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The Securities and Exchange Commission (“SEC”) announced on June 16 that Daniel Thibeault (“Thibeault”), a Massachusetts-based investment advisor facing both civil and criminal charges, was sentenced to 9 years in prison for his fraudulent misappropriation of more than $15 million in investor funds.  After numerous false statements to the SEC staff during the SEC’s investigation, Thibeault pled guilty to charges of securities fraud, wire fraud, aggravated identity theft, and obstruction of justice.  The criminal charges against Thibeault arose out of the same fraudulent conduct alleged in the SEC’s civil complaint.

Thibeault was the President and CEO of numerous investment advisory companies, including GL Capital Partners and GL Beyond Income Fund.  The SEC’s complaint alleged that Thibeault used GL Capital Partners to solicit investments in the GL Beyond Income Fund, claiming that investors’ money would be used to purchase variable rate consumer loans.  Investors were told that the purchased consumer loans would provide a return on investment when interest and principal payments were made on the loans.

The SEC’s complaint alleged, however, that investor money was never used to purchase the variable rate consumer loans, and that “defendants engaged in a scheme to create fictitious loans to divert investor money…and to report these fake loans as assets of the GL Beyond Income Fund.”  The plan was allegedly designed to hide that Thibeault and his associates had misappropriated millions from customers who had been told that they had collectively invested more than $40 million in the GL Beyond Income Fund since 2013.

On May 24, 2016, the Securities and Exchange Commission (“SEC”) charged Ash Narayan (“Narayan”), a California based investment adviser registered with RGT Capital Management (“RGT”), with fraud for secretly siphoning millions of dollars from investment accounts he managed for professional athletes, including NFL quarterback Mark Sanchez (“Sanchez”).

The SEC’s complaint (the “Complaint”) alleged that Narayan defrauded Sanchez, and MLB pitchers Jake Peavy and Roy Oswalt, of more than $33 million.  Narayan allegedly transferred the money to The Ticket Reserve, a struggling online sports and entertainment ticket business, without the knowledge or consent of the athletes he represented and often with forged signatures.  Narayan also inappropriately failed to disclose the fees he was receiving in return for investing the bulk of their money in the struggling company, that he himself owned more than three million The Ticket Reserve shares, and that he was a member of the company’s board of directors.

The Complaint stated that Narayan exploited the trust of athletes who relied on him to manage their finances.  Sanchez, for example, had his NFL paychecks deposited directly into his investment account managed by Narayan.  While professional athletes have high earning potential, they often only have a short window in which to earn money.  As a result, Sanchez and other athletes rely on financial advisors to pursue conservative interments that preserve their capital.  The Complaint stated that Narayan’s fraudulent investing did not adhere to this conservative investment objective.

A large number of investors are suing Bank of America’s brokerage arm, operated by Merrill Lynch, for sales practice abuses surrounding Strategic Return Notes.  As many as 44 complaints have been filed by investors against Merrill Lynch with the Financial Industry Regulatory Authority (“FINRA”).

Strategic Return Notes, issued by Bank of America, are structured notes linked to a proprietary volatility index (“VOL”). The VOL attempts to calculate the volatility of the S&P 500 (i.e., how drastically the S&P 500 changes in a given time frame).  News media outlets have reported that Merrill Lynch clients have lost most of their investments in a $150 million fund.

Merrill Lynch agreed to pay the SEC a $10 million penalty to settle charges that it made misleading statements in materials provided to retail investors about the Strategic Return Notes.  The SEC noted that the written materials for the Strategic Return Notes, which Merrill Lynch principally drafted and reviewed, did not disclose a quarterly cost of 1.5% that was tied to the value of the volatility index. FINRA also fined Merrill Lynch a $5 million fine for “negligent disclosure failures” in the sale of the volatility-linked structured notes.  Merrill Lynch neither admitted nor denied the charges made by the SEC and FINRA surrounding the Strategic Return Notes.

FINRA recently suspended Dennis Mark Adam Merritt (“Merritt”), a former Wells Fargo adviser and current employee of J.W. Cole Financial, from working in the financial services industry for four months because of unsuitable investments recommended to customers.

Merritt allegedly began recommending investment in a technology startup company to his customers just days after meeting with the company’s CEO.  According to FINRA, Merritt hoped to acquire future 401(k) business from the startup in exchange for recommending the company to investors as a lucrative investment opportunity, despite knowing little about the company.  FINRA scolded Merritt for failing to adequately research the startup and its financial health before recommending it as an investment opportunity to customers.  Merritt took only a cursory look at the company’s financial information and failed to notice that “the CEO and three other individuals owned all of the company’s…[stock], even though they had contributed no capital to the enterprise.”  Despite his lack of research on the company, Merritt told customers that the investment’s value could increase by 50% to 100%.

FINRA also alleged that in total, Merritt convinced four of his customers to invest $115,000 in the company, including a 91-year-old who invested $55,000.  When pitching the startup to investors, he falsely claimed he was personally invested in the company.  Merritt also failed to disclose to his customers that his friend worked as a computer programmer at the company, a conflict of interest that could potentially influence his portfolio recommendations.

On June 2, 2016, the Securities and Exchange Commission (“SEC”) charged Richard W. Davis Jr. (“Davis”), a North Carolina-based investment adviser, with fraud for failing to disclose conflicts of interest present in the real estate-related investment opportunities he presented to potential and current investors.

The SEC’s Complaint alleged the following causes of action: fraud in connection with the purchase or sale of securities in violation of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder; fraud in connection with the sale of unregistered securities in violation of Section 5 of the Securities Act; and the fraud by an investment adviser for conducting business that is fraudulent, deceptive, or manipulative in violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940.

The Complaint alleged that Davis defrauded at least 85 people of approximately $11.5 million by selling “interests in two unregistered pooled investment vehicles named DCG Commercial Fund LLC (“Commercial Fund”) and DCG Real Assets LLC (“Real Assets”)”.  Davis assured Commercial Fund investors that the capital raised would be used to fund short-term, fully secured loans to real estate developers, but failed to disclose that two of the four projects being funded were his own companies.  Davis also failed to disclose that the loans from Commercial Fund to his companies were in default, and failed to reflect the default in the shareholder’s account statements.

On April 11, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint (the “Complaint”) against Servergy, Inc. (“Servergy”), a technology company incorporated in Nevada but headquartered in Texas, William E. Mapp, III (“Mapp”) – its founder, Caleb J. White (“White”) – a former member of Servergy’s board of directors, and Texas Attorney General Warren K. Paxton, Jr. (“Paxton”), in connection with generating stock sales through misleading statements about allegedly revolutionary computer technology and a flurry of orders for the technology by well known businesses.

The Complaint alleges the following causes of action: fraud in the offer or sale of securities in violation of Section 17(a) of the Securities Act; fraud in connection with the purchase or sale of securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; offers and sales of unregistered securities in violation of Section 5(a) and (c) of the Securities Act (as against Mapp, White and Servergy); anti-touting in violation of Section 17(b) of the Securities Act (as against White and Paxton); and offers and sales of securities by an unregistered broker in violation of Section 15(a)(1) of the Exchange Act (as against White and Paxton).

The Complaint alleges that between November 2009 and September 2013, Servergy “raised approximately $26 million in private security offerings to develop what it claimed was a revolutionary new server, the Cleantech-1000.”   Servergy did so without filing any registration statements or relying on any such statements already in effect, and furthermore did not fall under any registration exemption.  The Complaint further alleges that Servergy and its then-CEO, Mapp, “led investors to believe that the [Cleantech-1000] was in high demand by falsely claiming notable companies like Amazon.com and Freescale Semiconductors had pre-ordered the product.”  However, the technology underlying the Cleantech-1000 was rather old and being phased out of the industry.

In March 2016, Raymond James & Associates, Inc. (“Raymond James”) moved to vacate a Financial Industry Regulatory Authority (“FINRA”) panel’s (the “Panel”) Award, delivered on February 2, 2016 (the “Award”), which awarded Mark Immel (“Mr. Immel”), a financial advisor formerly employed at Raymond James, $450,000 in compensatory damages.

In the underlying arbitration, and pursuant to the Award, Mr. Immel asserted the following causes of action against Raymond James in his Statement of Claim, filed on November 4, 2014:  unjust enrichment; intentional interference with business relationships; and expungement.    Mr. Immel alleged that after his involuntary termination, which occurred in February of 2014, Raymond James retained Mr. Immel’s book of business and failed to compensate him.  At the close of the arbitration hearing, Mr. Immel sought compensatory damages in the amount of $2,206,000, in addition to expungement of his record maintained by the Central Registration Depository (“CRD”).

On January 27, 2015, Raymond James filed its Statement of Answer and Counterclaims, alleging the following cause of action against Mr. Immel: breach of contract of implied covenant of good faith and fair dealing.  This allegation related to Mr. Immel’s alleged failure to repay a balance due on his promissory notes with Raymond James, which Raymond James alleges became due upon Mr. Immel’s termination.  On February 12, 2015, Mr. Immel filed an Answer to Counterclaim, arguing that Raymond James should be prevented from making any counterclaims relating to those promissory notes.  At the close of the arbitration hearing, Raymond James requested compensatory damages in the amount of $329,680.

On February 5, 2016, a Financial Industry Regulatory Authority (“FINRA”) panel of arbitrators (the “Panel) rendered an Award (the “Award”) against the Royal Bank of Scotland’s United States securities divisions, RBS Securities, Inc. (“RBS”), on behalf of the Claimant Jeffrey Howard (“Howard”).  The Panel determined that RBS’ termination of Howard’s employment for cause and subsequent use of defamatory language on his Form U-5 was actually an attempt to conceal “significant internal turmoil” within RBS.  As a result of the language, Howard was unable to find employment.

According to statements made to the New York Times, Howard’s career was on an upwards trajectory when he joined RBS as the Head of Prime Services for the Americas in 2012.  Prime Services is a line of business in which banks offer a “package of trading, settlement and cash management products to hedge funds and other big trading firms.”  By 2014, Howard had become the Global Head of Prime Services.  However, in August 2014, Howard was suddenly terminated from his employment.

Howard filed a Statement of Claim in November 2014 asserting the following causes of action: breach of contract; defamation per se; fraud in the inducement; and declaratory judgment.  As such, Howard sought $10 million in compensatory damages. In their Answer filed in January 2015, RBS denied Howard’s allegations and made various affirmative defenses.

On March 3, 2016, a Financial Industry Regulatory Authority (“FINRA”) panel (the “Panel”) rendered an award (the “Award”) in favor of Bruce Howard Tuchman (“Bruce Tuchman”) and Michelle H. Tuchman (“Michelle Tuchman”) for more than $1.3 million in compensatory damages, resulting from Wells Fargo Advisors, LLC’s (“Wells Fargo”) wrongful termination of Bruce Tuchman and illegal conversion of funds from Michelle Tuchman’s brokerage account.  The Award does not give any indication as to the relationship between Bruce Tuchman and Michelle Tuchman.

Bruce Tuchman had previously been employed at Smith Barney, but left to join Wells Fargo in 2009.  According to his Form U-5, he was terminated from Wells Fargo in June 2013 for allegedly failing “to follow firm policy regarding contacting customers prior to entering orders.”

In rendering the Award, the Panel consolidated two separate cases.  The first case (Case Number 13-02581) (“Case 1”) was Wells Fargo against Bruce Tuchman, with Frank Dryer (“Dryer”), a complex manager based out of Albany, New York, as a third-party respondent.  The second case (Case Number 13-02939) (“Case 2”) was Bruce Tuchman and Michelle Tuchman against Wells Fargo and Dryer.

On February 22, 2016, a Financial Industry Regulatory Authority (“FINRA”) panel (the “Panel”) rendered an award (the “Award”) dismissing Morgan Stanley Smith Barney, LLC and Morgan Stanley Smith Barney FA Notes Holding, LLC’s (collectively “Morgan Stanley”) promissory note claim against one of its registered representatives, Brandon Neal (“Neal”), and granting Neal’s counterclaims, finding that Morgan Stanley misrepresented the firm’s ability to handle certain businesses when soliciting Neal’s employment and awarding him $300,000 in compensatory damages plus interest.

Morgan Stanley initially brought an arbitration claim against Neal in 2014 for failure to repay a promissory note that was issued in 2012 (the “Note”), and became due upon Neal’s termination on January 10, 2014.  Morgan Stanley sought $215,722 in compensatory damages, in addition to $100,688.46 in interest, attorneys’ fees, and other costs.

Neal denied Morgan Stanley’s claims and filed the following counterclaims against Morgan Stanley: breach of implied covenant of good faith and fair dealing; fraud and misrepresentation; and negligent misrepresentation.  According to the Award, Neal alleged that Morgan Stanley “made several false representations to [Neal] in order to tempt him to leave his then-current employer [JPMorgan] and work for Morgan Stanley.”  In addition, Neal alleged that “had [Morgan Stanley] not made these representations, he would not have left [JP Morgan], nor executed a promissory note with [Morgan Stanley].”  According to statements made to the Wall Street Journal by Neal’s attorney, Neal was involved in an investment strategy of “borrowing against qualified replacement property bonds acquired from sales of stock to an employee stock ownership plan”.  Neal’s attorney also stated that “internal emails from Morgan Stanley showed the firm ‘had no intention of allowing [Neal] to bring this kind of business over.’”  Neal sought $1,301,385 in compensatory damages.