheim stated that no form 1099 was necessary because the entire portfolio consisted of only tax free bonds.  Finally, when a customer was considering purchasing a home, Oppenheim sent the fabricated account statements that contained fictitious values for the municipal bond mutual fund.

Recently, the Certified Financial Planner (“CFP”) Board of Standards (“Board”) took disciplinary action against 23 financial advisors, permanently revoking the CFP designation for three of those financial advisors.  The CFP designation is a professional certification mark for financial planners conferred by the Board and demonstrating that the recipient meets certain education, examination, experience and ethics requirements.  Formed in 1985, the mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP certification and upholding it as the recognized standard of excellence for personal financial planning.  There are approximately 71,000 financial advisors who hold the CFP designation.

Financial advisors with the CFP designation must follow the CFP Board’s Code of Ethics and Professional Responsibility and Rules of Conduct (“CFP Rules”).  The CFP Board may conduct investigations into conduct by financial advisors that potentially violate the CFP Rules.  These investigations can lead to private censure, a public letter of admonition, suspension of the right to use the marks for up to five years or permanent revocation of the CFP designation.

CFP Board investigations can be triggered by customer arbitrations, criminal matters, regulatory actions by the SEC, CFTC, FINRA and state regulators, bankruptcies, employment terminations, requests from other financial advisors with the CFP designation and anonymous tips.  The process begins through a Notice of Investigation sent by the CFP Board.  The CFP Board will explain the general allegations made, and the financial advisor is provided an opportunity to file a written response to the allegations.  After reviewing the response, the CFP Board may decide to issue a Complaint against the financial advisor, who must then file an answer.

On April 14, 2015, in a speech to the North American Securities Administrators Association (“NASAA”), Luis Aguilar, Commissioner to the Securities and Exchange Commission (“SEC”), stated that the SEC is looking closer at sales practices with respect complex securities.  The term, “complex securities” while difficult to define in a vacuum, refers to securities that often involve imbedded derivatives.  Complex securities include, but are not limited to; equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes.  For example, structured notes, contain characteristics of both bonds and derivatives and complex pay-off structured and opaque pricing features that may not be easily understood or suitable for mom-and-pop investors.

Many of the recent SEC enforcement actions alleging sales practices violations with respect to complex securities are prosecuted by the Complex Financial Instruments Unit of the SEC.  The Complex Financial Instruments Unit was created in 2010 and was formerly known as the Structured and New Products Unit.  The Complex Financial Instruments Unit’s enforcement actions have recently targeted big banks that were alleged to have misled sophisticated investors with respect to complex structured products, such as collateralized debt obligations.  However, in his speech, Commissioner Aguilar noted that the Complex Financial Instruments Unit is devoting more resources to complex products that are being marketed to unsophisticated, retail investors and that “[t]he Commission expects future enforcement cases in this space.”

According to Commissioner Aguilar: “The growth of [the complex securities market] was fueled by the growing interest in the retail market…[and] [a]n investor’s constant quest for the next big thing plays right into the hands of fraudsters, who often use the complexity of new products to hide their schemes.”  While difficult to define, Commissioner Aguilar stated that the growth of the complex securities market is evidenced by the facts that: 1) the total asset growth of exchange traded products in the U.S. rose to more than $2 trillion in March 2015 and retail investors and their advisers hold an estimated 50% of ETP assets in the U.S; 2) the alternative mutual fund market grew from about $76 billion in assets at the end of 2009 to over $311 billion in assets at the end of 2014; and 3) the structured note market has increased from $34 billion in 2009 to approximately $45 billion in 2014.  Commissioner Aguilar stated that he expects these markets will continue to grow.

On Monday, March 30, 2015, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative Cease-and-Desist Proceedings (“Order”) against Patriarch Partners, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners, XV, LLC (collectively “Patriarch Partners”), and CEO Lynn Tilton (“Tilton”), alleging that Tilton and Patriarch Partners breached their fiduciary duty to investors.  The SEC charges arise out of the concealment of poor performance of loan assets in three Collateralized Loan Obligation (“CLO”) funds, while improperly collecting approximately $200 million in fees.  The SEC’s Order may be accessed here.

As defined in the Order, “[a] CLO fund is a securitization vehicle in which a special purpose entity, the issuer, raises capital through the issuance of secured notes and uses the proceeds to purchase a portfolio of commercial loans.  A collateral manager, typically an investment adviser, determines what loans to purchase or originate on behalf of the CLO fund. Cash flows and other proceeds from the collateral are used to repay the investor noteholders in the CLO fund.”

The Order alleges that since 2003, Patriarch Partners and Tilton have defrauded customers through three (3) CLO funds, collectively known as the “Zohar Funds,” by providing false and misleading information relating to the performance and values of these funds.  The Zohar Funds raised more than $2.5 billion from investors and used the capital to make loans to distressed companies.  However, these distressed companies were found to have made only partial payments or no payments at all against the loans, and have performed poorly over the last few years.

Recently, World Equity Group, Inc. (“World Equity”), a broker-dealer, submitted a Letter of Acceptance Waiver and Consent (“AWC”) wherein it agreed to a censure and a $225,000 fine to settle allegations of violations of federal securities law as well as National Association of Securities Dealers (“NASD”) and Financial Industry Regulatory Authority, Inc. (“FINRA”) rules relating to its supervisory and compliance procedures. Although, World Equity did not admit or deny the allegations contained in the AWC, it agreed, as a condition of the AWC, to refrain from taking any action that would deny the allegations or create the impression that the findings of the AWC lacked a factual basis.

World Equity was formed in 1992 and has its home office in Arlington Heights, Illinois.  From 2009 through 2012 (the “Relevant Period”), World Equity maintained 68 registered branch offices and employed approximately 160 registered representatives.

Specifically, FINRA alleged in the AWC that during the Relevant Period, World Equity failed to implement supervisory systems adequately designed to detect and prevent rule violations.  FINRA alleged that: (1) World Equity failed to preserve e-mails communications with customers, in violation of SEC Rule 17a-4(b)(4) & (f), NASD Rule 3110 and FINRA Rule 4511; (2) World Equity failed to create and record account records for thirteen customer accounts as well as obtain and record suitability information for those customers, in violation of SEC Rule 17a-3(a)(17)(i)(A) and NASD Rules 3110 and 2310(b); (3) World Equity failed to implement supervisory systems designed to ensure the suitability of customer transactions in leveraged exchange traded funds, in violation of NASD Rule 3110; (4) World Equity failed to document that adequate due diligence was conducted, or improperly relied on issuers’ due diligence in connection with private placements and illiquid real estate investment trusts, in violation of NASD Rule 3010; (5) World Equity failed to establish an adequate supervisory system for the review of options trading activity and subsequently allowed such options trading activity to occur in unapproved accounts, in violation of NASD Rule 3010(b) and FINRA Rule 2360(b)(16)(A); (6) World Equity failed to effectuate a reasonable supervisory system to ensure compliance with Section 5 of the Securities Act of 1933, in violation of NASD Rule 3010; (7) World Equity failed to adequately enforce its “Chinese Wall” procedures designed to prevent conflicts of interest, in violation of NASD Rule 3010; (8) World Equity failed to implement a reasonably designed anti-money laundering (“AML”) program to detect, investigate and report suspicious activities, in violation of FINRA Rules 3310(a) and 2010, and NASD Rule 3011(a); and (9) in 2011, World Equity failed to conduct an adequate AML independent test, in violation of FINRA Rule 3310(c).