Articles Posted in Uncategorized

The Financial Industry Regulatory Authority Inc. (“FINRA”) yesterday announced that it is withdrawing its proposed rule that would have required brokers/registered representatives to include, “a prominent description of and link to” the database, BrokerCheck, on their websites and social-media pages, such as Facebook and Twitter. FINRA BrokerCheck is an online database that provides information about brokers and brokerage firms, as well as investment adviser firms and representatives. The report discloses, among other things, the state(s) the broker is licensed to conduct business, whether he or she has been sanctioned by securities regulators for violations of investment-related regulation(s) or statute(s), and whether there are any customer complaints or arbitrations awards against the broker. One of the main goals of BrokerCheck is to disclose information about FINRA-registered brokerage firms and brokers to help investors determine whether to conduct, or continue to conduct, business with these brokerage firms and brokers. Brokers/registered representatives are required to annually provide the BrokerCheck hotline number and FINRA website address to their clients in writing. Under the FINRA proposed rule, a broker or firm’s website would have had a direct link to the broker’s or firm’s specific BrokerCheck page, rather than to the BrokerCheck home page. Reportedly, FINRA withdrew the rule due to feedback it received against enacting the rule in 24 comment letters. For instance, David Bellaire, Financial Services Institute Inc.’s executive Vice President and General Counsel, opposed the rule because it was too broad and lacked clarity. He stated, “The rule did not work in the Internet environment that our financial advisers and broker-dealer members operate in…the current rule just reached too far.” He pointed to an example where the rule would be impossible for brokers to implement on social-media sites, such as Twitter, over which they had no control. Since Twitter provides users a 140-character biographical description page, a link to BrokerCheck would not fit into that space. Wells Fargo Advisors LLC also opposed the rule. Robert McCarthy, Director of regulatory policy at Wells Fargo Advisors, wrote, “WFA believes the proposed Rule 2267 amendments are overinclusive and underestimate the technical hurdles to compliance, particularly as the proposed rule provisions would require modifications to and maintenance of third-party social-network platforms and comparable Internet presences.” A representative of the Committee of Annuity Insurers, a group of 28 insurance companies, also stated, “We believe it is more logical for FINRA to focus first on any necessary enhancements to the manner in which the information in BrokerCheck is organized and presented to investors, and then focus on ways to allow investors to effectively access BrokerCheck.” It will be interesting to see if the Securities and Exchange Commission (“SEC”) and FINRA implement other proposals to make brokers’ backgrounds more accessible to investors.

Continue reading

On April 11, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) Department of Enforcement filed a temporary cease and desist order (“TCDO”) against Success Trade Securities, Inc. (“Success Trade”), a Washington, D.C. based broker-dealer, and its Chief Executive Officer & President, Faud Ahmed, to stop Success Trade and Ahmed’s fraudulent misuse of investors’ funds and assets. Success Trade is an online discount broker-dealer that sold more than $18 million in promissory notes to 58 investors, many of them being former professional football and basketball players. FINRA filed the TCDO because it believed that ongoing customer harm and depletion of investor assets would continue before resolution of former disciplinary proceedings. Success Trade and Ahmed agreed to the filing of the TCDO. Furthermore, FINRA Enforcement filed a complaint against Success Trade and Ahmed alleging that the broker-dealer sold promissory notes issued by Success Trade’s parent company, Success Trade Inc., which promised annual interest rates of 12% to 26%. FINRA alleges that the proceeds from the promissory note sales were used to make personal loans to Ahmed, as well as to pay returns to past investors and finance the broker-dealer’s operational expenses.

Continue reading

The Financial Industry Regulatory Authority, Inc.’s (“FINRA”) Department of Enforcement filed a complaint against John Thomas Financial (“John Thomas”) and its Chief Executive Officer, Anastasios “Tommy” Belesis, alleging fraud in connection with the sale of America West Resources, Inc. (“AWSR”) common stock, intimidation of its registered representatives, trading ahead, failing to provide best execution for customers, and various other violations. Moreover, the FINRA complaint names other John Thomas officers, including Michele Misiti, the Branch Office Manager, John Ward, a John Thomas Trader, Joseph Castellano, Chief Compliance Officer, and Ronald Vincent Cantalupo, the Regional Managing Director.

Continue reading

On April 10, 2013, the United States Attorney filed an indictment in the United States District Court for the District of Ohio against DBSI Inc. (“DBSI”), a Boise, Idaho real estate company and one of the largest syndicators of fake private placements, as well as four of DBSI’s top executives, with 83 charges, including but not limited to, conspiracy to commit securities fraud, wire fraud, mail fraud and interstate transportation of stolen property. See United States of America vs. Douglas L. Swenson, Mark A. Ellison, David D. Swenson, Jeremy S. Swenson, CR. No. 13-0091-SBLW. The DBSI executives named in the indictment are Douglas Swenson, co-founder and former president, Mark Ellison, co-founder and general counsel, and David and Jeremy Swenson, Douglas Swenson’s sons and assistant secretaries. According to the indictment, DBSI was operating like a Ponzi scheme by using new investor funds to pay returns to other investors. DBSI would raise new investor funds by two fraudulent schemes: one involved defrauding investors of $89 million through sales of high yield notes in 2008; the second involved the fraudulent sale of securities known as tenant-in-common 1031 exchanges. According to the indictment, DBSI lost most of investor funds through loans to technology startups from 1999 through 2008, as well as through the sale of the tenant-in-common 1031 exchanges, which lost DBSI approximately $3 million per month. From January 2007 through November 2008, DBSI and its executives misrepresented the firm’s financial strength and profitability when they knew that DBSI was unprofitable. Notably, DBSI raised a significant amount of funds through independent small to midsized broker-dealers, two of which were Medical Capital Holdings Inc. and Provident Royalties LLC.

Continue reading

The Securities and Exchange Commission (“SEC”) recently published a proposed rule change to Financial Industry Regulatory Authority Inc. (“FINRA”) Rule 8313, which governs whether FINRA can release disciplinary and other information to the public. The proposed rule change would make pending regulatory complaints against brokers and broker-dealers more visible and accessible to the public, including customers. Currently, complaints pending against brokers or broker-dealers are only disclosed to public customers and investors in summary form on FINRA’s BrokerCheck system. These summaries are based on disclosures made on the brokers and the firms’ Form U-4s (the Uniform Application for Securities Industry Registration or Transfer). FINRA rarely, if ever, makes the actual complaint public. According to the SEC’s publication, the purpose of the proposed rule change would be to “amend Rule 8313 to establish general standards for the release of disciplinary information to the public to provide greater information regarding FINRA’s disciplinary actions, clarify the scope of information subject to Rule 8313, and eliminate provisions that do not address the release of information by FINRA to the public.” The rule change proposal would permit FINRA to publicize the actual complaints filed against the brokers or the investment firms, either through monthly notices of disciplinary actions or through its online disciplinary reporting system. Many industry professionals have voiced negative opinions regarding the broad and harming effects this rule change could have on brokers and investment firms. Most of the negative criticism of the rule centers on the fact that the complaints that would be publicized under the new FINRA rule are unsubstantiated claims, whose merits have not been established. Industry professionals believe the reporting of unsubstantiated and meritless claims would severally prejudice brokers and broker-dealers’ reputation and profitability.

Continue reading

William P. Peterson, a former independent contractor affiliated with Great Pacific Securities (“GPS”) commenced an arbitration before the Financial Industry Regulator Authority, Inc. (“FINRA”) against GPS, alleging that GPS wrongfully terminated him and requested expungement of his Form U-5. GPS primarily conducts business with institutional investors, however permits its brokers and independent contractors to maintain family and friends retail investment accounts. After March 2011, Peterson no longer had any institutional investor customer accounts, and only maintained a book of business consisting of his family and friends’ retail investor accounts. According to the FINRA arbitration award, the Chief Executive Officer (“CEO”) of GPS, David Thomas Swoish, informed Peterson that FINRA was “cracking down on the ‘parking’ of inactive registrations and indicated that he was inclined to take some action,” against Peterson because he had no institutional clients since March 2011. See Award, William Poulis Peterson vs. Great Pacific Securities, Debasish Banerjee, Michele M. Cromer, David Alvin Swoish, and Christopher Vincent Vinck – FINRA Dispute Resolution No. 12-01785, dated March 12, 2013. In response, Peterson requested 90 days to look for a position at a retail firm before GPS terminated him and marked his Form U-5. A Form U-5 is the Uniform Termination Notice for Securities Industry Registration, and must be used by broker-dealers to terminate the registration of an associated person from association with a particular broker-dealer or investment firm, and filed with self-regulatory organizations, including FINRA. GPS, however, terminated Peterson on December 31, 2011 and marked his Form U-5 to represent that his termination was “voluntary.” In the FINRA arbitration, Peterson claimed that he was wrongfully terminated and that his Form U-5 contained an error as it designated his termination as “voluntary,” when it was not. The sole FINRA arbitrator presiding over the matter held that although Peterson’s termination as not voluntary, there was “no evidence whatsoever that [Peterson] suffered any injury based upon the wording of the [Form U-5] because it was more benign than a terse statement that [GPS] invoked its right to terminate its contract with [Peterson].” Thus, the FINRA arbitrator denied Peterson’s request for expungement and concluded that, “it does not appear that expungement would be of any benefit.” Seemingly, the arbitrator’s decision to deny Peterson’s request for expungement was contrary to FINRA’s requirement that any and all language on Form U-5s be true and accurate.

Continue reading

Recently, many investment firms are combining their registered investment adviser (“RIA”) groups with a broker-dealer arm. As a result, the investment firms are generating just as much income from brokers’ commissions, as they are from RIAs’ asset-based fees, thus, making their revenue similar to those of the larger wirehouses. According to a March 12, 2013 report from Aite Group LLC, “[c]ommission-based revenue and recurring [assets under management]-based fee revenue each comprise between 40% and 47% of total revenue for all RIA practices and large wirehouse practices, indicating that their business models are not all that different.” Aite Group LLC conducted an online survey of 534 financial advisers and arranged the financial advisers who responded to the survey into two groups; small firms with assets under management (“AUM”) between $30 and $99 million and large firms with AUM between $100 million and $1 billion. The study concluded that for smaller broker-dealers, 58% of their total revenue was generated from commissions, and for smaller RIAs, commissions accounted for 47% of their total revenue. Further, the study determined that for larger broker-dealers and RIAs, 40% of their revenues were generated from commissions. Aite Group LLC’s report stated, “[t]he roughly even allocation between commission and recurring AUM-based fee revenue for large-practice RIA-affiliated advisors suggests that commission revenue is an important revenue source for RIA practices of all sized.” Bill Butterfield, Aite Group LLC’s research analyst stated to the media, “[t]he reality is that a lot of advisers are dully registered. They’re doing commission-based business and fee-based business, as well. The way that advisers conduct business is not as clear-cut based on channel affiliations as it was 10 or 15 years ago.” Interestingly, the growing trend for RIAs to dully register as brokers has garnered significant attention from industry regulators, including, but not limited to, the Securities and Exchange Commission (“SEC”), which has targeted dully registered RIAs as an examination priority for 2013.

Continue reading

On March 22, 2013, the Securities and Exchange Commission (“SEC”) charged the broker-dealer John Thomas Financial (“John Thomas”), Anastasios “Tommy” Belesis (“Belesis”), the owner of the broker-dealer John Thomas, and George R. Jaresky Jr. (“Jaresky”), a Houston, Texas hedge fund manager, with defrauding investors. According to the SEC’s Order Instituting Administrative and Cease-And-Desist Proceedings (“SEC Order”), Jaresky worked closely with Belesis to start two hedge funds known as the John Thomas Bridge and Opportunity Fund LP I and the John Thomas Bridge and Opportunity Fund II, which ultimately raised $30 million from investors. The hedge funds invested in bridge loans to start-up companies, equity investments in mostly microcap companies and life settlement policies. The SEC Order alleges that although Jaresky informed investors that he was solely responsible for investment decisions, Belesis also directed some investments from the hedge funds into a company in which John Thomas had close business and personal relationships. Additionally, according to a statement made by the SEC to the media, Belesis “also bullied Jaresky into showering excessive fees on John Thomas Financial, even in instances where the firm had done virtually nothing to earn them.” Indeed, the SEC Order alleged that Jaresky inflated the hedge funds’ valuations in order to increase the fees he collected, and then diverted a substantial portion of those fees to John Thomas. Andrew M. Calamari, the Director of the SEC’s New York office, made the following statement to the media: “Jaresky disregarded the basic standards to which all fund managers are held. Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the fund’s expense. Belesis in turn exploited the supposed independence of the funds to surreptitiously pull the strings on key decisions.”

Continue reading

LPL Financial LLC (“LPL”) has become the nation’s fourth largest brokerage firm, with 13,3000 brokers, 6,500 offices nationwide, and 4.3 million customers. With this growth, however, has come increased censure and scrutiny from federal and state regulators. Specifically, LPL has been penalized by securities industry regulators for selling complex investments to unsophisticated investors, for engaging in speculative trading practices, and for theft of client assets. As a result of these sales practice abuses, LPL has been the subject of actions brought by state securities regulators in Illinois, Massachusetts, Montana, Oregon and Pennsylvania. Indeed, Lynne Egan, Deputy Securities Commissioner in Montana, stated, “LPL is on our radar screen more than any other firm.” Further, according to a review of data compiled by the Financial Industry Regulatory Authority, Inc. (“FINRA”), the brokers of LPL have been subject to more disciplinary and enforcement actions and investigations than brokers at LPL’s largest competitors. For example, in 2009, the state securities regulators in Montana sentenced one of LPL’s brokers to 10 years in prison for operating a Ponzi scheme. Furthermore, in February 2013, the Massachusetts Secretary of the Commonwealth, William Galvin reached a $2.5 million settlement with LPL regarding the brokerage firm selling non-traded real estate investment trusts (“REITS”) to unsophisticated LPL customers. It seems that regulators believe that the increased regulatory scrutiny on LPL and its brokers is due to their “Independent Contractor” model of business. In LPL’s “Independent Contractor” model its brokers pay for their own overhead, including office space and staff, which allows for the brokerage firm to allocate upwards of 80% of commissions directly to the brokers. Some in the industry believe the unusually high commissions provided by LPL to its brokers leaves the broker-dealer with a smaller budget for compliance, and attracts brokers who are interested in breaking the rules.

Continue reading

Recently, the Financial Industry Regulatory Authority, Inc. Department of Enforcement (“FINRA Enforcement”) stated that it began investigating broker Tony Thompson and his broker-dealer TNP Securities LLC (“TNP”), for failure to comply with FINRA demands for documents and information. In 2008, Mr. Thompson, a prominent real estate investor and broker, started TNP. He is also the Chief Executive Officer of Thompson National Properties, a real estate investment company specializing in leased single or multi-tenant investment opportunities, and Triple Net Properties LLC, a well-known real estate investment company which promoted real estate investments known as tenant-in-common exchanges that were sold through independent broker dealers during the real estate bubble. According to FINRA’s BrokerCheck Report for TNP, TNP and Mr. Thompson failed “to produce a privilege log for approximately 316,000 attorney-client privilege e-mails.” Failure to produce such documents to FINRA is a violation of various industry and FINRA rules. Specifically, FINRA Rules 8210 and 2010 require broker-dealers, like TNP, to turn over documents and information to regulators when requested. Reportedly, the FINRA document request that TNP allegedly failed to comply with regarded TNP and Mr. Thompson’s efforts in selling a non-traded real estate investment trust, specifically the $272 million TNP Strategic Retail Trust Inc. Mr. Thompson made the following statement to the media: “[t]he biggest challenge [is logging] 316,000 attorney-privileged e-mails, which would take one person potentially a few years.” Further, Mr. Thompson is also reportedly facing financial issues as he sold $21.5 million worth of private notes for Thompson National Properties LLC, from 2008 to 2009, which defaulted last year.

Continue reading