New York Securities Lawyer Blog

Published on: June 30, 2015

Lax & Neville LLP Wins A $16.6 Million Award In A FINRA Arbitration On Behalf Of Two Retail Investors, Through Ontonimo (OMO) Limited, Against BNP Paribas Securities Corp.

On June 26, 2015, Lax & Neville LLP, a leading national securities arbitration law firm, won a FINRA arbitration award on behalf of two retail investors (the “Retail Investors”), through Ontonimo (OMO) Limited (“Ontonimo”), against BNP Paribas Securities Corp. (“BNPP”) for the sale and marketing of an unsuitable security to the Retail Investors. A highly sophisticated and experienced three (3) person Arbitration Panel rendered the arbitration award after a ninety-five (95) day arbitration hearing (186 hearing sessions), which is the longest customer FINRA arbitration hearing in the last twenty (20) years and the second longest ever. The Arbitration Panel awarded the Retail Investors, through Ontonimo, $16.1 million in compensatory damages, inclusive of interest. This award of compensatory damages represents 100% of the net out-of-pocket loss plus interest and is one of the largest FINRA arbitration awards of compensatory damages in a customer dispute. Significantly, in addition to that relief, after winning six (6) Motions For Sanctions and five (5) Motions To Compel, the Arbitration Panel awarded $500,000 in sanctions for attorneys’ fees for BNPP’s failure to comply with the Arbitration Panel’s various discovery orders. This is the largest amount of sanctions awarded in a customer FINRA Arbitration in at least the last ten (10) years. To view this Award, Ontonimo (OMO) Limited vs. BNP Paribas Securities Corp. – FINRA Case No. 10-04744, click here.

The single investment at issue was a Resetable Strike Equity Option Transaction, which is a highly speculative and leveraged derivative call option. BNPP recommended that the Retail Investors invest approximately $14.3 million, which is more than 60% of their investable assets, into this one unsuitable security. Because BNPP had a policy that prohibited the sale of this product to retail customers, BNPP required the Retail Investors to form a corporate entity, Ontonimo, through which the Retail Investors would purchase the investment in order to circumvent BNPP’s own compliance rules. Further, BNPP required one of the Retail Investors to become a so-called “investment advisor” for Ontonimo by mandating that he execute a sham investment advisory agreement, even though he had no prior professional financial services experience and no securities licenses. In less than one and one-half years, the Resetable Strike Equity Option Transaction became worthless and the Retail Investors lost their entire $14.3 million investment. The Retail Investors paid BNPP in excess of $2.3 million in fees and costs for this investment. BNPP further retained approximately $700,000 of the value of the Resetable Strike Equity Option Transaction after its expiration.

The Arbitration Panel’s message was clear: The Retail Investors should never have been marketed and sold this unsuitable security.

Published on: June 26, 2015

J.P. Morgan Challenges Its Limited Participation Under The Protocol For Broker Recruiting By Seeking A Preliminary Injunction Against A Six-Broker Team Transitioning To Morgan Stanley

By Lax & Neville LLP

In May 29, 2015, J.P. Morgan Chase Bank, N.A. and J.P. Morgan Securities LLC (collectively “JPMorgan”) moved to renew a motion, before the United States District Court for the District of New Jersey, seeking a preliminary injunction (the “Motion”) against six (6) former registered representatives (the “Brokers”), who left JPMorgan to join Morgan Stanley. According to court documents, the Brokers managed $2 Billion of client assets derived from four-hundred (400) families’ accounts that produce approximately $15 million in revenue per year. The purpose of the preliminary injunction was the preserve the status quo ante by enjoining certain client solicitation activities by the Brokers, while JPMorgan and the Brokers resolved issues related to the Brokers’ transition to Morgan Stanley through arbitration.

In its Motion, JPMorgan alleged, inter alia, that since transitioning from JPMorgan to Morgan Stanley, the Brokers illegally solicited JPMorgan clients and converted JPMorgan’s confidential and proprietary client information. JPMorgan’s Motion argued that a preliminary injunction preventing the Brokers from continuing to solicit JPMorgan clients is necessary because the resulting financial harm and loss of customers’ confidence is unascertainable and as such, no other adequate remedy at law exists.

On June 8, 2015, the Brokers filed a forty-page Memorandum of Law in Opposition to Motion for Injunctive Relief (“Opposition”). Generally, the Brokers’ Opposition argued that the District Court should deny JPMorgan’s Motion because JPMorgan is a signatory to the Protocol for Broker Recruiting (the “Protocol”) and all of the Brokers’ activities were permitted under the Protocol. Briefly, the Protocol is an agreement between many of the major securities firms that is designed to give clients the opportunity to choose their financial advisory on the merits of their relationships, rather than though the court system. Under the Protocol, a registered representative who transitions from one Protocol signatory firm to another is permitted to solicit his or her clients once they join the new firm and is permitted to retain certain limited client information.

Published on: June 25, 2015

FINRA Fines E1 Asset Management $25,000 And Suspends Ron Itin and Ahsan Shaikah For Supervisory Failures

By Lax & Neville LLP

On June 5, 2015, E1 Asset Management, Inc. (“E1 Asset Management”), Ron Y. itin (“Itin”), and Ahsan R. Shaikh (“Shaikh”) submitted a Letter of Acceptance Waiver and Consent (“AWC”) to settle allegations by the Financial Industry Regulatory Authority (“FINRA”) that they collectively failed to maintain a reasonable supervisory system at E1 Asset Management. Both Itin and Shakih are employed by E1 Asset Management in supervisory capacities. A copy of the FINRA AWC may be found here.

FINRA alleged that E1 Asset Management, Itin, and Shaikah violated NASD Rules 3010, 2110 and FINRA Rule 2010 by failing to establish and maintain E1 Asset Management’s supervisory systems. According to the AWC, from July 2008 to April 2012, Itin and Shaikh failed to establish a supervisory system reasonably designed to: 1) review registered representatives’ communications with the public; 2) review trading to detect and monitor potential churning activity; 3) review the new account opening process to ensure customer suitability profiles were properly established; 4) perform adequate suitability review for leveraged exchange traded funds (“ETFs”) in customer accounts; and 5) supervise the activities of registered representatives subject to E1 Asset Management’s heightened supervision program.

The FINRA allegations of supervisory failures came after numerous customers commenced FINRA arbitrations alleging sales practice abuses by E1 Asset Management registered representatives. According to FINRA, many of these arbitrations concluded in settlements. However, the form release agreements that E1 Asset Management utilized during this time contained ambiguous language that could have been interpreted by the customers as prohibiting them from cooperating with regulatory investigations. Specifically, those agreements stated that customers must not “[c]ommence or prosecute, or assist in the filing, commencement or prosecution in any government agency, arbitral tribunal, self-regulatory body or court in any claim or charge against E1 Asset Management.” FINRA alleged that E1 Asset Management, Itin, and Shaikah violated NASD Rule 2111 and FINRA Rule 2010 for including impermissible confidentiality provisions in its form settlement and release agreements.

Published on: June 25, 2015

SEC Publishes Its Requests for Industry Comment Regarding Its Regulation of Exchange Traded Products

By Lax & Neville LLP

On June 12, 2015, the Securities and Exchange Commission (“SEC”) solicited public comment on its approval and regulation of exchange traded products (“ETPs”). ETPs are similar to open-ended mutual funds, but can be bought and sold throughout the day at market prices, rather than net-asset value. ETPs include, but are not limited to, exchange-traded funds, pooled investments, and exchange-traded notes. The SEC’s request for comment asked fifty-three (53) sets of questions touching on subjects such as arbitrage mechanisms, pricing, listing standards, legal exemptions, suitability requirements, and broker-dealer marketing and sales practices with respect to ETPs among other subjects.

According to the SEC, the number of ETPs available to retail customers rose dramatically from 2006-2013. As of 2014, the SEC estimates there are approximately 1,664 ETPs listed on U.S. exchanges, with a market value surpassing $2 trillion. Some financial firms design complex ETPs and market them to retail clients in an effort to outperform the market. In a press release accompanying the SEC’s request for industry comment, SEC Chairwoman Mary Jo White stated, “[a]s new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded and marketed to investors, especially retail investors.”

In line with the SEC’s concern for retail investors, the SEC solicited industry comment regarding broker-dealer sales practices and investors’ understanding and use of ETPs that generally focused on:

Published on: June 25, 2015

Office of Compliance Inspections and Examinations Publishes New Retirement-Targeted Industry Reviews and Examinations Initiative

By Lax & Neville LLP

On Monday, June 22, 2015, the Securities Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced that it was launching a multi-year Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) Initiative. The new ReTIRE Initiative follows OCIE’s 2015 Examination Priorities, which focuses on “examining matters of importance to retail investors and investors saving for retirement.”

The ReTIRE Initiative addresses high-risk areas of broker-dealers’ or investment advisers’ sales, investment and oversight procedures, with emphasis on select areas where retail investors saving for retirement may be harmed. Specifically, the ReTIRE Initiative will focus on the following areas:

Reasonable Basis for Investment Recommendations: Broker-dealers and investment advisers must have a reasonable basis when making recommendations or providing investment advice. OCIE staff will assess how registered representatives and investment adviser’s: 1) select account types; 2) perform due diligence on investment options; 3) make initial investment recommendations; and 4) provide on-going account management.

Published on: June 24, 2015

FINRA Fines Morgan Stanley Wealth Management $650,000 And Scottrade Inc. $300,000 For Failure To Supervise Wire Transfers

By Lax & Neville LLP

On June 22, 2015, the Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it had reached a near $1 million settlement with Morgan Stanley Wealth Management (“Morgan Stanley”) and Scottrade Inc. (“Scottrade”) for failing to supervise wire transfers. Brad Bennett, Executive Vice President and Chief of Enforcement at FINRA, commented on the settlements and stated, “Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.” A complete copy of the FINRA press release is available here.

Through a Letter of Acceptance Waiver and Consent (“AWC”), Morgan Stanley submitted to censure and agreed to pay a $650,000 to settle charges that from at least June 2009 through November 2014, Morgan Stanley failed to establish, maintain and enforce reasonable supervisory systems and written procedures regarding outgoing wire transfers and branch check disbursements from customer accounts. Additionally, from approximately June 2009 through September 2011, Morgan Stanley failed to establish and maintain reasonable supervisory systems regarding its third-party service provider’s coding and acceptance of money orders, which were deposited into customer accounts. The Morgan Stanley AWC may be found here.

Specifically, FINRA alleged that between October 2008 and June 2013, three (3) Morgan Stanley registered representatives, in two (2) branch office locations, collectively converted approximately $494,400 from thirteen (13) Morgan Stanley customer accounts by causing fraudulent wire transfers and branch checks to be sent to third-party accounts. During this time, Morgan Stanley had no supervisory procedures in place to detect and monitor disbursements from separate accounts to the same third-party account. Additionally, Morgan Stanley’s system did not address comparing customers’ signatures on outgoing wire transfer request forms with those on file. Furthermore, Morgan Stanley’s third-party service provider miscoded certain types of customer deposits that would have raised red flags earlier. Together, FINRA alleged that Morgan Stanley’s supervisory failures constituted violations of NASD Rule 3012, NASD Rule 3010, and FINRA Rule 2010.

Published on: June 2, 2015

FINRA Releases Second Proposed Broker Compensation Rule for Comment

By Lax & Neville LLP

On May 28, 2015, the Financial Industry Regulatory Authority (“FINRA”) released its second proposed rule designed to help investors understand what financial incentives their broker may have to transition between member firms and how those transitions could affect the customer’s investments. The complete FINRA release regarding the new rule may be found here. FINRA encouraged all interested parties to comment on the proposal no later than July 13, 2015.

Rule 2272 — “Educational Communication Related to Recruitment Practices and Account Transfers” (the “Proposed New Rule”) would require delivery of a FINRA created educational communication focusing on key considerations for customers contemplating transferring their assets, with their broker, to the recruiting firm. According to FINRA, a recruiting firm is any member firm that hires or associates with a registered representative who was previously associated with another member firm. FINRA created the Proposed New Rule because it was concerned that retail customers were not aware of important factors they should consider when making the decision to transfer assets to the transitioning registered representative’s new firm.

FINRA’s educational communication is intended to motivate customers towards making inquiries of the transitioning registered representative and the customer’s current firm, to the extent that the customer considers the content of the educational communication important to his or her decision. Specifically, FINRA’s educational communication highlights the potential implications of transferring assets to the recruiting firm and suggests questions the customer should ask questions regarding: 1) whether financial incentives received by the representative may create a conflict of interest; 2) assets that may not be directly transferrable to the recruiting firm, and, as a result, the customer may incur costs to liquidate and move those assets or incur inactivity fees by leaving them with the current firm; 3) the potential costs related to transferring assets to the recruiting firm, including the difference in the pricing structure and fees imposed between the customer’s current firm and the recruiting firm; and 4) the differences in products and services between the customer’s current firm and the recruiting firm.

Published on: May 26, 2015

LPL Financial LLC Violates FINRA Supervision Rules During Its Expansion

By Lax & Neville LLP

On May 6, 2015, LPL Financial LLC (“LPL”) submitted a Letter of Acceptance, Waiver and Consent (“AWC”) to the Financial Industry Regulatory Authority’s (“FINRA”) Department of Enforcement to settle allegations that LPL violated FINRA supervisory rules. The AWC was submitted “without admitting or denying the findings,” and on the condition that, if accepted, “FINRA will not bring any future actions against LPL alleging violations based on the same factual findings.”

LPL has been a FINRA member firm since 1973, is headquartered in Boston, MA and has approximately 18,343 registered representatives operating from approximately 10,702 registered branch office locations and 18,396 non-registered office locations. LPL is the largest organization of independent financial advisors in the United States based on total revenue. In 2007, LPL Financial Holdings, Inc., LPL’s parent company, expanded LPL’s broker-dealer business by acquiring other financial services firms and recruiting registered representatives from other broker-dealers. From 2007 to 2013, the number of registered representatives at LPL more than doubled from 8,322 to 17,601 and LPL’s revenue increased from $2.28 billion to $4.05 billion. According to FINRA, while LPL’s business grew, LPL failed to similarly increase its supervisory resources, resulting in inadequate supervisory systems and procedures.

Specifically, according to FINRA, LPL failed to properly supervise its representative’s sale of non-traditional exchange traded funds (“non-traditional ETFs”), variable annuities, mutual funds, and illiquid or non-exchange-traded real estate investment trusts (“non-traded REITs”). Non-traditional ETFs are a class of complex products that include leveraged, inverse and inverse-leveraged ETFs, which seek to earn a multiple of the performance of the underlying index or benchmark or earn a return inverse to the return of the benchmark’s performance, or both. Generally, non-traditional ETFs utilize swaps, futures contracts, and other derivatives instruments to achieve these objectives. According to FINRA, LPL failed to review the length of time for which these securities were held by customers, despite written supervisory procedures which require monitoring non-traditional ETFs on a daily basis. This is especially important because many of these products “reset” daily and over time, that resetting function can cause the specific non-traditional ETF’s performance to deviate significantly from the index it tracks. Additionally, the short positions taken by inverse ETFs contain more risk than a corresponding long position because the potential for loss in a short position is limitless. FINRA further alleged that LPL failed to enforce its written supervisory procedures with respect to account allocation limits for non-traditional ETFs, and failed to ensure that its registered representatives were adequately trained to sell non-traditional ETFs. FINRA alleged that LPL violated National Association of Securities Dealers (“NASD”) Rule 3010(b) and FINRA Rule 2010, which state that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

Published on: May 8, 2015

SEC Charges Veros Partners Alleging $15 Million Ponzi Scheme

By Lax & Neville LLP

On April 22, 2015, the Securities and Exchange Commission (“SEC”) filed a Complaint in the District Court for the United States Southern District of Indiana, Indianapolis Division (the “Complaint”), against Veros Partners, Inc., Matthew D. Habb, Jeffery B. Risinger, Veros Farm Loan Holding LLC, Tobin J. Senefeld, FarmGrowCap LLC, and PinCap LLC alleging that Veros Partners, Inc. and Mr. Habb, its president, propagated and executed a Ponzi scheme and “fraudulently raised at least $15 million from at least 80 investors … mostly from Veros’ own clients, in two separate farm loan offerings.”

The Complaint states that SEC seeks “to enjoin Defendants from raising additional investor funds, to prevent them from ensnaring more victims in their scheme, and to prevent the further dissipation of investor assets.” The SEC also seeks “the disgorgement of Defendants’ ill-gotten gains, as well as prejudgment interest and significant civil penalties.”

The Ponzi-scheme offerings took place from 2013 to 2014, when investors purchased securities issued by Veros Farm Loan Holding LLC and FarmGrowCap LLC, two companies run by Matthew D. Habb, Jeffrey B. Risinger and Tobin J. Senefeld. Investors were told that their funds would be used “to make short-term operating loans to farmers for the 2013 and 2014 growing seasons.” Although some funds were used for the stated purpose, most was used to cover the unpaid debt of the farms, and $7 million was used to pay investors in other, unrelated offerings. Further, over $800,000 went directly to Matthew D. Habb, Jeffrey B. Risinger and Tobin J. Senefeld for “success” and “interest rate spread” fees.

Published on: April 24, 2015

FINRA Fines H. Beck, Inc. $ 425,000 to Settle Sales Practice Violations Regarding Unit Investment Trusts

By Lax & Neville LLP

On March, 30, 2015, H. Beck Inc. (“H. Beck”) submitted a Letter of Acceptance Waiver, and Consent (“AWC”) to settle allegations of sales practice violations by the Financial Industry Regulatory Authority (“FINRA”). FINRA alleged that: 1) H. Beck failed to establish a reasonable supervisory system and written supervisory procedures to identify and apply applicable unit investment trust (“UIT”) sales charge discounts to customers; 2) H. Beck failed to reasonably supervise its registered representatives’ use of consolidated reports; and 3) H. Beck failed to enforce its written supervisory procedures regarding its non-registered representatives’ use of outside email accounts. Without admitting or denying the facts alleged in the AWC, H. Beck submitted to censure and paid civil fines of $ 425,000 to settle the FINRA allegations. A full version of the FINRA AWC may be found here.

A UIT is a type of investment company that issues securities representing an undivided interest in a portfolio of securities. UITS are usually issued by a sponsor that assembles the portfolio of securities, deposits the securities in a trust, and then sells units through a public offering. Each UIT unit is a redeemable security that is issued for a specific term and entitles the investor to a proportionate share of the UIT’s net assets. The UIT sponsor usually offers a variety of different ways for investors to reduce the sales charges for their purchases, such as offering a discount on purchases that are funded from Redemption proceeds from another UIT.

In the AWC, FINRA noted that on March 31, 2004, FINRA reminded its members of their obligation to develop written supervisory procedures to ensure that customers receive the appropriate sales charge discounts for their UIT investments. See NTM 04-26, Unit Investment Trust Sales. FINRA’s guidance instructs its members to make sure that UIT transactions take place “on the most advantageous terms available to the customer.” Specifically, the AWC alleges that, in violation of NASD Conduct Rule 2110 and FINRA Rule 2010, from October 2008 through September 2013, H. Beck failed to give customers discounts for approximately $ 23 million of UIT investments purchase. Additionally, for its failure to implement written supervisory procedure reasonably designed to ensure that customers received sales charge discounts, FINRA alleged that H. Beck violated NASD Conduct Rules 3010(a)-(b) and 2110, as well as FINRA Rule 2010.