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The Financial Industry Regulatory Authority, Inc. (“FINRA”) banned Gary Chackman, a former broker associated with LPL Financial LLC (“LPL”), for violating the firm’s policies and procedures regarding the sale of non-traded Real Estate Investment Trusts (“REITS”) and other alternative investments. According to his FINRA BrokerCheck Report, “[t]o evade the firm’s limitation on the concentration of alternative investments in customers’ accounts, Chackman regularly misidentified his customers’ purported liquid net worth on a required firm form . . . As a result of Chackman’s misrepresentations on those forms, his customers’ concentration in alternative investments, gauged as a percentage of their purported liquid net worth, remained below the firm’s limitations.” Further, Chackman’s unsuitable recommendation of the REITS and other alternative investments over-concentrated the customers’ investment accounts in illiquid investments. Reportedly, one of Chackman’s clients made seven (7) purchases of one REIT, over six (6) months, which after one year constituted 35% of the customer’s assets and 25% of her liquid net worth. Chackman’s FINRA BrokerCheck also states that as a result of the misrepresentations Chackman made on his customers’ alternative investment purchase forms, Chackman evaded the firm’s supervision, which resulted in LPL’s books and records being inaccurate. It is reported that Chackman is the subject of three customer complaint arbitrations, as well as an investigation by the Securities and Exchange Commission.

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On Wednesday, November 20, 2013, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative Cease-and-Desist Proceedings (“SEC Order”) against Larry C. Grossman and Gregory J. Adams, alleging that while Grossman and Adams were associated with the investment advisory firm Sovereign International Asset Management, Inc. (“Sovereign”), they implemented investments that were “risky, lacked diversification, and lacked independent administrators and auditors.” Sovereign was a small investment advisory firm run by Grossman that was based out of Clearwater, Florida. On October 1, 2008, Grossman sold Sovereign to Adams, a financial industry professional from Palm Harbor, Florida, and thereafter, Adams assumed Grossman’s role as Managing Partner and sole owner of Sovereign.

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On February 28, 2012, Ronnie Erickson and Stacy Erickson, individually and on behalf of The Ronnie L. Erickson Trust, The Stacy L. Erickson Trust, and The Ronnie and Stacy Erickson Charitable Trust (“Claimants”) filed an arbitration before the Financial Industry Regulatory Authority, Inc. (“FINRA”) against the independent broker-dealer National Planning Corporation (“NPC”), Christopher Ronald Olson (“Olson”) a broker and associated person formally registered with NPC, and Preferred Resource Group, Inc. (“PRG”).

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Jinesh “Hodge” Brahmbhatt is a broker formally registered with Success Trade Securities, Inc. (“Success Trade”) from April 2009 until April 2013. Success Trade and its President and Chief Executive Officer, Fuad Ahmed, were charged by the Financial Industry Regulatory Authority, Inc. (“FINRA”) in a Complaint for defrauding various investors, including several NFL and NBA professional athletes, through the sale of $18 million in fraudulent promissory notes. In April 2013, FINRA filed a Complaint against Mr. Ahmed and Success Trade which alleges that “[f]rom March 2009 through at least February 2013, Ahmed and [Success Trade] raised over $18 million from 58 investors, many of whom are current National Football League (“NFL”) and National Basketball Association (“NBA”) players, through the fraudulent and unregistered sales of promissory notes issued by [Success Trade’s] parent company, [Success Trade, Inc.].” (See Department of Enforcement vs. Success Trade Securities, Inc., et al., Disciplinary Proceeding No. 2012034211301). The Complaint also states that the notes purported “to offer interest rates ranging from 12% to 26% paid on a monthly basis typically over three years. To meet its monthly interest obligations at these exorbitant rates, [Success Trade] issued, and [Respondents] sold, additional [Success Trade] notes to new and existing investors,” by making various misrepresentations of material facts and omitting to disclose other material facts to investors. A disciplinary proceeding was held by FINRA regarding their allegations in their Complaint against Success Trade and Mr. Ahmed, during which Mr. Brahmbhatt was supposed to appear.

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On November 5, 2013, the Securities and Exchange Commission (“SEC”) banned former Merrill Lynch broker, James R. Lanier, from the securities industry for stealing his clients’ funds. Lanier was registered with Merrill Lynch between August 2007 and March 2010 in Tallahassee, Florida. According to federal prosecutors, Lanier misappropriated $887,931 from investment advisory and/or brokerage accounts of Merrill Lynch clients and customers between September 2008 and March 2010. Lanier forged letters purportedly authorizing the transfer of customer and/or client funds to bank accounts he controlled. Among other things, Lanier used approximately $1 million in client funds not only to invest in a cellular telecommunications business, but also to purchase a condominium and a pickup truck. To conceal his fraud, Lanier transferred a portion of the misappropriated funds to bank accounts of customers and/or clients who requested liquidation of their Merrill Lynch accounts. In March 2013, Lanier was convicted of wire fraud, mail fraud, money laundering, and aggravated identify theft. United States v. Lanier, No. 4:12-cr-51 (N.D. Fla. Mar. 8, 2013). He was sentenced to 106 months of incarceration and a five-year term of post-release supervision, and was ordered to pay $887,931 in restitution.

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Merrill Lynch Pierce Fenner & Smith Inc (“Merrill Lynch”) was fined $500,000 by Massachusetts securities regulators for failing to stop one if its brokers, Jane E. O’Brien, from defrauding clients. Ms. O’Brien, who has resigned from Merrill Lynch, had been a top producer for Merrill Lynch’s Boston office, bringing in nearly $154 million in assets under management, and earning $903,734 in gross revenue for the firm in her first year, regulators said. Reportedly, O’Brien started borrowing from clients in 2007, and by 2011 had borrowed approximately $2.2 million. In one instance, she used money a client intended to invest in a software company for her own personal expenses. It was not until O’Brien’s retirement accounts were nearly empty that Merrill Lynch noticed that she might be having financial difficulties. Specifically, regulators said that, O’Brien prematurely removed $380,750 from her own retirement account at Merrill Lynch, and that those withdrawals, which incurred tax penalties, could have signaled that she was in financial trouble. However, Merrill Lynch reportedly did not inform the Massachusetts securities regulators about reviewing her conduct until six days after she was indicted by the Justice Department, the regulators said. William F. Galvin, Secretary of the Commonwealth of Massachusetts, charged Merrill Lynch with failure to supervise for failing to notice patterns of behavior by a financial adviser that suggested she was in financial trouble.

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On or about May 24, 2012, Laverne B. Coalson, Individually, and Douglas L. Coalson and Gloria F. Coalson, as Trustees of the Coalson Insurance Trust U/A Dated 7/9/99 (“Claimants”) filed an arbitration before the Financial Industry Regulatory Authority, Inc. (“FINRA”) against Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) and their broker, Donny D. Vogler (“Vogler”). Claimants’ statement of claim alleged the following causes of action: deceptive insurance practices; deceptive trade practices under the Texas Deceptive Trade Practices-Consumer Protect Act; violation of the Texas Securities Act; negligent misrepresentation; breach of contract and implied covenant of good faith and fair dealing; negligent supervision; control person liability; and respondeat superior. The causes of action related to Claimants’ allegation that Respondents recommended inappropriate investments as part of their estate plan, including a variable universal life insurance product known as the “Merrill Lynch Funds Estate Investor II,” which Claimants asserted was unsuitable for their investment goals. Respondents denied the allegations made in the Statement of Claim and asserted affirmative defenses. After nine hearing sessions, the Panel determined that Merrill Lynch was liable to Claimants for compensatory damages in the amount of $957,485.50, plus interest. Further, the Panel found Merrill Lynch liable for $78,228.93 as sales load disgorgement, plus interest. Merrill Lynch also was ordered to pay Claimants $17,698.38 in costs; $23,950.00 in expert witness fees; and $120,474.40 in Attorneys’ fees pursuant to Texas law. Claimants’ claims against Vogler were denied and dismissed with prejudice, but his request for expungement was denied.

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Michael Farah, a broker formerly associated with the investment firm Wedbush Securities, Inc. (“Wedbush”) won a $4.2 million Financial Industry Regulatory Authority (“FINRA”) arbitration award against the firm regarding Farah’s former sale of risky collateralized mortgage obligations. According the arbitration award, in his Statement of Claim filed in 2005, Farah alleged that “Wedbush made misrepresentations and omitted material facts in connection with the collateralized-mortgage-obligations [“CMO”] investments that he recommended to his clients, causing Farah to lose clients and annual income.” Thereafter, in 2012, Farah amended his claim to include allegations that Wedbush failed to indemnify him in various customer arbitrations raised against the broker-dealer relating to the sale of the CMO investments. In response, Wedbush filed Counter-Claims against Farah alleging the following claims: express indemnification, implied equitable indemnification, interference with contractual relations, interference with prospective economic advantage, intentional misrepresentation, negligent misrepresentation and breach of contract, which all “relate to losses [Wedbush] allegedly suffered as a result of multiple arbitration proceedings arising out of the CMO investments recommended by Farah.” After 15 hearing sessions, the FINRA arbitration panel awarded Farah $1.3 million for loss of income. Further, the arbitration panel found that Wedbush was responsible to pay Farah $1.4 million in punitive damages, $1.47 million for attorneys’ fees, $18,500 for expert witness fees, $21,074 for Farah’s court reporter fees, and $600 for the claim filing fee. The FINRA arbitration panel denied Wedbush’s counter-claims.

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UBS is once again in the midst of legal troubles for the sale and marketing of highly leveraged, risky closed-end bond funds that were heavily invested in Puerto Rican municipal debt, such as the Tax Free Puerto Rico Fund II. According to media reports and lawsuits filed against UBS by investors in Puerto Rico, these closed-end bond funds had a leverage ratio of approximately 50%, which means that for every dollar of customer assets the fund holds, it has approximately another dollar of assets bought with borrowed money. UBS manages other Puerto Rican funds that are similarly leveraged. By way of comparison, an average leverage ratio on funds similar to UBS’s in the U.S. is approximately only 20%. To make matters worse, UBS encouraged clients to borrow money on margin to invest in those funds. According to UBS’s own brokers, UBS lent money to its customers improperly by encouraging them to borrow on credit lines, which caused more investor losses. UBS brokers were incentivized to do so as they received commissions for securities bought on the credit line, and then received more compensation if the customer used the credit line. Most brokerage firms require customers who open a credit line to sign a document that they will not use the credit line to buy securities. According to reports, UBS clients did not sign such documents, in violation of UBS’s policies and procedures. The value of these risky highly leveraged closed-end bond funds managed by UBS have declined in value by approximately 50% or more, resulting in losses to investors. UBS’s clients have been forced to liquidate hundreds of millions of dollars in holdings in the bond funds to meet margin calls. The erosion in government-bond prices in Puerto Rico has also sparked a liquidity problem in shares of these funds.

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On September 20, 2013, the Securities and Exchange Commission (“SEC”) filed a Complaint in the United States District Court for the Southern District of Florida against registered representative, Tibor Klein, and former registered representative, Michael Shechtman, which alleged that Klein and Shechtman (collectively referred to as “Defendants”) engaged in insider trading of King Pharmaceuticals, Inc. (“King”) securities prior to an October 2010 tender offer announcement. The Complaint alleges that Klein, an investment adviser and owner of Klein Financial Services, learned of nonpublic material information regarding Pfizer’s acquisition of King from his friend who was an attorney representing King. The SEC claims that Klein misappropriated that information and purchased securities in King for himself, and at least 40 of his clients, before the insider information went public. The Complaint also alleges that Klein provided the inside information to Shechtman, a former broker who used to be affiliated with Ameriprise Financial Services, Inc., who also used the information to purchase King securities for himself and his wife. Further, it is alleged that after the information regarding Pfizer’s acquisition of King was made public, Klein sold his and his clients’ King securities which earned Klein a profit of $8,824, and generated profits in his clients’ accounts in the amount of $319,550. Similarly, the Complaint alleges that after the information became public, Shechtman sold his and his wife’s King securities for a profit of $109,040. The Complaint alleges that the Defendants violated Section 10(b) and 14(e) of the Exchange Act, and seeks disgorgement of ill-gotten gains, financial penalties and a permanent injunction enjoining Defendants from future violations of federal securities laws.

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