Articles Posted in Uncategorized

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.

On February 17, 2016, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21c of the Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Order”), against Charles P. Grom (“Grom), a Deutsche Bank  Securities, Inc. (“Deutsche Bank”) Analyst, for issuing a stock rating for Big Lots, Inc. (“Big Lots”) that was inconsistent with his own personal opinions, in violation of Rule 501 of Regulation AC, which requires that “brokers, dealers, and certain persons associated with a broker dealer, including research analysts, include in their research reports a certification by the research analyst that the views expressed in the research report accurately reflect the research analyst’s personal views about the subject securities and issuers.”

Grom worked as a Managing Director and a senior equity research analyst at Deutsche Bank from June 2011 to February 2013, covering two subsectors of the consumer retail sector – broadlines/department stores and supermarkets.  According to the Order, he was terminated in February 2013 for “‘conduct not consistent with firm standards.’”  He is currently employed at CRT Capital Group LLC.

Deutsche Bank equity research analysts provide insight and recommendations through publicized research reports, which include ratings based on a company’s performance for the prior twelve months (BUY, SELL or HOLD), the expected price of the stock in the next twelve months, and “estimates of the company’s upcoming quarterly and annual earnings per share.”    As part of Deutsche Bank’s evaluation of an analyst, it reviews how well the analyst is able to cultivate relationships with senior-level management at the companies on which the analyst is conducting research.  Such relationships ultimately allow Deutsche Bank greater access to those companies, and yield more accurate and complete research.

On February 4, 2016, a Financial Industry Regulatory Authority (“FINRA”) panel (the “Panel”) awarded Herbert M. Doucet and Margie Doucet (collectively “Claimants”) $307,000 for losses stemming from investments in direct participation programs (“DPPs”) involving non-traded real estate investment trusts (“REITs”), promissory note programs, master limited partnerships (“MLPs”) and private oil drilling programs offered by VSR Financial Services, Inc. (“VSR”).  VSR is a small, full-service securities broker-dealer founded in 1985, focusing on long-term strategies and products.

In their Statement of Claim, the Claimants alleged the following causes of action against VSR: breach of fiduciary duty; fraud, misrepresentation and non-disclosure; negligence and gross negligence; breach of contract; violation of Louisiana Blue Sky Law; and unjust enrichment.

The amount awarded reflects almost all of the $308,221 in compensatory damages the Claimants originally sought.  The Panel further held that the Claimants could retain their investments in these DPPs, specifically MPF Senior Note Program I, Atlas America Series #25 – 2004, AmREIT Monthly Income & Growth II, Cole Credit Property Trust, and ArciTerra Note Fund II.

On February 5, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint in the United States District Court for the District of Connecticut (the “Complaint”) charging Dennis Wayne Hamilton, the Vice President of Tax for Harman International Industries, Inc. (“Harman”), with insider trading in his own employer’s stock, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Harman is headquartered in Stamford Connecticut, dealing in high quality audio systems for personal and professional use.  Harman is listed on the New York Stock Exchange (symbol HAR).  Dennis Wayne Hamilton, a resident of Norwalk, Connecticut, is a Certified Public Accountant in Colorado, and has been the Vice President of Tax for Harman since 2009, working closely with the Chief Executive Officer and the Chief Financial Officer to prepare the taxes and earnings announcements.  According to the Complaint, Dennis Wayne Hamilton “also regularly attended meetings of Harman’s audit committee that were held after the close of each fiscal quarter.  At these meetings, the audit committee received drafts of Harman’s not-yet-announced earnings releases and other nonpublic information.”

The Complaint alleges that towards the end of 2013, Dennis Wayne Hamilton used the unreleased quarterly earnings figures and announcement for the first quarter of 2014 to facilitate his purchase of 17,000 shares of Harman stock at $72.02 per share, for a total purchase price of over $1.2 million.  Dennis Wayne Hamilton violated Harmon’s own internal policies by not only using nonpublic information, but also by failing to obtain permission from general counsel to trade in the company’s stock.  He was able to generate a profit of $131,958.62 when the earnings report was made public the next day and the stock price subsequently rose by more than 12% to $81.02.