New York Securities Lawyer BlogOn March 7, 2013, the United States District Court For The Middle District Of Tennessee found Richard Olive guilty of three counts of mail fraud, four counts of wire fraud and two counts of money laundering for operating a scheme involving charitable gift annuities. According to the underlying Indictment against Mr. Olive, filed by in U.S. Attorneys’ Office on February 1, 2012, between January 2006 through May 2007, Mr. Olive solicited elderly investors for $30 million in annuities and real estate investments for his phony charity, the National Foundation of America. Mr. Olive represented to the elderly investors he targeted that the National Foundation of America was a legitimate 501(c)(3) nonprofit organization which would provide them with an “installment bargain contract” that would guarantee a payout over a certain time period that was tax deductible. Furthermore, according to the Indictment, when the elderly investors would transfer existing annuities to Mr. Olive, he would surrender most of the annuities to the National Foundation of America, and in doing so, triggered large surrender penalties. The Indictment further stated that the brokers of the phony charity were paid commissions well above the industry standard and that the elderly clients’ funds were ultimately misappropriated by Mr. Olive to support his lavish lifestyle. Some examples of how Mr. Olive misappropriated the elderly investors’ funds include, but are not limited to, paying a $153,000 credit card bill, paying for a family trip to New Orleans on a private jet, paying for a $250,000 settlement on a lawsuit against Mr. Olive, and purchasing a $700,000 condominium in Las Vegas. This recent guilty jury verdict is not the only time Mr. Olive has been subject to criminal and regulatory charges. Indeed, last month, the Securities and Exchange Commission (“SEC”) Department of Enforcement filed charges against Mr. Olive, his wife Susan, and We the People Inc. of the United States, which is the Tallahassee based organization for which Mr. Olive and his wife were the key executives. According to the SEC Department of Enforcement, between June 2008 and April 2012, Mr. Olive, his wife, and We the People Inc. of the United States raised $40 million from 400 elderly investors in more than 30 states by using a phony charitable gift annuity.
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Jeffrey Rubin Barred From Securities Industry For Recommending Unsuitable Investments To Nearly 30 NFL Players
Recently, the Financial Industry Regulatory Authority, Inc. Department of Enforcement (“FINRA Enforcement”) banned Jeffrey Rubin, a former broker located in Fort Lauderdale, Florida, from associating with any member firm. FINRA Enforcement alleged that Mr. Rubin recommended unsuitable investments and failed to get firm approval for involvement in a securities deal for a now-bankrupt Alabama casino and entertainment project. According to FINRA Enforcement, Mr. Rubin unsuitably recommended that a National Football League (“NFL”) player invest in the casino securities deal, which ultimately lost the NFL player $3 million. On March 7, 2013, FINRA Enforcement executed a Letter of Acceptance, Waiver and Consent (“AWC”) with Mr. Rubin, which further stated that Mr. Rubin referred nearly 30 other NFL players to the promoter for the casino/entertainment project, who ultimately invested and lost approximately $40 million. In doing so, Mr. Rubin failed to provide written notice to, or obtain written authorization from his employer member firms, Lincoln Financial Advisors Corp. and Alterna Capital Corp., regarding his engagement in outside business activities. Reportedly, these NFL players include Plaxico Burress, Santonio Holmes, Jevon Kearse, Santana Moss, Greg Olsen, Kyle Orton, Terrell Owens, Roscoe Parrish, Clinton Portis, Fred Taylor and Gerard Warren. Further, the AWC states that Mr. Rubin failed to disclose unsatisfied tax liens made by the Internal Revenue Service against Mr. Rubin on his Form U-4, which is a violation of FINRA Rules 1122 and 2010. Brad Bennett, FINRA’s Enforcement Chief made the following statement to the media: “This case demonstrates how broker misconduct can target high-income, inexperienced and vulnerable investors.”
FINRA Arbitration Panel Awards Brokers $1.5 Million In Compensatory Damages For Their Counter-Claims, And Denies Morgan Stanley’s Breach of Promissory Note Case
Recently, on February 21, 2013, a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel issued a consolidated award which denied Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings, LLC (collectively referred to as “Morgan Stanley”) the relief they sought for the alleged unpaid balances of promissory notes, and instead awarded two former Morgan Stanley brokers approximately $1.5 million in compensatory damages, finding that Morgan Stanley cost the brokers significant commissions by changing their work environment. See Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings, LLC vs. Jorge Carreras, FINRA No. 11-03407, consolidated with Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holdings, LLC vs. Carlos Javier Molina, FINRA No. 11-03408. Morgan Stanley filed a Statement of Claim against Jorge Carreras and a separate Statement of Claim against Carlos Molina, both on September 1, 2011, alleging breach of promissory notes. Mr. Carreras and Mr. Molina in turn filed separate Statements of Answers which contained counterclaims against Morgan Stanley. The counterclaims included the following: breach of contract (commission agreements), negligent misrepresentation, constructive discharge, and breach of contract (bonus agreements). Mr. Carreras and Mr. Molina filed a motion to consolidate the cases, which despite Morgan Stanley’s opposition, was granted by FINRA. The FINRA arbitration panel denied Morgan Stanley’s claims against Mr. Carreras and Mr. Molina and granted Mr. Carrera and Mr. Molina’s counterclaims, ordering Morgan Stanley to remit compensatory damages, totaling nearly $1.5 million to the brokers. The arbitration award states, “[t]he Panel found that [Morgan Stanley] changed the work environment involving the Swiss platform, causing significant commissions lost to [Mr. Carreras and Mr. Molina].” This arbitration award is an exception to the industry norm as it is unusual for a broker to win cases where their former broker-dealer files an arbitration to collect the outstanding balance of a promissory note or debt, even when the broker asserts viable counter claims. Experienced counsel can help brokers like Mr. Carreras and Mr. Molina identify which fact patterns fit the exception and make a case worth fighting. The lawyers at Lax & Neville LLP have that experience.
The SEC Warns Investors Of Deficiencies In Investment Adviser’s Compliance With Custody Rules
On March 4, 2013, the Securities and Exchange Commission (“SEC”) issued an investor alert regarding the custody rule under the Investment Advisers Act of 1940, Rule 206(4)-2, and its importance in safeguarding investors’ funds from misuse or misappropriation by their investment advisers. The custody rule outlines the requirements for how a SEC registered investment adviser must maintain custody of client accounts and securities in order to ensure that the investment advisers do not engage in fraud, deceptive, or manipulative acts, when holding their clients’ assets. Although most investment advisers engage third-party custodians to hold their clients’ assets, the firms that do not utilize a third-party custodian, and instead maintain custody of their clients’ assets, create increased concerns for the SEC, as there is a larger chance the investment adviser could engage in fraud. For example, the $65 billion Ponzi scheme perpetrated by Bernard L. Madoff was partially attributed to the fact that Madoff’s firm maintained custody of his clients’ assets, rather than holding the clients’ assets at a third-party custodian. In light of these concerns, the SEC’s National Examination Program (“NEP”) conducted an examination of investment advisers’ compliance with the custody rule and found widespread non-compliance in over 140 advisory firms.
Broker Wins Unusual FINRA Arbitration Award Regarding A Forgivable Loan
Paul Tanner, a former Lehman Brothers Holding Inc. (“Lehman”) broker, won a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration against his former employer regarding an unpaid amount of a forgivable loan that Tanner purportedly owed to Lehman. In its Statement of Claim, Lehman alleged breach of contract and unjust enrichment claims for failure to pay the promissory note, and requested $366,368.77 in compensatory damages. Tanner asserted counter-claims against Lehman, including that he was due $1.7 million for referral fees on investment banking business he brought to Lehman, and supported his counter-claims with documentation establishing that he was the source of numerous banking deals brought to the Lehman’s investment bankers. The FINRA arbitration panel presiding over the arbitration denied Tanner’s counter-claims, but held that Tanner did not have to pay back the remaining amount of the loan which was not forgiven, in the amount of $337,000. Furthermore, the FINRA arbitration panel held that Tanner was not liable to Lehman for interest, attorneys’ fees or collection costs. This arbitration award is an example of the exceptions to the normal result of broker note collection cases as it is extremely unusual for a broker to win. Experienced counsel can help advisors like Tanner identify which fact patterns fit the exception and make a case worth fighting. The lawyers at Lax & Neville LLP have that experience.
Lax & Neville LLP has represented individuals, securities industry employees, financial services professionals and securities industry companies nationwide in employment matters and securities-related and commercial litigation, including loan default cases and Form U-5 expungement matters. Please contact our team of attorneys for a consultation at (212) 696-1999.
The United States Supreme Court Holds That The SEC Must File Enforcement Cases For Securities Fraud Within 5 Years
On February 27, 2013, the United States Supreme Court issued a decision in the matter, Gabelli vs. Securities and Exchange Commission, Index No. 11-1274, in which the Supreme Court unanimously ruled that the Securities and Exchange Commission (“SEC”) must bring securities fraud cases seeking civil damages within 5 years of the actual fraud, not within 5 years of discovery of the fraud. In April 2008, the SEC brought a civil enforcement action against Gabelli Funds LLC (“Gabelli”), the investment adviser to the Gabelli Global Growth Fund, which alleged that from 1999 to 2002 Gabelli allowed Headstart Advisers, Ltd. (“Headstart”) to use market-timing techniques in exchange for Headstart to be able to invest in a hedge fund run by Gabelli, which achieved returns of up to 185%, while other investors’ returns were less than 24%. In its defense, Gabelli argued that by filing the case in 2008, the SEC violated the statute of limitations as the case was commenced more than 6 years after the last alleged fraudulent incident. The District Court for the Southern District of New York ruled in favor of Gabelli. Thereafter, the SEC appealed the District Court decision to the Second Circuit Court of Appeals, which reversed the District Court Decision.
FINRA Appeals Schwab’s Big Win Regarding Customer Class-Action Waivers
In October 2011, Charles Schwab & Company, Inc. (“Schwab”) amended its customer Account Agreement by adding language to include a Waiver of Class Action or Representative Action clause (“Waiver Clause”), which required Schwab customers to waive their right to participate in a class action lawsuit against the firm, and instead arbitrate any disputes with the broker-dealer on an individual basis before the Financial Industry Regulatory Authority, Inc. (“FINRA”). This amendment, which was reportedly sent by Schwab to approximately 7 million customers, is extremely significant because if the Waiver Clause becomes effective, Schwab will eliminate the risk of customer class actions. It is conceivable that every other broker-dealer would follow suit, and eventually every customer of a SEC regulated broker-dealer would be precluded from bringing a class action. This makes sense because class actions are costly and expose the broker-dealer to significant potential liability. However, Schwab provides an alternative basis in explaining why it amended its customer Account Agreement to include the Waiver Clause: “[Schwab] believes customers are better served through the existing FINRA arbitration process and that class action lawsuits are cumbersome and less effective means of resolving disputes-for both parties. See http://www.aboutschwab.com/press/statement.
Merrill Lynch Settles Case With Client Associates For $12 Million
Recently, Merrill Lynch, Pierce, Fenner and Smith (“Merrill Lynch”) settled a lawsuit filed on behalf of a potential class of 12,000 client associates who sought damages for unpaid overtime work compensation between 2010 and 2012. Merrill Lynch client associates supported and assisted Merrill Lynch financial advisors in servicing clients and developing new business. Merrill Lynch client associates are general licensed and registered representatives. The potential class of 12,000 client associates was derived of four state law classes in Maryland, Washington, New York and California, and one federal class that covers all other client associates not employed in one of those four states. Recovery by the individual class members will be computed based upon a formula taking into account the client associates’ individual circumstances and work experiences. Now that the settlement agreement has been finalized, it will be reviewed for approval by the District Court for the Southern District of New York. If the settlement is approved by the Southern District Court of New York, class members will need to decide whether or not to opt-in, which means potential class members will need to determine whether or not they will participate in the settlement in order to receive a portion of the recovery. The decision whether or not to opt-into a class action settlement can often times be difficult as many individual rights are affected by this decision. An individual who decides to opt-out of the class action settlement will not be bound by the result of the class action settlement as they will not share in the recovery, however, they will then have the opportunity to pursue individual claims on their own behalf. Merrill Lynch client associates who are FINRA registered representatives, and who decide to opt-out of the class action settlement, can presumably pursue individual claims regarding their unpaid overtime compensation with Merrill Lynch, a FINRA member firm, in a FINRA arbitration.
FINRA Set To Propose Changes To Member Firm Rules
Recently, on February 14, 2013, Richard Ketchum, Chief Executive of the Financial Industry Regulatory Authority, Inc. (“FINRA”), sent FINRA member firms an e-mail stating that the FINRA board has approved issuing a revised proposal regarding membership rules. Originally, FINRA sent member firms a proposal of various rule changes regarding FINRA membership in 2010. Both the Securities Industry and Financial Markets Association (“SIFMA”) and the Financial Services Institute Inc. (“FSI”) wanted FINRA to amend the original proposed rule changes, as they thought it granted FINRA too much broad authority. Indeed, after receiving the initial proposal in March 2010, FSI provided FINRA with a comment letter which stated that the rule proposal would, “provide FINRA with excessively broad authority to request documents and information from firms, impose vague standards of review and . . . extend FIRNA’s jurisdiction well beyond its traditional bounds.” The revised proposal of rule changes will address regulatory issues identified by FINRA, and will codify existing interpretations of various membership rules. Specifically, the proposed rules regard providing FINRA with advanced notice of: new products and services, personnel expansion, transactions involving more than 10% of a firm’s ownership, assets or revenue, and changes to a member firm’s service providers.
SEC Charges James Tagliaferri, Virgin Islands Based Investment Adviser, With Fraud
On Thursday, February 21, 2013, the Securities and Exchange Commission (“SEC”) charged James Tagliaferri (“Tagliaferri”), an SEC registered investment adviser, with fraud, and alleged that he withheld facts that he was receiving “kickbacks” for investing his customers’ money in “thinly-traded companies.” See http://www.sec.gov/news/press/2013/2013-25.htm. The SEC Order Instituting Administrative Proceedings (“SEC Order”) against Tagliaferri alleges that until about 2007, Tagliaferri invested TAG clients’ funds in conservative and liquid investments including municipal bonds and blue-chip stocks. Thereafter, Tagliaferri, through his St. Thomas based SEC registered investment advisory firm, TAG Virgin Islands (“TAG”), used discretionary authority of his clients’ accounts to purchase promissory notes issued in various private closely-held companies. These closely held private companies were merely holding companies with which Tagliaferri had personal or “family effected personal and business transactions.” For example, the SEC alleges that Tagliaferri invested at least $40 million of TAG clients’ funds in a private horse racing company, International Equine Acquisitions Holdings, Inc. The SEC’s Order also references other private, closely-held entities through which Tagliaferri perpetrated this fraud which include, but are not limited to, Basileus Holdings, LLC; Emerging Markets Global Hedge Ltd.; IP Global Investors, Ltd., Geomas, Inc.; Hettinger Media Ltd.; Devermont Communications, Ltd.; Equities Media Acquisition Corp. Inc.; Stanwich Absolute Return Ltd.; Mulsanne Enterprises Ltd.; Jamsfield Investments, Inc.; Pacific Rim Assurance Co.; 1920 Bel Air LLC; Drexel Holdings; and Life Investment Company, LLC. In exchange for pledging TAG client funds to these companies, TAG received millions of dollars in cash and other compensation, which was undisclosed to his clients, thus creating a conflict of interest with his clients. Additionally, Tagliaferri misappropriated $5 million in investor funds to a private equity fund, UMS Partners Fund II, L.P. (“UMS”) purportedly in exchange for promissory notes in UMS, however no such notes existed.