New York Securities Lawyer BlogOn June 10, 2014, a FINRA arbitration panel rendered a decision in a case in which Wells Fargo Advisors, LLC (“Wells Fargo”) brought a claim against Philip Anthony Duamarell (“Duamarell”), one of its former brokers, for breach of four promissory notes dated November 30, 2007, December 1, 2008, February 1, 2009 and September 1, 2009. (See FINRA Arbitration Case No. 10-04257). Duamarell denied the allegations in the Statement of Claim filed by Wells Fargo and he asserted various counterclaims against Wells Fargo, including, but not limited to, inequitable misconduct, constructive termination, and breach of the written employment contract. Duamarell claimed that during the recruitment process, Wells Fargo oversold its ability to service corporate stock plans. He further claimed that he left Wells Fargo when it became clear that Wells Fargo was unable to do business with clients in the same way as his former employer, Smith Barney. In one of the largest promissory note decisions this year, the FINRA arbitration panel found that Duamarell was liable for the principal balance due on all four promissory notes, totaling $1,282,024.77, and denied his counterclaims in their entirety. The arbitration panel did not hold Duamarell liable for Wells Fargo’s legal fees and interest.
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SEC Charges Paradigm Capital Management and Candace Weir with Conducting Conflicted Transactions and Retaliating against Whistleblower
The Securities and Exchange Commission (“SEC”) filed an Order instituting Cease and Desist Proceedings against Paradigm Capital Management (“Paradigm”), an investment adviser firm, and Candace Weir, the founder, Director, President, Chief Investment Officer, and Portfolio Manager of Paradigm. Weir is also the founder, Director, Chief Executive Officer, and President of C.L. King & Associates, Inc. (“C.L. King”), a broker-dealer based in Albany, New York. The SEC charged Paradigm and Weir with engaging in prohibited and conflicted transactions and then retaliating against the employee who reported the unlawful trading activity to the SEC. In anticipation of the institution of the SEC proceedings, Paradigm and Weir submitted an Offer of Settlement and agreed to pay $2.2 million to settle the SEC’s civil charges.
The Securities And Exchange Commission Charges Investment Advisor With Defrauding Clients
On June 3, 2014, the Securities and Exchange Commission (“SEC”) filed an emergency enforcement action against Scott Valente (“Valente”) and The Eliv Group, LLC (“The Eliv Group”), his one-man advisory firm based out of Albany, New York, in order to stop their alleged ongoing fraud. In its Complaint, the SEC alleges that since at least November 2010 through the present, Valente and The Eliv Group fraudulently lured approximately eighty (80) individual and unsophisticated investors who mainly reside in the Albany and Warwick, New York area to become advisory clients and invest more than $8.8 million. Valente and The Eliv allegedly made various misrepresentations to potential customers, including that they have achieved consistent and outsized, positive returns and that clients’ principal was “guaranteed” by a large money market fund. Instead, Valente and The Eliv Group sustained investment losses for each of the full three years The Eliv Group had been in existence, and customers’ funds were not “guaranteed” or backed by money market funds. According to the SEC Complaint, on The Eliv Group website, Valente claimed that he had a 30-year record of investment experience “dedicated to the highest standards of service” when in fact he had filed for bankruptcy twice and was permanently expelled from the broker-dealer industry in 2009 based on the Financial Industry Regulatory Authority’s findings that he had engaged in serial misconduct against numerous customers.
Long Island Real Estate Managers, Adam Manson and Brian Callahan, Plead Guilty in $96 Million Ponzi Scheme Case
On May 12, 2014, Adam Manson (“Manson”) pleaded guilty to conspiracy to commit securities fraud by engaging in a $96 million Ponzi scheme. Manson’s co-defendant is his brother-in-law and former investment fund manager, Brian Callahan (“Callahan”), who pleaded guilty on April 29, 2014 to securities fraud and wire fraud. According to various court filings, between December 2006 and February 2012, Callahan raised more than $118 million from at least forty (40) investors in connection with four (4) different investment funds. Callahan ensured investors that their money would be safely invested in mutual funds and hedge funds. Contrary to his representations, Callahan misappropriated approximately $96 million of investor funds and began to operate a large scale Ponzi scheme. One of the various ways Callahan misappropriated investor funds was by diverting millions of dollars towards the Panoramic View, an unprofitable beachfront resort and residential development in Montauk, New York that Callahan and Manson co-owned. Further, Manson assisted Callahan in concealing the massive Ponzi scheme by deceiving independent auditors, including by presenting fake promissory notes that overstated the assets of the funds they purportedly managed and by lying about debts owed by the Panoramic View.
FINRA Panel Finds That Former Wells Fargo Broker Is Entitled To Partial Forgiveness On Promissory Note
On April 25, 2014, a FINRA arbitration panel rendered a decision in a case in which Wells Fargo Advisors, LLC (“Wells Fargo”), formerly known as Wachovia Securities, LLC, (“Wachovia”) brought a claim against Steven Grundstedt (“Grundstedt”), one of its former brokers, for breach of three promissory notes dated July 30, 2008, October 23, 2009 and May 28, 2010. (See FINRA Arbitration Case No. 11-02245). The FINRA arbitration panel found that Mr. Grundstedt was entitled to an offset against the outstanding balance of the first promissory note dated July 30, 2008 since Wachovia breached an implied contract and/or the covenant of good faith and fair dealing in the contracts Grundstedt signed, causing him substantial economic damage.
SEC Charges American Pension Services Inc. With Defrauding Investors
The Securities and Exchange Commission (“SEC”) announced fraud charges against American Pension Services Inc. (“APS”), a Utah-based retirement plan administrator, and its founder, president and CEO Curtis L. DeYoung. According to the SEC Complaint, APS and DeYoung defrauded investors by investing their savings in high risk investments, causing them to lose more than $22 million of their savings.
Bank of America/Merrill Lynch Wins Discrimination Case Brought By Three Former Female Trainees
Justice Cynthia S. Kern of the New York Supreme Court dismissed a Complaint filed by three (3) former female trainees, Julia Kuo, Sandra Hudson and Catherine Wharton, against Bank of America/Merrill Lynch (“Merrill Lynch”) claiming that they were terminated based upon sexual discrimination. According to Justice Kern’s Decision and Order, the females were employed by BOA/ML starting in 2008 and participated in one of Merrill Lynch’s two training programs, the Practice Management Development Program or the Paths of Achievement Program (which was the predecessor to the Practice Management Development Program), until they were terminated on January 26, 2009. According to their Complaint, the female trainees allege that they were supervised by Joe Mattia, who provided each of the females with a copy of a book entitled, “Seducing the Boys Club.” Further, the female trainees also alleged that Mr. Mattia required the trainees to attend a talk with the book’s author at the BOA/ML Fifth Avenue branch office, during which the author “encouraged women to stroke men’s egos with flattery and manipulation in order to succeed in a male-dominated environment, such as Merrill Lynch.” The Complaint further asserted that after the market downturn in the fall of 2008, and the acquisition of Merrill Lynch by Bank of America, Mr. Mattia was replaced by a new Branch Manager. On January 26, 2009, the new branch manager laid off thirteen (13) trainees, including all of the female trainees, but retained fourteen (14) male trainees who were not meeting their performance goals. Although Judge Kern acknowledged that the talk at the branch office with the author of “Seducing the Boys Club” was “validly assailed as inappropriate,” she ultimately dismissed the case and accepted BOA/ML’s defense that the trainees continually failed to meet their achievement and performance goals. Indeed, Judge Kern’s nineteen (19) page decision stated, “It is undisputed that a computer, and not a Merrill Lynch employee, targeted Ms. Wharton and other underperforming trainees for termination and that the computer did so based on statistical performance metrics.”
FINRA Sends New Expungement Rule To The Securities And Exchange Commission
During the February 13, 2014 FINRA Board of Governors (“Board”) meeting, the Board discussed a new proposed rule that would prohibit conditions relating to expungement of customer dispute information. On April 14, 2014, FINRA sent the proposed rule to the Securities and Exchange Commission (“SEC”) for possible approval. The text of the proposed rule is as follows: “No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.” The SEC has the ability to open the proposal for public comment, modify it or approve it as is.
The SEC Provides Investment Advisers With Guidelines Regarding The Use Of Testimonials On Social Media
In March 2014, the Securities and Exchange Commission (“SEC”) issued guidelines concerning the ability of registered investment advisers to use social media to disseminate testimonials or advertisements featuring public commentary about the adviser. The SEC issued these guidelines in response to increased demand from customers for independent commentary or reviews of service providers, including registered investment advisers. Currently, Section 206(4)-1(a)(1) of the Investment Advisers Act of 1940 (“Advisers Act”), known as the “Testimonial Rule,” prohibits any investment adviser from engaging in any act, practice or course of business that the SEC defines as fraudulent, deceptive or manipulative. Specifically, section 206(4)-1(a)(1) states “[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice or course of business . . . for any investment adviser registered or required to be registered under the [Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.” Prior to issuing the guidelines, the SEC took the position that advertisements with testimonials were misleading because they emphasized comments and activities favorable to the adviser and ignored those that were unfavorable. In the recently issued guidelines, the SEC analyzes what constitutes a “testimonial,” which although not defined in the Adverse Act, may include public commentary made by a client about his or her experience with, or endorsement of, an investment adviser or a statement made by a third party about a client’s experience with, or endorsement of, an investment adviser. The guidelines emphasize that an adviser’s publication of an article by an unbiased third party regarding the adviser’s performance is not a testimonial, unless it includes a client endorsement. The determination of whether advertisements on social media constitute a prohibited testimonial is extremely fact specific. The SEC guidance assists investment advisers in developing policies and practices for participating in social media without violating SEC rules regarding public commentary in testimonials. Advisers should consult guidelines before posting advertisements or testimonial on social media. The guidelines can be accessed here: http://www.sec.gov/investment/im-guidance-2014-04.pdf
FINRA To Fly Arbitrators To Puerto Rico To Administer Puerto Rico Municipal Bond Fund Cases
The Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it has expanded its pool of arbitrators who can preside over cases in Puerto Rico in order to administer the hundreds of customer cases regarding the sale of Puerto Rican municipal bond funds. More than 200 cases have been filed in Puerto Rico by customers who allegedly incurred a financial loss as a result of their investments in Puerto Rican closed-end municipal bond funds. Claims have been filed against UBS Financial Services Inc. (“UBS”), Merrill Lynch, Pierce, Fenner & Smith, Santander Bank, Oriental Financial Services, Corp., and other firms. Indeed, as we have previously blogged, numerous lawsuits have been filed against UBS for the sale and marketing of highly leveraged, risky closed-end bond funds that were heavily invested in Puerto Rican municipal debt. It has now been reported that investors’ losses in the Puerto Rico closed-end municipal bond fund investments have risen to billions of dollars. According to reported research, nineteen (19) closed-end local municipal bond funds sold by UBS brokers in Puerto Rico lost $1.66 billion in the first nine months of 2013, with the biggest losers being UBS Puerto Rico funds that had large holdings of municipal bonds that were originally brought to market with UBS as the underwriter.