New York Securities Lawyer BlogOn February 21, 2013, James Tagliaferri, an SEC registered investment advisor, was arrested for defrauding investors of his advisory firm, TAG Virgin Islands, Inc. (“TAG”). Additionally, the United States Attorney’s Office in the Southern District Of New York commenced a criminal action against Tagliaferri in the District Court for the District of the Virgin Islands (St. Thomas Division), Index No. 13-cr-00003-CVG-RM-1. The criminal allegations against Tagliaferri include that Tagliaferri received at least $3 million in undisclosed compensation in exchange for investing his clients’ funds in various illiquid promissory notes and securities without disclosing such compensation to his clients. Furthermore, Tagliaferri is alleged to have inappropriately used client funds, including using client funds to make payments to other investors who were demanding positions in their account be liquidated. Additionally, it is alleged that Tagliaferri placed false and fictitious securities investments in clients’ accounts. The U.S. Attorney Preet Bahara for the Southern District of New York stated, “As alleged, James Tagliaferri concocted an elaborate scheme to defraud his clients, including taking millions of dollars in undisclosed compensation in exchange for placing their hard-earned money in certain investments. Financial advisers have a professional and legal responsibility to act in their clients’ best interests which is exactly the opposite of the conduct in which Tagliaferri allegedly engaged.” The US Attorney has charged Tagliaferri with investment adviser fraud, securities fraud, wire fraud, and violations of the Travel Act.
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FINRA Warns Investors About The Risks Of Bonds
During January 2013, interest rates experienced a small increase. As a result, recently, on February 14, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) posted an investor alert which warned investors that in the event of rising interest rates, “outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops.” Many investors are unaware of the inverse relationship between bonds and interest rates – as interest rates rise, bond prices fall. In an effort to educate bond investors, FINRA alerted investors to the importance of a bonds duration, and stated, as “duration signals how much the price of your bond investment is likely to fluctuate where there is an up or down movement in interest rates. The higher the duration number, the more sensitive your bond investment will be to changes in interest rates.” Similarly, FINRA warned of the impact duration has on bond funds. Indeed, FINRA provided the example of “a bond fund with 10-year duration will decrease in value by 10 percent if interest rates rise one present. On the other hand, the bond fund will increase in value by 10 percent if interest rates fall one percent.” Therefore, FINRA concluded, that if investors held long-term bonds or bond funds with primarily long-term bonds, the value of those investments is expected to decline, in many instances, significantly, when interest rates continue to rise. Investors should be aware of the potential risks of bond and bond fund investments in the event that interest rates continue to rise, as expected.
Massachusetts Regulators Urge SEC To Consider Banning Pre-Dispute Agreements
In November 2012, the Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it would begin hearing disputes between registered investment advisors and investors if the registered investment advisor and investor entered into a pre-dispute agreement which designated FINRA as the forum to adjudicate their disputes. Recently, on February 12, 2013, William Galvin, the Massachusetts Secretary of the Commonwealth, sent a letter to the Securities and Exchange Commission (“SEC”) urging the SEC to ban registered investment advisors (“RIA”) from requiring investors to execute pre-dispute agreements. Generally, a pre-dispute agreement requires an investor to waive their right to bring file a lawsuit in court regarding a dispute with their RIA, and instead, requires such a dispute to be arbitrated either before the American Arbitration Association (“AAA”) or FINRA. Mr. Galvin made a statement to news reporters that, “[t]here tends to be a very personal relationship between an investment adviser and clients, and the facts [in a dispute] are very important,” and “turn on statements made. So an investor shouldn’t be precluded from court.” It will be interesting to see whether other state securities regulators will file similar letters with the SEC, and how the SEC will respond to Mr. Galvin.
The SEC Approves Amendment to FINRA Rule 8210 Regarding Inspection of Books and Records And Testimony
Recently, in late December 2012, the Securities and Exchange Commission (“SEC”) adopted the proposed amendment to the Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 8210, which deals with FINRA staff and adjudicator’s ability to inspect and copy books and records, and require testimony, from member firms, associated persons and other persons under FINRA’s jurisdiction. FINRA initially filed a request to amend Rule 8210 in September 2009, and thereafter made two amendments to the initial rule proposal. Now, over three years later, on February 25, 2013, the amended FINRA Rule 8210 will become effective. The new FINRA Rule 8210 significantly broadens FINRA’s ability to inspect member firms’ and/or associated persons’ books and records and compel sworn testimony. Specifically, the new rule adds the phrase “possession, custody or control,” to the scope of books and records it can inspect. The addition of the word “control” means that a member firm or associated person has a legal right, authority or ability to obtain upon demand the relevant books or records. This broadens FINRA’s reach and authority since FINRA will be able to inspect and copy the books and records not only in the possession and custody of such entities and individuals, but also any books and records under their control. Based upon FINRA’s broad based ability to inspect and copy a wider array of books and records, it is imperative for member firms, associated persons, or individuals subject to FINRA’s jurisdiction to seek the advice of counsel when they are subject to a FINRA Rule 8210 request.
SEC Brings A Suit Regarding The Equity Investment Management and Trading, Inc. Ponzi Scheme
In February 2009, the Securities and Exchange Commission (“SEC”) filed a Complaint against Anthony Vassallo (“Vassallo”), Kenneth Kenitzer (“Kenitzer”) and Equity Investment Management and Trading, Inc. (“EIMT”) in the United States District Court for the Eastern District of California. The Complaint alleges that Vassallo and Kenitzer operated a $40 million Ponzi Scheme through EIMT from May 2004 through November 2008, which defrauded approximately 150 investors. Vossallo and Kanitzer were able to perpetrate this fraud by sending the EIMT investors false monthly performance reports which lead investors to believe that EIMT was engaging in actual securities transactions which generated an approximate 36% annual return. Reportedly, EIMT purported to implement a computer program designed by Vossallo to time the stock market and produce a virtually risk-free 36% annual return. According to the Complaint, the EIMT Ponzi Scheme was revealed in November 2008, when Vossallo and Kanitzer were unable to satisfy investor requests to access their investment funds as it lost nearly all of its investors’ funds. On April 30, 2009, Stephen Anderson was appointed as the receiver of EIMT. Since his appointment as receiver in April 2009, Mr. Anderson has been seeking to recover funds from various sources with the intention of distributing such funds to EIMT investor victims who lost virtually all of their investments with EIMT. Kenitzer, Vassallo’s co-conspirator, has already pleaded guilty and is awaiting sentencing.
A FINRA Arbitration Panel Awards $30 Million To US Airways For Oppenheimer’s Sale of Structured Private Placements In Auction Rate Securities
Recently, on January 31, 2013, a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel issued an arbitration award to U.S. Airways, Inc. (“US Airways”) for $30 million in compensatory damages against Oppenheimer & Co. Inc. (“Oppenheimer”), its broker, Vincent Woo (“Woo”), and third-party Respondents Deutsche Bank Securities, Inc. for sales practice abuses related to structured, private placement auction rate securities, also known as ARS. See US Airways, Inc. vs. Oppenheimer & Co., Inc. and Vincent Woo vs. Deutsche Bank Securities, Inc. and Deutsche Bank AG, FINRA Case No. 09-00878. On February 17, 2009, US Airways filed a Statement of Claim against the broker-dealer Oppenheimer and its broker, Woo. The Statement of Claim alleged the following causes of action against Oppenheimer and Woo: breach of contract; unsuitability; unauthorized purchases; violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act; fraudulent misrepresentation; conversion, negligence; gross negligence; breach of fiduciary duty; and failure to supervise in connection with the sale of structured, private placement auction rate securities. On July 10, 2009, Oppenheimer and Woo filed an Answer denying the allegations contained in US Airways’s Statement of Claim, and asserted various affirmative defenses. On July 10, 2009, Oppenheimer filed a Third-Party Statement of Claim against Deutsche Bank Securities, Inc. and Deutsche Bank AG alleging the following causes of action: violation of Section 10(b), 15A(b)(3) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder; FINRA Rule 2010; breach of settlement agreement; fraudulent misrepresentation; negligence misrepresentation; common law negligence; contribution and indemnity; and unjust enrichment. Oppenheimer and Woo’s Third Party Statement of Claim requested that the arbitration award specifically state that Oppenheimer reasonably relied on the representations of Deutsche Bank Securities, Inc. and Deutsche Bank AG regarding the integrity of the auction rate securities at issue. In response, on October 2, 2009, Deutsche Bank Securities Inc. denied the allegations in the Third Party Statement of Claim and asserted various affirmative defenses. Deutsche Bank AG is not a member firm associated with FINRA, and therefore did not appear in the arbitration and did not voluntarily agree to arbitrate before FINRA. As such, the FINRA arbitration panel made no determination regarding any claims against Deutsche Bank AG. After 127 hearing sessions, spanning from September 2011 through December 2012, a FINRA arbitration panel held Oppenheimer, Woo and Deutsche Bank Securities, Inc. jointly and severally liable to US Airways in the amount of $30 million, with Woo’s liability not exceeding the commissions he received.
FINRA Proposes New Rule For Broker-Dealers To Provide Links to BrokerCheck On Their Firm Websites
On January 25, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a regulatory notice which proposed a rule that would require broker-dealer member firms and registered representatives to include “a prominent description of and link to BrokerCheck . . . on their websites, social-media pages and any comparable internet presence.” FINRA’s BrokerCheck reports contain information on broker-dealer firms, as well and individual brokers, including, but not limited to, their professional background, employment history, and most importantly, whether they have been subject to FINRA or securities regulators disciplinary proceedings and/or customer complaints. Currently, FIRNA requires brokerage firms to send their clients written communications detailing the BrokerCheck hotline and providing the FINRA BrokerCheck website. The new rule proposal would require brokerage firms and brokers to also provide a direct link on their website to the firm’s or broker’s specific BrokerCheck page, which would allow investors to click directly to the firm or broker’s relevant BrokerCheck report. This rule proposal was the result of a January 2011 study, conducted by the Securities and Exchange Commission, that examined ways to increase investor access to BrokerCheck. Indeed, FINRA’s notice stated, “FINRA believes that the proposed rule change would increase investor awareness and use of BrokerCheck, thereby helping investors make informed choices about the individuals and firms with which they conduct business.
New Rule Requires Mutual Funds That Trade Commodities To Register With The CFTC
Recently, the Commodity Futures Trading Commission (“CFTC”) implemented a new rule, Rule 4.5, which requires mutual funds and their investment advisers that invest in commodities, including futures, swaps and options, to register with the CFTC. This new rule will expose mutual funds that invest in a certain threshold level of commodities to further and stricter scrutiny by regulators, and will increase costs. It is reported that most industry experts believe that this new rule is redundant of former rules imposed by the Securities and Exchange Commission, which already regulates mutual funds. Recently, the Investment Company Institute (“ICI”) and the United States Chamber of Commerce (“USCOC”) appealed a District Court Decision upholding the implementation of the new rule. David Hirschmann, President and Chief Executive of the USCOC commented, “The District Court’s decision fell far short of well-established D.C. Circuit precedent requiring agencies to adequately measure the costs imposed by capital markets regulations on businesses, investors and the economy as a whole, and to weigh them against the desired benefits.” Similarly, Paul Schott, ICI’s President and Chief Executive stated, “we brought this challenge because the CFTC failed to justify the regulatory excess and added costs of its amendments to Rule 4.5, which would impose that agency’s regulatory regime atop the comprehensive regulation already applied to registered funds by the [SEC] . . . We believe the District Court decision is deeply flawed and will clearly harm the many shareholders of registered funds that will bear the costs of overlapping regulation by two agencies.” It is believed that there is such harsh opposition to this new Rule 4.5 since investment advisers and mutual funds will be faced with significant compliance costs which will ultimately be passed along to investors. Moreover, opposition to this rule may result in investment advisers being forced to limit mutual fund exposure to commodities, and fain exposure of those commodities through more costly, and potentially risky, means.
FINRA Reports Increased Arbitration Awards Ordering Restitution In 2012
At the end of each year, the Financial Industry Regulatory Authority, Inc. (“FINRA”) conducts an assessment of its enforcement achievements in order to evaluate how to better allocate its time and resources during the following fiscal year. FINRA determined that in 2012, it ordered registered member firms and associated persons to return $34 million to harmed investors. This constitutes a 75% increase from the $19.4 million in restitution that FINRA ordered in 2011. Interestingly, however, FINRA increased the number of disciplinary proceedings in 2012, however, only ordered firms to pay $68 million in penalties, which was a $4 million decrease from 2011. Additionally, FINRA referred 692 potential matters to the Securities and Exchange Commission, and other federal and state law enforcement regulators, which was a 6% increase from 2011. These results can be attributed to FINRA implementing a more risk-based examination and application of a cross-market surveillance detection program. Richard Ketchum, FINRA’s chairman and chief executive stated, “[p]rotecting investors and helping to ensure the integrity of the nation’s financial markets is at the heart of what we do every day.”
Possible New FINRA Rule Excluding Certain Industry Professionals From Public Arbitrator Pool
Recently, on Friday, January 11, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) posted Release No. 34-68632 on the Securities and Exchange Commission (“SEC”) website which was the Notice of Filing of Proposed Rule Change Relating to Amendments to the Customer and Industry Codes of Arbitration Procedure to Revise the Public Arbitrator Definition (“Notice”). In its Notice, FINRA proposed the revised definition of “public arbitrator” to exclude “persons associated with a mutual fund or hedge fund from serving as public arbitrators and require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators.” Further, the rule change would require attorneys, accountants and other securities industry professionals, as well as spouses and immediate family members of such individuals, to wait two years after leaving the industry before being able to serve as a public arbitrator. Currently, FINRA has imposed a five-year waiting period upon industry employees from serving as public arbitrators, and has banned any securities industry employee with over 20 years of industry experience from ever serving as a public arbitrator. FINRA believes the definition “would improve investors’ perception about the fairness and neutrality of FINRA’s public arbitrator roster.”