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On March 4, 2015, H.D. Vest Investment Securities, Inc. (“H.D. Vest”) submitted an Offer of Settlement (“Offer”) to the Securities and Exchange Commission (“SEC”) solely for the purpose of settling the SEC’s allegations that H.D. Vest violated key customer protection rules after failing to adequately supervise registered representatives who misappropriated customer funds.  In addition to paying a $225,000 fine, H.D. Vest agreed to retain an independent compliance consultant to improve its supervisory controls.

H.D. Vest is a financial services firm that offers tax and financial planning advice to its customers.  With its main corporate office in Texas, H.D. Vest has a nationwide network of over 4,500 independent contractor registered representatives.  Most of H.D. Vest’s independent contractor registered representatives are tax professionals who operate tax businesses through affiliated businesses operating separately from the broker-dealer.  This type of business is known as an outside business activity and is heavily regulated by both the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”).

The SEC uncovered H.D. Vest’s deficient supervisory controls in the wake of wrongdoing by its representative Lewis J. Hunter (“Hunter”), a former registered representative whom FINRA barred from the industry in May 2013.  The SEC alleged that between September 2010 and February 2011, Hunter fraudulently and illegally transferred approximately $300,000 from two elderly customers’ accounts to unaffiliated businesses he controlled.  According to the SEC, Hunter told these elderly investors that these funds were used for investments.  Hunter, however, used those funds for personal expenses and to make fraudulent dividend payments to those two elderly customers in a Ponzi-like manner.  This type of fraudulent activity is commonly referred to as “selling away” and is a violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.  The SEC also alleged that other H.D. Vest registered representatives misappropriated customer funds through outside business activities through entities unaffiliated with a broker-dealer and similar fraudulent selling away schemes dating as far back as December 2007 (the “relevant period”).

The Financial Industry Regulatory Authority’s (“FINRA”) February 2015 disciplinary actions release reported that on December 9, 2014, Citigroup Global Markets, Inc. (“Citigroup”) submitted a letter of Acceptance Waiver and Consent (“AWC”) to settle allegations that it failed to deliver prospectuses to its customers who purchased shares in Exchange Traded Funds, (“ETFs”) in violation of Section 5(b)(2) of the Securities Act of 1933, FINRA Rule 2010, and NASD Rules 3010(a) and 3012.  The full AWC can be found here.  Citigroup submitted the AWC without admitting or denying the findings and solely for the purpose of settling the allegations brought by FINRA.  Along with submitting the AWC, Citigroup consented to censure and a fine of $3,000,000—paid jointly to FINRA and the New York Stock Exchange (“NYSE”).

An ETF is typically a registered unit investment trusts or open-end investment company whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. However, some ETFs, known as “Short” or “Bear” ETFs, seek to achieve the opposite performance of their benchmark.  In other words, the value of a Short ETF tracking the price of gold should go down when the price of gold rises, and vice versa.  When an ETF utilizes debt and complex financial derivatives to amplify their returns, they are known as a “Leveraged ETF.”  It is important for customers to know both the benchmark the ETFs tracks and the way that the ETF utilizes leverage prior to purchasing shares in an ETF.

While ETF shares are typically listed on national securities exchanges and trade throughout the day, they trade at prices established by the market, not the net-asset-value of the ETF’s portfolio.  However, many ETFs “reset” daily, and as such, their long term performance may not reflect the benchmark they follow.  Because of this resetting feature, ETFs may not be appropriate for long term investing.  Under Section 5(b)(2) of the Securities Act of 1933, delivery of shares in an ETF is prohibited unless it is accompanied or preceded by a copy of a prospectus, or a written description, but only then if certain conditions are met.

Under the False Claims Act (31 U.S.C. §§ 3729–3733), private individuals (often called “relators” or “whistleblowers”) may file an action against persons or companies who have defrauded the government.  Last year, the U.S. Department of Justice (“DOJ”) obtained a record $5.69 billion in settlements and judgments from civil cases involving False Claims Act violations.  The DOJ’s record setting recovery in 2014 brings the total recovery in False Claims Act cases from January 2009 through the end of September 2014 to $22.75 billion.

These increased recoveries can be attributed to changes in legislation focused on preventing companies from defrauding the government.  For example, Congress amended the False Claims Act more than 28 years ago to, among other things, increase the monetary incentives for relators to file a lawsuit against individuals or entities for defrauding the federal government.  In subsequent amendments, through the Fraud Enforcement and Recovery Act of 2009 and the Affordable Care Act of 2010, Congress has provided additional inducements and protections to whistleblowers and relators.

Often, a relator will expose fraud and false claims by their employer at great risk to their career.  To incentivize relators, Congress has established a statutory scheme whereby a successful action may entitle a relator to as much as 30% of any recovery.  A recent report, published by the DOJ, details the success of these inducements in that more relators and whistleblowers are commencing more False Claims Act lawsuits; the result of which are more civil fines and penalties awarded to the government and more payments to whistleblowers and relators.  Since Congress amended the False Claims Act, the number of lawsuits filed under the qui tam provisions of the False Claims Act rose from 30 in 1987, to more than 700 for each of the last two years.  As the number of FCA lawsuits increased, so have corresponding whistleblower awards.  From January 2009 to September 2014, the government paid awards exceeding $2.47 billion.  Of the $5.69 billion the government recovered in 2014, the government paid out $435 million to relators.

New evidence suggests that UBS Financial Services Inc.’s (“UBS”) Puerto Rican office may have forced its brokers to sell the now infamous UBS Puerto Rico municipal bond funds.  A recent Reuters article by Suzanne Barlyn published a previously unreleased Spanish language audio recording of former UBS of Puerto Rico chairman, Miguel Ferrer, directing UBS brokers to sell shares in the funds.

According to the article, in April 2011, years before the price of bond funds sunk, a group of UBS brokers were approached by management and asked why they were not selling more of UBS Puerto Rico municipal bond funds’ shares.  In response, the brokers came forward with a list of twenty-two reasons why these funds were potentially bad investments for some clients; including, but not limited to, allegations that the funds suffered from low liquidity, excessive leverage, instability and an overconcentration of Puerto Rican government debt that was underwritten by UBS.

This was unacceptable to management and in a subsequent meeting, that was recorded by one of the brokers, Chairman Ferrer chastised the UBS brokers, saying, “[y]ou need to focus again on the attractive benefits of our funds and stop this nonsense that there are no products available—because if there are no products, go home, get a new job!” Ferrer stated that the brokers’ criticism of the UBS Puerto Rico municipal bond funds was “bullshit” and stated that they had almost $1 billion in client assets under management that were not generating commissions.

Recently, both the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have investigated the electronic cigarette, vaporizer, or “vape” markets.  Gerri Walsh, FINRA’s Senior Vice President for Investor Education, stated:  “The popularity of e-cigarettes has grown rapidly over the last several years, and the e-cigarette and ‘vape’ markets have been the subject of considerable media attention. Investors interested in this market have to look beyond the hype and be watchful for pump-and-dump fraudsters who are eager to make their money disappear into thin air.”

On December 16, 2014, the SEC suspended trading of a Las Vegas, Nevada company called American Heritage International, Inc. (“American Heritage”), which is a publically traded company that manufactures and markets its brand of vape products.  American Heritage stock trades over the counter on OTC Link, LLC under the symbol “AHII.”  OTC Link, LLC is an electronic inter-dealer quotation system that displays quotes from broker-dealers for many over the counter securities.  These over the counter securities can be thinly traded or closely held companies that often do not meet the minimum listing requirements for trading on a national securities exchange, such as the New York Stock Exchange.  OTC Link, LLC is a FINRA member and registered with the SEC as an alternative trading system.  In its “Order of Trading Suspension” the SEC cited a lack of current and accurate information regarding the stock and further concerns over potentially manipulative activity as its reasons to suspend trading.

American Heritage stated that it was cooperating with the SEC investigation.  According to a release on the company’s website the SEC action was prompted by a series of unsolicited “Robo-calls” regarding the company’s common stock.  A Robo-call is an automated phone message from a stockbroker or financial advisor that are commonly used to quickly get information out to clients in a time of crisis.  Here, it appears that the Robo-calls were part of a pump-and-dump scheme regarding AHII stock.

On January 13, 2015, the Securities Exchange Commission (“SEC”) published the 2015 examination priorities for the Office of Compliance Inspections and Examinations (“OCIE”).  The OCIE protects investors through administering the SEC’s nationwide examination and inspection program for registered entities, such as broker-dealers, transfer agents, and investment advisers, among other organizations.[1]  Generally, OCIE staff promotes compliance with the federal securities laws through outreach, publications, and examinations designed to improve compliance, prevent fraud, monitor risk, and inform future SEC policy.

The OCIE publicizes its examination priorities to foster self-governance and increased compliance by its member firms.  The SEC establishes its annual examination priorities after consulting with the five Commissioners, senior staff from the SEC’s eleven regional offices, the SEC’s policy-making and enforcement divisions, the SEC’s Investor Advocate, and other regulatory agencies.

This year, the OCIE’s examination priorities will focus on three “thematic areas:”

On December 8, 2014, in a long awaited decision, the United States Court of Appeals for the Second Circuit affirmed the United States District Court of the Southern District of New York’s (Rakoff, J.) judgment dismissing the trustee’s § 546 (e) claims in In re: Bernard L. Madoff Investment Securities LLC. This ruling was important to many Madoff victims because Irving H. Picard, trustee for debtor Bernard L. Madoff Securities LLC (“BLMIS”), invoking his clawback powers, sued hundreds of BLMIS customers seeking to avoid fictitious profits paid by the Madoff firm to the customers. These clawback claims fall into two categories, claims for withdrawals exceeding a customer’s net deposits in the two (2) years prior to the BLMS failure, and withdrawals exceeding net deposits in the two (2) – six (6) year time frame. Some defendant customers moved to dismiss the two (2) – six (6) year avoidance claims pursuant to 11 U.S.C. § 546 (e), which shields from recovery securities-related payments made by a stockbroker. The District Court ruled in favor of the defendant customers, holding that § 546 (e) barred any claims outside two (2) years of the petition date and dismissed those claims. The District Court certified the dismissal as a final judgment and the trustee appealed.

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On December 4, 2014, Lax & Neville LLP won expungement relief for James R. Young (“Mr. Young”), a registered representative formerly employed by UBS Financial Services, Inc. (“UBS”) who sought expungement of nine (9) customer complaints on his Central Registration Depository (“CRD”) record pursuant to the FINRA Code of Arbitration Procedure, Rules 2080 and 12805. CRD is the central licensing and registration system for the U.S. securities industry and its regulators, which contains information made available to the public via FINRA’s BrokerCheck. Pursuant to FINRA Code Rules 2080 and 12805, an arbitration panel may grant an expungement of customer dispute information from a registered representative’s CRD record. In the FINRA arbitration, Mr. Young asserted that he and his clients were all victims of UBS’s “product problem” relating to its offering, developing, marketing and selling structured product investments issued by the, now bankrupt, Lehman Brothers Holdings, Inc. (herein “Lehman Principal Protected Structured Products”). Mr. Young requested the expungement of Lehman Principal Protected Structured Products arbitrations and customer complaints from his record on the basis that he was not involved in the alleged wrongdoing.

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On October 29, 2014, the Securities and Exchange Commission’s (“SEC”) Enforcement Division, in an Order Instituting Administrative and Cease-And-Desist Proceedings (“Order”), alleged that Sands Brothers Asset Management, LLC (“Sands Brothers”), its co-founders Steven Sands and Martin Sands, and its Chief Compliance Officer and Chief Operating Officer Christopher Kelly, violated Section 206(4) of the Investment Advisers Act of 1940, which prohibits a registered investment adviser from engaging in fraudulent, deceptive or manipulative conduct, and the ‘custody rule’ in 17 CFR §275.296(4)-2, which requires an adviser to implement procedures to safeguard customer funds and securities. See 17 CFR §275.296(4)-2. Sands Brothers is a New York limited liability company that was formed in 1998, with offices in Connecticut, New York and California, and provides investment advisory services. As of July 2014, Sands Brothers had approximately $64 million under management.

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The Commission of Financial Institutions for the Commonwealth of Puerto Rico (“OCFI”) ordered UBS Financial Services Inc. of Puerto Rico (“UBS”), a division of UBS Wealth Management Americas, to pay $5,200,000 in fines and restitution in an October 9, 2014 enforcement action. The penalty stems from UBS’ alleged recommendation to customers to use personal loans (“non-purpose loans”) for the purchase of municipal bond funds that ultimately trailed the sinking Puerto Rican economy. The original investment objective was to benefit from the tax advantages that these securities offer, but Puerto Rico’s economic woes have caused the devaluation of municipal bond funds generally. At the losing end of UBS’ practices were its conservative-risk clients who had significant portions of their liquid assets invested in closed-end funds, and whose non-purpose loans were ineligible for use in purchasing such securities.

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