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On Monday, February 24, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) fined broker-dealer Berthel Fisher & Co. Financial Services Inc. (“Berthel Fisher”) and an affiliate, $775,000 for compliance and supervisory failures surrounding the inappropriate sale to its customers of alternative investments and nontraditional exchange-traded funds (ETFs), including non-traded real estate investment trusts (REITS), leveraged and inverse exchange-traded funds (ETFs), managed futures, oil-and-gas programs, equipment-leasing programs and business-development companies.

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Former Bank of America/Merrill Lynch registered representative, Gary Lane, was sentenced to 10 years in prison for operating a Ponzi scheme that defrauded at least six investors of $2.7 million. Reportedly, Mr. Lane victimized elderly and unsophisticated investors by asking them to deposit funds into an account outside of Bank of America/Merrill Lynch. According to Daniel Bogden, the United States Attorney for the District of Nevada, Mr. Lane guaranteed investors that the money deposited into the account would be invested in U.S. Treasury Bonds, which would generate more than 6% interest and would mature in two years. Mr. Bogden also stated that the bonds never existed, and instead investors’ funds were deposited into Mr. Lane’s wife’s investment account. Mr. Lane would use the funds to pay other investors the purported interest and to pay personal expenses.

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During the February 13, 2014 FINRA Board of Governors (“Board”) meeting, the Board discussed possible rule proposals related to its BrokerCheck database. According to FINRA’s Website, “BrokerCheck is a free tool to help investors research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, as well as investment adviser firms and representatives.”

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On September 4, 2012, financial adviser Vincent W. Romano (“Romano”) filed a Statement of Claim with the Financial Industry Regulatory Authority, Inc. (“FINRA”) against his former employer, Morgan Stanley Smith Barney, LLC (“Morgan Stanley”). In his Statement of Claim, Romano raised libel and slander causes of action relating to his Form U-5 termination form and alleged that Morgan Stanley marked his employment record in order to harm Romano’s campaign for political office in Illinois. Romano stated that, “[Morgan Stanley] feared a loss of business with the city of Chicago and the state of Illinois because [Morgan Stanley] has a relationship with House Speaker Michael Madigan, and [Romano] was running on a reform platform that could upset Michael Madigan’s political power.” Romano further alleged that Morgan Stanley “failed to follow its own procedures regarding running for political office and fabricated a reason to terminate [Romano].” As a result of these actions, Romano sought $2 million in compensatory damages and $6 million in punitive damages.

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Financial Industry Regulatory Authority Inc. has proposed a new rule to the SEC that would allow FINRA arbitrators to direct cases to FINRA’s enforcement division before the case has closed. As it stands now, FINRA arbitrators are required to wait until the arbitration case has concluded before they can report to FINRA’s Enforcement Department any wrongful conduct or concerns that they learn during the arbitration proceedings about a broker/registered representative or broker dealer. Pursuant to FINRA’s proposed rule change form filed with the SEC to amend Rule 12104 of the Code of Arbitration Procedure for Customer Disputes and Rule 13104 of the Code of Arbitration Procedure for Industry Disputes to broaden arbitrators’ authority to make referrals during an arbitration proceeding, “Finra is concerned that the current rule’s requirement that arbitrators in all instances must wait until a case is concluded before making a referral could hamper Finra’s efforts to uncover threats to investors as early as possible. . . Finra is proposing, therefore, to broaden the arbitrators’ authority under the Codes to make referrals during the hearing phase of an arbitration in those extremely rare circumstances in which investor protection requires that the referral not be delayed.”

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The Financial Industry Regulatory Authority Inc. (FINRA) has a new focus on cracking down on brokers who submit inappropriate or falsified corporate expense reports. In recent years, FINRA is increasingly imposing fines and barring brokers from the industry for violations relating to inappropriate submission of personal expenses. To some observers and registered representatives that face FINRA in cases related to allegedly inappropriate submission of expenses, it does seem that these matters are being treated on the same level as sales practices violations involving a customer.

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Lax & Neville was recently retained by an investor to file a claim regarding alleged sales practice abuses by Gilford Securities Inc. (“Gilford”), a broker-dealer, and Adam Coblin (“Coblin”), CRD# 2005853, one of its former financial advisors who resigned in July 2013 while under review by Gilford for customer complaints. We believe that Coblin may have engaged in similar sales practice abuses with many of his customers and are currently investigating whether Coblin churned and charged excessive commissions in his customers’ brokerage accounts, and whether he sold unsuitable securities such as Delcath Systems, Prospect Global Resources or Vivus Inc. to customers. It should be noted that according to Coblin’s FINRA BrokerCheck Report, several customers have recently filed customer complaints against him based on alleged sales practice abuses. For example, one of his former customers filed an arbitration claim against him and Gilford in November 2012 alleging compensatory damages of $910,555 as a result of alleged unsuitable investments and excessive trading. Gilford settled that matter for $375,000 in September 2013. Another customer filed an arbitration claim against Gilford and Coblin in October 2013 alleging compensatory damages of $133,000 as a result of alleged misrepresentations, unsuitability, unauthorized trading and other sales practice abuses. That claim and other customer complaints against Coblin are still pending.

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As we have previously blogged, numerous lawsuits have been filed against UBS Financial Services Inc. (“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 recently 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.

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On December 5, 2013, the Securities and Exchange Commission (“SEC”) filed an Order Making Findings and Imposing Remedial Sanctions And A Cease-and-Desist Order (the “Order”) against John Thomas Capital Management Group, LLC d/b/a PATRIOT 28 LLC (“JTP”), the broker-dealer John Thomas Financial, Inc. (“JTF”), its associated member and owner Anastasios “Tommy” Belesis (“Belesis”), and its branch office manager George Jarkesy Jr. (“Jarkesy”) (collectively “Respondents”).

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On December 12, 2013, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) stating that Merrill Lynch, Pierce, Fenner & Smith, Inc., through its affiliate Merrill Lynch International (collectively referred to as “Merrill Lynch”), made various misrepresentations during the marketing of a series of collateralized debt obligation transactions (“CDO”) during 2006 and 2007. In a CDO transaction, a special purpose vehicle issues securities that are backed by collateral owned by the issuer. CDOs have collateral managers who are responsible for the selection and monitoring of the portfolio of assets that backs the CDO.

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