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The Securities and Exchange Commission (“SEC”) has approved a proposal by the Financial Industry Regulatory Authority, Inc. (“FINRA”) to allow it to publicly release any disciplinary complaints or decisions it issues against registered representatives, registered investment advisers (“RIAs”) or broker-dealers. Moreover, FINRA will be permitted to release information regarding the names of the parties involved, but is given authority to redact such information when FINRA deems necessary. This disciplinary information will be disseminated through a monthly notice and on FINRA’s online disciplinary action reporting system. FINRA’s June Notification can be viewed here. With regard to FINRA’s proposal, on June 21, 2013, the SEC made the following statement, “[t]he Commission believes that the proposed rule change promotes transparency, consistency across FINRA’s program, and clarity regarding the information FIRNA releases to the public and will provide greater access to information regarding FINRA’s disciplinary actions.” Many critics of this proposal feel that FINRA disciplinary complaints that are dismissed or withdrawn should not remain on the published notifications forever. The SEC, however, rebutted this criticism by stating that dismissed and withdrawn disciplinary complaints are already permanently publicized on a registered representative’s FINRA BrokerCheck Report.

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Recently, there has been an increasing reliance by investors on the Financial Industry Regulatory Authority’s (“FINRA”) BrokerCheck system to determine which brokers and investment professionals have been subject to disciplinary action. As a result, brokers and FINRA registered representatives are requesting that customer complaints be expunged from their BrokerCheck report as they do not want red flags alarming existing and potential customers. Since FINRA arbitration proceedings are private and confidential, the way FINRA promotes that public investors can become familiar with a broker’s disciplinary record is through the information available on FINRA’s BrokerCheck system. BrokerCheck provides information to the public regarding customer complaints, regulatory actions, and the brokers’ criminal history and bankruptcies. In very limited circumstances, FINRA Rules permit brokers to obtain arbitration orders recommending expungement of certain information contained on a broker’s BrokerCheck, if the arbitration panel determines that the claim was false or if the broker was not involved in the alleged sales practice violation. See FINRA Rules 2080, 12805 and 13805. If the arbitration panel recommends expungement, the broker must then have the arbitration award confirmed by a court of competent jurisdiction. The court order confirming the arbitration award then directs FINRA’s Central Registration Depository (“CRD”) to expunge the relevant information. When brokers request that information be expunged from their record, state regulators are given an opportunity to intervene and oppose the expungement. According to state regulators, in 2012, they received 519 expungement requests, as compared to 110 requests in 2009. This perhaps, can be attributed to FINRA’s new disclosure rule, which requires that brokers must report all complaints involving them, whether they were named as a party or not in the underlying arbitration. This new FINRA reporting rule may have helped investors gather more information regarding brokers since previously brokers who were not named in the a complaint had no requirement to report it, even if their actions were found to be abusive. There are critics on both sides of the rule. Some critics of FINRA’s new policy for expungement say that brokers can now simply purchase their clean record. If a broker seeks expungement, they can simply enter into a confidential settlement agreement with the customer which is conditioned upon the customer’s cooperation in the expungement process. This means that the customer will most likely not appear at the expungement hearing, making it more likely for the arbitration panel presiding over the expungement matter to be persuaded by the broker that the claims were meritless or that the broker was not involved in the alleged wrongful conduct. There are times, however, when arbitrators are aware that the broker is seeking to purchase a clean record, and will require that the client attend the expungement hearing to ensure that the information expunged actually should not appear on the broker’s BrokerCheck Report in accordance with FINRA rules. Other critics say that brokers are the only professionals that have such a reporting or disclosure system and that even unverified and obviously false complaints are now required to be reported on CRD reports. Many brokers complain that in cases that involve their sale of faulty investments that were created by their firms, or in cases in which the product that was sold, and not the brokers sale of the product, is at issue, the FINRA rules require the reporting of the claim regardless of the brokers lack of real involvement in the complained of actions.

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On May 29, 2013, a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel issued an award against RBC Capital Markets, LLC (“RBC”) regarding misrepresentations made to investors concerning the collapse of Lehman Brothers. See Russell Rupp and Linda Rupp vs. RBC Capital Markets, LLC – FINRA Case Number 11-03927. In October 2011, Russell and Linda Rupp (“Claimants”) filed a statement of claim against RBC alleging breach of fiduciary duty, negligence, negligent supervision, fraud and breach of contract. Claimant’s causes of action related to Lehman Brothers preferred stock and other fund securities. RBC denied the claims asserted in the statement of claim. After 4 days of hearing, the FINRA arbitration panel awarded Claimants approximately $300,000 in compensatory damages regarding their Lehman Brothers preferred stock investments, as well as interest. The arbitration panel also awarded Claimants an additional $300,000 in compensatory damages for their losses in the other securities at issue in this matter, namely PowerShares Financial Preferred closed-end fund, Alpine Dynamic Dividend Fund and Alpine Total Dynamic Dividend Fund. Most importantly, the arbitration panel found RBC liable to pay Claimants punitive damages in the amount of $250,000. According to the FIRNA award, the arbitration panel “determined that [RBC] falsified the Customer Questionnaire as to the risk level that the customer had agreed to and misrepresented that the U.S. government would not allow Lehman Brothers to fail.” See Award, page 3.

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The Financial Industry Regulatory Authority, Inc. (“FINRA”) suspended Wendy J. Worcester, TNP Securities LLC’s (“TNP”) co-chief compliance officer, from associating with a FINRA broker dealer for five months, and fined her $15,000. According to FINRA, Worcester failed to adequately and independently conduct proper due diligence into TNP’s three private placement offerings. Two of TNP’s private placements paid old investors with new investor funds. According to FINRA, “[d]uring 2009 and 2010, the [TNP 12% Notes Program LLC and TNP Participating Notes Program LLC] were unable to pay certain investor distributions from operating cash . . . [and instead] relied on new investor proceeds or transfers from cash from [Thompson National Properties, TNP’s affiliate that sponsored the private placements,] or its affiliates in order to make distributions to investors. Moreover, according to FINRA, Ms. Worcester had various roles at TNP and its affiliates, including working in compliance at TNP from May 2009 through October 2010, acting as Chief Financial Officer of TNP Strategic Retail Trust, which was a non-traded real estate investment trust (“REIT”) created by TNP’s founder, Tony Thompson. FINRA stated, Worcester did not “examine and reasonably evaluate historical and current financial statements of the issuer, [Thompson National Properties] and its affiliates, to identify and reasonably evaluate negative trends indicated by the financial statements and the requirements for significant capital infusions, increased revenues from operations or decreased expenses.”

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In 2012, the Financial Industry Regulatory Authority (“FINRA”) experienced a lull in customer initiated arbitrations, which were down 16% from 2011. FINRA also experienced a 21% decline in customer related arbitrations during the first four months of 2013. Industry experts and securities lawyers believe that this decline in case filings will pick up as investors are looking toward investments that have a higher yield, and sometimes a higher risk than anticipated, including bond and income funds, alternative investments, variable annuities, private placements, Tenants In Common (“TIC”), non-traded Real Estate Investment Trusts (“REITs”), and other non-equities. It is anticipated that action taken by the Federal Reserve in the near future will cause interest rates to rise, and as a result the value of those high yielding investments will plummet. Industry experts and investment attorneys believe that the investor groups who will be devastated by the rise in interest rates will be the elderly and individuals on fixed incomes whose investments constituted their “nest eggs.” Although bond investors may be able to ride out the high interest rates and await maturity, investors in bond funds will not have that luxury as industry reports have highlighted recent declines in bond fund net inflows. For example, for the first quarter of 2013, it was reported that intermediate-term-bonds experienced a 71% drop in monthly net inflows. Industry experts have been warning bond fund investors of what to experience as interest rates rise. Specifically, FINRA Chief Executive Officer, Richard Ketchum, at the annual FINRA Conference in Washington D.C. on May 20 – 22, 2013, warned investors of the “sounding alarms about the possibility of plunging bond values as the economy recovers and interest rates rise.” It will be interesting to see whether the number of FINRA customer related cases rises as interest rates rise.

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The five commissioners of the Securities and Exchange Commission (“SEC”) unanimously voted in favor of enforcing new rules applicable to prime money market mutual funds in an effort to decrease investor runs during financial crises. Prime money market mutual funds invest in short-term corporate debt and are considered riskier than funds that solely invest in government securities. The SEC’s proposed rule change would require prime money market mutual funds with mostly institutional investors to abandon a fixed $1 share price, and permit the funds to float their prices. The SEC proposal would also cap daily redemptions at $1 million per shareholder. Similarly, as part of the proposal, the SEC is considering allowing prime money market mutual funds to disallow investors from withdrawing their funds during times of stress, or imposing a hefty fine for investors who choose to do so. The SEC is targeting prime money market mutual funds, as those funds are considered most likely to experience investor runs during economic turmoil. For example, in the weeks following the collapse of Lehman Brothers in 2008, institutional investors who were concerned about prime money market mutual fund exposure to Lehman debt withdrew nearly $300 billion from the prime money market mutual funds since they were concerned that the share prices would fall below $1 per share.

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At the end of May 2013, Allied Beacon Partners Inc. (“Allied Beacon”), a mid-sized independent broker-dealer, announced to its 200 registered representatives that the firm violated industry and regulatory rules that require investment firms to maintain sufficient capital in excess of customer funds in order to remain in business. The Securities and Exchange Commission’s net capital rule regulates broker-dealers’ ability to meet financial obligations to customers and creditors. Since Allied Beacon violated the net capital requirement rules, it continues to operate its business for the sole purpose of allowing customers to close out positions. Brokers at Allied Beacon are no longer permitted to purchase new securities for clients. Allied Beacon was a legacy broker-dealer to 2 failing broker-dealers, Workman Securities Corp. and Community Bankers Securities LLC (“Community Bankers”). One investor complaint, which was filed against Community Bankers in 2010, resulted in a Financial Industry Regulatory Authority Inc. (“FINRA”) arbitration award for $1.6 million, which Allied Beacon was ordered to pay to the victimized customers. The investor complaint alleged that Community Bankers failed to conduct due diligence regarding the selling of private placements, including, but not limited to, Medical Capital LLC, Shale Royalties, and Provident Royalties LLC. Moreover, the investor complaint alleged that Community Bankers used new investor funds to repay principal and returns to existing investors; thereby, furthering a Ponzi scheme. After Allied Beacon paid the FINRA award, it did not have sufficient capital in reserve, and therefore was in violation of the net capital regulatory rule.

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The Securities and Exchange Commission (“SEC”) filed a complaint against former LPL Financial LLC (“LPL”) investment adviser, Blake Richards, in the United States District Court of the Northern District of Georgia. The SEC Complaint alleges that Richards misappropriated client funds that “constituted retirement savings and/or life insurance proceeds from deceased spouses.” See SEC vs. Blake Richards, Index No. 13-cv-01729 (JEC). The SEC Complaint states that Richards misappropriated at least $2 million from at least 6 different customers. According to the SEC, Richards would instruct customers to write checks out to an entity called “Blake Richards Investments” or “BMO Investments” and promised the customers that he would invest their funds through his investment vehicle in life insurance policies, fixed income assets, variable annuities, or well-known stocks. Further, contrary to Richards’ representations, he converted the customers’ funds for his personal use. Moreover, to cover up his scheme, Richards, on at least one occasion, provided a fictitious account statement to a customer on purported LPL letterhead. Further, when customers would request that Richards liquidate their holdings, Richard would usually deliver the funds with a cashier’s check or personal check. The SEC also filed a temporary restraining order seeking that a court freeze Richards’ assets as they constituted the converted customer funds. Interestingly, a Vice President of Independent Bank of Georgia, an entity where Richards maintains his personal accounts, filed a Response to the SEC’s temporary restraining order stating that all that remains in Richards’ accounts as of the day of the filing of the temporary restraining order was $108.44 in his personal checking account, $100.00 in a business checking account and 2,500 shares of Independent Bank of Georgia stock. It is unclear whether Richards holds any other assets at other financial institutions. The court has yet to rule on the SEC’s pending temporary restraining order.

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The Securities and Exchange Commission (“SEC”) filed a Complaint against Daniel Bergin, a senior equity trader at Cushing MLP Asset Management LP (“Cushing”), charging him with front running client orders. Cushing is a registered investment advisory firm owned by Swank Capital, which primarily invests in master limited partnerships and energy-related securities. Front running is defined as the unethical and illegal practice of a broker trading a security based upon information that was not yet provided to the broker’s clients. According to the SEC Complaint, Bergin used accounts registered to his wife to conduct personal securities trades before executing large orders of the same securities for clients, which earned him at least $1.7 million in profits. The Complaint also names Bergin’s wife, Jacqueline Zaun, as a relief defendant in order to recover the purported profits from her accounts. Specifically, the SEC Complaint alleges that of the $1.7 million in profits, more than $520,000 was generated in Bergin’s wife’s account between 2011 and 2012 from 132 specific instances of front running client orders. The Complaint also alleges that Bergin used privileged information regarding the timing and extent of trades the firm made on behalf of clients to effectuate the profitable trades in his wife’s accounts. This conduct similarly violated Cushing’s policies and procedures which strictly prohibited employees from engaging in personal trading of securities within seven days of a client’s trade in the same security. Swank Capital made the following statement: “As the SEC Complaint makes clear, these illegal trades were actively concealed from the firm. Consistent with our zero-tolerance policy related to such matters, we have taken swift and decisive action, and terminated the individual’s employment.” Marshall Sprung, deputy chief of the SEC Enforcement Division’s Asset Management Unit, made the following statement: “Bergin betrayed the trust of his clients by secretly using information about their trades to gain an unfair trading advantage and reap massive profits for himself.” Moreover, David Woodcock, Director of the SEC’s Fort Worth regional office that conducted the investigation of Bergin made the following statement: “Bergin’s misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients” financial interests against his own.”

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On February 14, 2012, two former brokers of Fordham Financial Management, Inc. (“Fordham Financial”), Christopher Griffith (“Griffith”) and David Speciale (“Speciale”), on behalf of themselves and all others similarly situated, filed an Opt-in Fair Labor Standards Act (“FLSA”) Collective Action against their former employer, Fordham Financial, and its President and Director, William Baquet (“Baquet”), for failure to pay minimum and overtime wages, and for improper wage deductions. See Christopher D. Griffith and David Speciale vs. Fordham Financial Management, Inc. and William Baquet, Index No. 12-cv-01117 (PAC) (S.D.N.Y.). The FLSA establishes standards for minimum wage and overtime pay. Employees can participate in an overtime collective action if they have been unlawfully denied overtime wages. To gain certification from a court of competent jurisdiction that a lawsuit for wages can proceed as an FLSA collective action, the employees must show that all employees who would join in the action are “similarly situated.” Griffith and Speciale alleged that Fordham Financial failed to compensate its employees with the New York state minimum wage for the hours worked, and one-and-a-half times their regular compensation rate as over-time for any hours worked in excess of the 40 hour work week, which was in violation of the terms of their employment. Moreover, Griffith and Speciale alleged that Fordham Financial illegally and improperly made deductions from their commissions, including deductions to pay assistants and support staff. On May 25, 2012, Fordham Financial and Baquet filed an Answer to the Complaint which denied the allegations and raised standard affirmative defenses. On December 14, 20012, Griffith and Speciale filed a Motion to Certify the FLSA Collective Action (“Motion to Certify”). Fordham Financial Opposed this Motion to Certify and filed 12 Declarations from current/former employees contesting the allegations set forth by Griffith and Speciale. On May 22, 2013, the Honorable Paul Crotty rendered an Opinion and Order granting Griffith and Speciale’s Motion to Certify. According to Judge Crotty’s Opinion and Order, “Griffith and Speciale have satisfied their ‘minimum burden’ of making a modest factual showing that they and other employees were victims of a common policy or plan. Plaintiffs’ Motion for conditional certification is granted.” See Opinion and Order, page 7, dated May 22, 2013. The Conditional Certification of an FLSA Collective action is always opt-in, which means that an individual who wants to participate in the potential judgment in the collective FLSA action must opt-in and chose to participate to be bound by the judgment. This is distinguishable from a Rule 23 Class Action, where class members need to opt-out if they decide they do not want to be bound by the class action judgment. The FLSA opt-in Collective Action would cover any Fordham Financial employee who was a stockbroker at any Fordham Financial office location from February 14, 2006 through February 14, 2012. Judge Crotty ordered that Fordham Financial provide Griffith and Speciale the contact information for all stockbrokers employed by Fordham Financial within the 6 year period so that Griffith and Speciale can notify all potential opt-in plaintiffs of this pending litigation.

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