New York Securities Lawyer BlogOn August 1, 2013, the Securities and Exchange Commission (“SEC”) approved new disclosure requirements for broker-dealers who maintain custody of investor assets. These rules are part of the SEC’s response to the devastation caused by Bernard Madoff’s massive Ponzi scheme. The new SEC rules require brokerage firms who hold investor assets to file quarterly reports attesting to whether and how they maintain customer securities and cash. Further, brokerage firms are required to file annual compliance reports with the SEC verifying adherence with financial-responsibility rules, including, but not limited to, the net capital requirement rule. These annual and quarterly reports will be reviewed by independent public accountants. SEC Chairman, Mary Jo White, stated, “These rules will provide important additional safeguards for customer assets. . . These rules will strengthen the audit requirements for broker-dealers and enhance our oversight of the way they maintain custody.”
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SEC Files Investor Fraud Lawsuit in Bitcoin Ponzi Scheme Case
The Securities and Exchange Commission (“SEC”) filed its first investor fraud lawsuit against Bitcoin Savings and Trust, and its owner and founder, Trendon T. Shavers, for using the virtual currency, Bitcoin, to perpetrate a Ponzi Scheme. According to the Complaint, Bitcoin (“BTC”) is a virtual currency that is traded on virtual exchanges for conventional currency, or can be used to purchase online goods and services. The SEC alleges that from September 2011 through November 2012, Shavers raised 700,000 BTC from 66 investors for a total of $4.5 million in cash. In exchange, Shavers promised investors a 7% weekly return based on BTC arbitrage. Further, Shavers represented to investors on online forums that the “risk is almost 0.” The SEC further claims that Shavers did not trade BTC, but instead, used new investor funds for day trading, for personal use or to pay off early investors.
Radio Host Patrick Kiley Sentenced To 20 Years In Prison For Perpetrating Ponzi Scheme
Patrick Kiley, a 75 year old radio host, was sentenced to 20 years in federal prison by a Minnesota Federal Judge for perpetrating a $194 million Ponzi Scheme which defrauded 1,000 victims. Between 2005 and 2009, Kiley and his 3 co-defendants, solicited investments for foreign currency trading and promised investors guaranteed returns of 10.5 – 12%. Kiley would often promote this investment scheme on his former radio show, “Follow The Money,” which was syndicated on 200 nationwide stations, including Worldwide Christian Radio. During his radio show, Kiley would provide listeners with advice as to how to avoid financial ruin by providing their life savings and nest egg to his company for the foreign currency investment. The Judge who convicted and sentenced Kiley determined that Kiley would lure unsophisticated radio listeners into investing in his company by using religious affiliations. Kiley was convicted of 12 counts of wire and mail fraud, 1 count of conspiracy to commit wire and mail fraud, and 2 counts of money laundering. Kiley, and his co-defendants, were ordered to pay $155 million in restitution to the victims.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses, including losses suffered in Ponzi Schemes. Please contact our team of attorneys for a consultation at (212) 696-1999.
Massachusetts Securities Division Issues Subpoenas To 15 Brokerage Firms Regarding Their Sales Practices Of Alternative Securities To Senior Citizens
In early July 2013, the Massachusetts Securities Division began a massive investigation of 15 brokerage firms regarding their sale of alternative investments to senior citizens. Alternative investments include, but are not limited to, oil and gas partnerships, private placements, structured products, hedge funds, tenant-in-common offerings and real estate investment trusts (“REITS”). According to reports, the launch of the investigation includes the Massachusetts Securities Division sending information subpoenas to the following firms: Morgan Stanley, Merrill Lynch, UBS Securities LLC, Fidelity Brokerage Services Inc., ING Financial Partners Inc., LPL Financial LLC, Commonwealth Financial Network, MML Investor Services LLC, Investors Capital Corp., Signator Investors Inc., Meyers Associates LP, and WFG Investments Inc. The information subpoenas request that the broker-dealers provide information regarding the sale of any alternative product sold over the past year, the identity of the investor, the commissions generated, the review and compliance process related to such sale, and the related training and marketing materials. The firms were required to comply with the information subpoena by July 24, 2013. Massachusetts Secretary of the Commonwealth, William Galvin, stated that the recent investigations into REITS and other alternative investments, “heightened my concern that the senior marketplace is being targeted for the sales of these high-risk, esoteric products. . . While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents who push the products to score . . . large commissions.”
Ohio Division Of Securities Issued A Cease And Desist Order to Steadfast Income REIT Inc.
In early July 2013, the Ohio Division of Securities issued a Cease and Desist Order against Steadfast Income REIT Inc. (“Steadfast”), a nontraded real estate investment trust (“REIT”) for announcing a share price increase before the price change became effective. The Steadfast nontraded REIT invests in multifamily real estate and apartment houses and has $691.4 million in total assets. According to the Cease and Desist Order, on July 12, 2012 Steadfast announced that the value of the nontraded REIT was $10.24 per share, when instead, Steadfast sold shares at $10.00 per share until September 10, 2012. The Order specifically stated, “Steadfast’s decision to publicly announce an offering price increase 59 days prior to implementation of the price increase created a sale period that may have artificially increased investor demand for its securities.” Mark Heuerman, registration chief counsel for the Ohio Division of Securities, made the following statement to the media, “It creates a window for discounted sales price. It’s in the best interest of prior shareholders that the REIT sell shares for what it is worth.” Since the Ohio Division of Securities does not have authority to fine members, investors who incurred losses will unfortunately not recover restitution.
Major League Baseball All-Star, Mike Sweeney, Files Lawsuit Against UBS Financial Services Inc. and His Former Broker Ralph A. Jackson III
Mike Sweeney, a five-time Major League Baseball all-star, filed a lawsuit in the Los Angeles Superior Court against UBS Financial Services Inc. (“UBS”) and his former broker, Ralph A. Jackson III (“Jackson”), alleging that Jackson made unsuitable investments in Sweeney’s portfolio which amounted to $7.6 million in losses. According to the Complaint, Sweeney was introduced to Jackson in or about 1997 or 1998, before Sweeney’s baseball career took off when he joined the Kansas City Royals in 2001 and 2002. Further, in his Complaint, Sweeney alleges that when Jackson transitioned from his original firm Salomon Smith Barney to UBS, in January 2002, Sweeney’s portfolio was 73% invested in municipal bonds, with the remainder in large cap stocks. The Complaint continues to allege that from 2002 through 2007, Jackson invested $6.85 million of his portfolio into 11 private-equity investments that were misrepresented as safe and suitable. These investments ultimately lost Sweeney $4.9 million. Further, Sweeney alleges that Jackson invested $2.7 million into two private-equity investments without his knowledge and authorization. Sweeney’s attorney stated that his case was filed in court, rather than in an arbitration before the Financial Industry Regulatory Authority, Inc. (“FINRA”), because his case falls outside FINRA’s 6-year eligibility rule. FINRA’s 6-year eligibility rule, Rule 12206, states that no claim shall be eligible for arbitration before FIRNA when six years have elapsed from the occurrence or event giving rise to the claim. Sweeney’s attorney informed the media that there is no similar eligibility bar in court cases and does not believe the applicable statute of limitations will bar Sweeney’s case since Sweeney did not uncover the fraud until recently.
FINRA Bars John Thornes and Suspends Thornes & Associates for Stealing $4.2 million from Clients
The Financial Industry Regulatory Authority, Inc. (“FINRA”) has barred John Thornes, a California broker, and suspended his broker-dealer, Thornes & Associates Inc. of Redlands, Calif., over allegations that Mr. Thornes stole $4.2 million from two clients. FINRA alleged that from December 2010 and January 2013, Mr. Thornes converted customer assets in two trust accounts, by making at least 50 transactions falsely characterized as loans, and transferring the money to two of his friends. In the settlement agreement, FINRA stated that Mr. Thornes diverted approximately $1.7 million from a $2 million trust account belonging to a 77-year-old retired homemaker with Alzheimer’s who lived in a nursing home. As if that was not enough, FINRA further claimed that Mr. Thornes depleted $2.5 million from a $3 million trust account created by a deceased friend of Mr. Thornes’ parents to fund educational scholarships using the same fictitious loan scheme. According to FINRA, none of the loans have been repaid. The case was settled last Thursday. It is not known whether Mr. Thornes will face any criminal charges in the matter.
A Whistleblower and Former FINRA Registered Representatives Takes Credit For Exposing FINRA Director’s Criminal Past
In early June 2013, the Financial Industry Regulatory Authority, Inc.’s (“FINRA”) Southern Regional Director, Mitchell C. Atkins, resigned to pursue other interests. David Evansen, a former registered representative and self-proclaimed whistleblower, has taken credit for exposing Atkins’s criminal history, which supposedly lead to his resignation from FINRA. According to reports, in the spring of 2013, Evansen wrote a letter to FINRA’s Chief Executive, Richard Kethcum, and FINRA’s Executive Vice President, Susan Axelrod, claiming that Atkins was indicted in Louisiana in 1993 for using money raised in bingo games for non-charitable purposes. Moreover, it is reported that Atkins was indicted on a felony and misdemeanor charge in March 1993, and although the felony charge was dismissed, Atkins pleaded guilty to the misdemeanor charge. Further, upon information and belief, Atkins was sentenced in 1994 to conditional probation, 100 hours of community service, a $500 charitable contribution and a $500 fine. Although FINRA claims that Atkins resigned to pursue other interests, the timing of Evansen’s letter and the resignation are certainly interesting. According to reports, Evansen may have been motivated to send this letter to FINRA’s executives since he believed Atkins may have been mounting a huge enforcement action against him. Indeed, in August 2012, a FINRA Enforcement Hearing Panel barred Evansen from the industry for failing to respond to questions regarding customer complaints he received while registered with the broker dealer, Newbridge Securities. Evansen is appealing the bar as he claims he had not been properly notified of the inquiry and had responded to all FINRA questions in 2011. According to Evansen’s FINRA BrokerCheck Report, Evansen received seven customer complaints, of which four settled for approximately $465,000. Evansen left the industry in 2010 to work in logistical consulting.
New FINRA Rule Proposal Filed with the SEC
On June 21, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a new set of proposed and updated supervisory rules with the Securities and Exchange Commission (“SEC”). These proposed and updated rules are part of FINRA’s continued efforts to consolidate legacy New York Stock Exchange (“NYSE”) and National Association of Securities Dealers (“NASD”) Rules. The June 2013 proposal from FINRA did not include a new rule proposed by FINRA in its original proposed rule filing in June 2011, which would have required broker-dealers to supervise non-securities related businesses. Despite the decision to not include that proposed rule in its recent filing, FINRA reminded broker-dealers that FINRA Rule 2010, which requires high commercial standards and just and equitable principles of trade, applies to non-securities activities of member firms and associated persons. Another proposed rule which was included in the June 2013 proposal requires independent broker-dealers to tighten supervision of “far-flung offices.” FINRA proposed that an “appropriately registered [senior] principal” needs to “regularly supervise the activities of on-site producing principal” through regular, periodic on-site supervision. FINRA stated that this supervision is necessary since a registered principal cannot effectively supervise their own sales activities. The proposed filing states, “[w]hile the senior principal is not required to be physically present full time at the one-person [office of supervisory jurisdiction], the member must be able to demonstrate ‘effective supervision and control’ of the activities of the on-site principal.” Further, the proposed filing only requires a principal to supervise no more than one office of supervisory jurisdiction (“OSJ”). Indeed the FINRA filing states, “[t]here is a further general presumption that a principal supervising more than two OSJs is unreasonable and . . . will be subject to greater scrutiny.” The SEC is expected to publish these newly proposed rules for comment shortly.
FINRA Will Conduct More Frequent Background Checks On Active Arbitrators
The Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it will conduct more frequent background checks on an annual basis on arbitrators to be appointed to new cases. Previously, FINRA only conducted background checks on individuals who were applying to be FINRA arbitrators for the first time. Recently, a public arbitrator, Demetrio S. Timban Jr., appointed in a major case failed to disclose his own legal issues. Timban was appointed to preside over an arbitration filed by Athena Venture Partners LP against Goldman Sachs & Co. regarding alleged investor fraud in a private investment fund for an approximate $1.4 million in damages. During the arbitration process, FINRA sent the parties updated background information on the presiding arbitrators, which for the first time disclosed that Arbitrator Timban was arrested and indicted in New Jersey in October 2011 for practicing law in the state without being licensed there. According to media reports, the charges against Timban were ultimately dropped, however Timban also had legal troubles in the state of Michigan for writing checks without sufficient funds. After this disclosure, the parties in the above referenced arbitration did not challenge the Arbitration Panel’s composition and permitted Timban to remain on the case. The Arbitration Panel rendered an Arbitration Award denying the claims. Timban, however, was the only arbitrator out of the three panel members who did not sign the award. FINRA spokeswoman, Michelle Ong, stated, “[t]he procedures we are putting in place will help ensure not only that parties receive the information that they should but also that FINRA’s active arbitrators are eligible to serve.”