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Redwood Trust, Inc. (“RWT”), a publicly traded real estate investment trust (“REIT”), filed a Form 8-K on April 2, 2020 revealing that its book value fell as much 56% in the first quarter, resulting in the decline of RTW shares of approximately 31% in a single day. See RWT SEC filing http://www.snl.com/Cache/IRCache/c7e6c9bfb-d506-663b-3b5d-328e2398755c.html.

The Form 8-K reported as follows:

Preliminary Estimate of Book Value – Excluding any potential decline in the value of our intangible assets since December 31, 2019, as of March 27, 2020, we estimate that on a preliminary basis GAAP book value per common share is between $7.03 and $7.67, an estimated year-to-date decline of approximately 52% to 56% from our GAAP book per common share at December 31, 2019.

Direxion has announced that on March 31, 2020, the leverage of 10 daily ETF’s will be changed from 300% to 200%. Direxion released the following presser:

NEW YORK — March 27, 2020—The investment objective and strategy of each Fund in the table below is currently to seek daily leveraged, or daily inverse leveraged, investment results, before fees and expenses, of 300% or -300%, as applicable, of the performance of its underlying index. Effective after market close on March 31, 2020 each Fund’s investment objective and strategy will change to seek daily leveraged, or daily inverse leveraged, investment results, before fees and expenses, of 200% or -200%, as applicable, of the performance of its underlying index, as shown below:

Since inception, these 10 Direxion funds have been used by traders, funds and investors as trading or hedging vehicles. Collectively, these funds hold billions of dollars of total assets. Direxion’s changing the leverage ratio of its funds may have been prompted by the extreme market volatility seen across capital markets throughout March 2020. However, this change could lead to immediate and significant losses by both Direxion fund investors and those who purchased options on Direxion funds.

Lax & Neville has significant experience with complex securities cases involving ETFs, ETNs and options. If you have suffered investment losses from Direxion funds or options, or your broker’s or investment advisor’s purchase of ETFs or ETNs in your investment account, contact Lax & Neville LLP today at (212) 696-1999 and schedule a consultation.

On February 14, 2020, four former Credit Suisse investment advisers represented by Lax & Neville LLP won a $2.2 million FINRA arbitration award against Credit Suisse Securities (USA) LLC for failure to pay their earned deferred compensation when it exited the U.S. wealth management business in October 2015.  See Galli, et al. v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01489.  This is one of numerous FINRA arbitrations against Credit Suisse arising from its calculated decision to withhold more than $200 million in deferred compensation from nearly 300 former advisers in breach of their employment agreements and its own deferred compensation plans.   Seven have gone to award thus far, including five brought by  Lax & Neville LLP.  See Galli, et al. v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01489; DellaRusso and Sullivan v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01406; Lerner and Winderbaum v. Credit Suisse Securities (USA) LLC, FINRA No. 17-00057; Finn v. Credit Suisse Securities (USA) LLC, FINRA No. 17-01277; and Chilton v. Credit Suisse Securities (USA) LLC, FINRA No. 16-03065.  All seven FINRA arbitration panels and a New York State Judge (Credit Suisse Securities (USA) LLC v. Finn, Index No. 655870/2018 (N.Y. Sup. Ct. 2019)) have found for the advisers and ordered Credit Suisse to pay the deferred compensation it owes them.

Lax & Neville LLP has won more than $13 million in compensatory damages, liquidated damages, interest, costs and attorneys’ fees on behalf of former Credit Suisse investment advisers.  To discuss these FINRA arbitration Awards, please contact Barry R. Lax, Brian J. Neville, Sandra P. Lahens or Robert R. Miller at (212) 696-1999.

On January 28, 2020, the SEC charged Edward E. Matthes, a former registered representative and investment adviser in Wisconsin, with defrauding 26 of his majority elderly clients out of approximately $2.4 million.

According to the SEC’s complaint, between April 2013 and March 2019, Matthes made misrepresentations to his clients, claiming that a new investment opportunity would generate a higher return for them and earn a guaranteed minimum yield of 4% per year. The claimed investment opportunity did not exist and Matthes simply stole approximately $1.4 million from his clients. Matthes allegedly used the money to renovate his home, pay child support and purchase various luxury items.

Matthes further misappropriated an additional $1 million of his clients’ money by allegedly making unauthorized sales and withdrawals from his clients’ variable annuities and depositing the money directly into his personal bank account instead of clients’ accounts. Matthes used all of the funds he raised for his own personal use and to operate a Ponzi-like payment scheme, paying $170,000 to certain, select customers.

On January 14, 2020, the SEC informed the public that they had filed an enforcement action and obtained a temporary restraining order and asset freeze against Kenneth D. Courtright, III, an Illinois resident, and his company, Todays Growth Consultants Inc. (TGC) in connection with an alleged Ponzi-like scheme that raised at least $75 million from over 500 investors.

The SEC’s complaint, initially filed in federal court in Chicago on December 27, 2019, and unsealed on January 14, 2020, charges Courtright and his company with antifraud and registration violations and seeks emergency relief, as well as permanent injunctions, return of ill-gotten gains with prejudgment interest, and civil penalties. On Dec. 30, 2019, the Court issued a temporary restraining order, ordered an asset freeze and other emergency relief.

Between 2017 and 2019, Courtright and TGC operated under the alleged false promise that they could provide a minimum guaranteed rate of return on revenues, generated by websites, to their investors. TGC claimed it would use investor funds to buy or build a website and develop, market, and maintain the website for investors. However, TGC’s sales were conducted through unregistered securities offerings. In reality, as alleged, Courtright and TGC were operating a Ponzi-like scheme, using investor funds to pay investor returns, in addition to paying for Courtright’s personal expenses, including his mortgage and private school tuitions for his family.

On November 14, 2019, two former Credit Suisse investment advisers represented by Lax & Neville LLP won a $1.6 million FINRA arbitration award against Credit Suisse Securities (USA) LLC for unpaid deferred compensation. This is the sixth FINRA panel to rule on claims arising from Credit Suisse’s refusal to pay its advisers more than $200 million in earned deferred compensation when it closed its US private bank. All six FINRA panels have found for the advisers and ordered Credit Suisse to pay the deferred compensation it owes.

The claimants, Richard J. DellaRusso and Mark L. Sullivan, were advisers in the New York branch of Credit Suisse’s US private banking division (“PBUSA”) and were terminated when Credit Suisse closed PBUSA. Credit Suisse took the position, as it has with hundreds of its former investment advisers, that Mr. DellaRusso and Mr. Sullivan voluntarily resigned and forfeited their deferred compensation. A three member FINRA Arbitration Panel determined that Credit Suisse terminated Mr. DellaRusso and Mr. Sullivan without cause and breached their employment agreements by cancelling their deferred compensation.

The FINRA Panel awarded Mr. DellaRusso and Mr. Sullivan compensatory damages totaling $1,235,817, which included 100% of their deferred compensation awards, 2015 deferred compensation, and severance. The FINRA Panel also awarded interest and, having concluded that the cancellation of deferred compensation violated the New York Labor Law, attorneys’ fees. See NYLL § 198(1-a). The FINRA Panel recommended expungement of Mr. DellaRusso’s and Mr. Sullivan’s Forms U-5, the termination notice a broker-dealer is required to file with FINRA. As with hundreds of their colleagues, Credit Suisse falsely reported that Mr. DellaRusso’s and Mr. Sullivan’s “Reason for Termination” was “Voluntary.” The FINRA Panel recommended that the “Reason for Termination” be changed to “terminated without cause.” The FINRA Panel also denied Credit Suisse’s counterclaims. To view this Award, visit 17-01406.

On December 26, 2019, FINRA sanctioned five firms, LPL Financial LLC, J.P. Morgan Securities LLC, Morgan Stanley Smith Barney LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., for failing to ensure asset transfers on legally mandated dates for at least 80,585 accounts. 53,384 of the accounts came from Morgan Stanley and 15,366 accounts came from Merrill Lynch; while, 5,666 accounts were at J.P. Morgan Securities, 5,249 accounts were at LPL, and 920 accounts were at Citigroup.

Accounts operating under the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA), allow customers to transfer funds to a minor beneficiary without creating a formal trust. In these accounts, a custodian conducts investments on behalf of the beneficiary, until the beneficiary reaches the age of majority, at which point the account is transferred from the custodian to the beneficiary. The five firms failed to follow the rules governing these wealth transfers, by allowing the custodians to conduct transactions in the accounts after the accounts were transferred to the beneficiaries.

FINRA requires firms to “know your customer,” by verifying the authority of any person acting on behalf of a customer. Following the “Know Your Customer” (KYC) rule requires firms to implement supervisory systems to verify custodian authority to make investment decisions in the accounts. The five firms failed to adequately supervise the accounts and therefore failed to follow FINRA’s KYC rule.

On December 18, 2019, the SEC voted to propose amendments to the definition of accredited investor, potentially vastly changing suitability criteria for investors. This change could have a significant impact both on investors who may gain access to a now-expanded range of private placements and on the viability of damages claims for sales practices abuses related to private placements.

One of the main criteria that would be changed in the proposed amendments is net worth. The proposals would expand eligibility to individuals with professional knowledge, experience, or certifications. Expanded eligibility criteria was also proposed for institutional investors.

SEC Chairman Jay Clayton said the following with regard to the proposal:

On November 11, 2019, the Hong Kong Securities and Futures Commission (“SFC”) announced that UBS Financial Services (“UBS”) was fined $51.09 million for overcharging thousands of clients throughout the last decade. The SFC said in its statement that their investigation found that UBS overcharged up to 5,000 clients on “post-trade spread increases,” and that these charges were far in excess of standard firm fee disclosures and rates. UBS also agreed to pay approximately $25.5 million in restitution to affected clients.

According to the SFC, UBS stated that the investigation was triggered by a self-reported discovery of systemic internal control failures. Most firms have compliance software in place that prevents fees or spread markups in excess of certain ratios, with manual overrides required to circumvent these controls. Based on the SFC statement, it was unclear to the public which specific internal controls were breached and whether the breaches were caused by software or human error. UBS issued the following response to the SFC statement:

The relevant conduct predominately relates to limit orders of certain debt securities and structured note transactions, which account for a very small percentage of the bank’s order processing system.

According to a Complaint filed by Janney Montgomery Scott (“Janney”) in the Eastern District of Pennsylvania, financial advisor Jordan Braunstein (“Braunstein”) left with firm client data and violated the restrictive covenants in his contracts. The Complaint recited that when Braunstein departed Janney for Paradigm Wealth Management, he took not only his own client list, but also a list of all the clients serviced by the Lexington Avenue Wealth management team that he led, including many who were introduced and serviced by other advisors on the team.

Janney took the position that Braunstein violated both the Protocol for Broker Recruiting (“the Protocol”) and the Lexington Avenue Team Agreement, arguing that Braunstein was allowed to take only a limited list of legacy clients he brought over from Morgan Stanley and clients he introduced to the Lexington Avenue Team while at Janney. But, Janney reasoned, he could not take clients that other members of the team had originated. Pending a hearing on the matter, the Judge issued a temporary restraining order (“TRO”) barring Braunstein from soliciting any of Janney’s clients.  Firms can obtain TROs through any court of competent jurisdiction, pursuant to FINRA Rule 13804 upon a showing of three elements: (1) a likelihood of ultimate success on the merits; (2) the prospect of irreparable injury if the provisional relief is withheld; and (3) a balance of equities tipping in the moving party’s favor.  A party seeking a TRO from court is also required to submit to arbitration and at the same time file with the Director a statement of claim requesting permanent injunctive and all other relief relating to the same dispute.  A party will then need to prevail at an arbitration hearing in order to convert the TRO into a permanent injunction.

Whenever a financial professional exits a team, important legal questions arise surrounding the sourcing of client relationships, the servicing of clients, the existence of joint rep codes or client revenue sharing agreements, and ultimately the ownership of client relationships. While brokerage firms have the incentive to restrict departing brokers’ client contact to prevent customers and assets from leaving the firm, brokers clearly have the incentive to retain their books of business upon switching firms to the extent same does not violate any restrictive covenants in their employment agreements. Firms are required by FINRA Regulatory Notice 19-10 to provide customers with a departing broker’s new contact information if the firms have it, but only if the customers ask. Successfully navigating FINRA Rules, federal privacy laws and employment agreements can mean the difference between a smooth transition and receiving a TRO preventing the solicitation or servicing of clients at a new firm.