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In another chapter of the continuing legal troubles facing UBS, AG and UBS Financial Services of Puerto Rico, Inc. (collectively “UBS”) for its marketing and sale of closed-end bond funds composed of Puerto Rican municipal debt (the “Puerto Rico Bond Funds”), two former UBS registered representatives, Jorge and Teresa Bravo (collectively, the “Bravos”), are suing the firm in an arbitration before the Financial Industry Regulatory Authority (“FINRA”) for its sales and management practices with respect to the Puerto Rico Bond Funds and are seeking $10 million in damages. Lax & Neville LLP has covered the developments in the Puerto Rico Bond Fund litigation extensively in our earlier blog posts and continues to investigate customer claims related to these investments. Links to those earlier posts may be found here, in chronological order: link 1, link 2, link 3, link 4, link 5.

The Bravos, who managed more than $ 120 million in client assets, were both senior vice presidents at UBS. According to news sources, the Bravos’ FINRA complaint alleges that UBS fraudulently maintained a conflict of interest, which it then concealed from its clients and the Bravos, in relation to its underwriting and marketing of the Puerto Rico Bond Funds. Through their FINRA complaint, the Bravos allege that UBS created a high-pressure environment to induce its registered representatives to sell more of the Puerto Rico Bond Funds to customers or risk being fired. The Bravos also allege that during that time, UBS cheated them out of money’s owed and ultimately forced them to leave the firm.

The UBS Puerto Rico Bond Funds have potentially cost investors billions of dollars in damages. If you have invested in the Puerto Rico Bond Funds with Jorge Bravo or Teresa Bravo, Contact Lax & Neville LLP today by calling 212-696-1999.

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In what has become a hot issue this Spring, the Labor Department yesterday proposed a new set of standards for brokers who offer advice in connection with 401(k)’s and other retirement accounts. Currently, brokers are required only to recommend products that are “suitable” for investors, which permits the sale of products that earn the broker high fees. Reuters reports that the new standards will require brokers to put their clients’ best interests first ahead of any personal financial gain. The Labor Department proposal will require “best interest” contracts between brokers and investors.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other litigations against broker-dealers and other financial firms.

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I noted in my March 20 post that the Chair of the SEC had just come out in favor of a rule requiring brokers to act in their clients best interests. While investors wait for the SEC to move forward on the issue, the New York City Comptroller, Scott Stringer, is proposing that New York State require brokers to disclose the present state of their relationship to clients – “I am not a fiduciary” and “I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.” The Wall Street Journal posited that New York’s adoption of such a requirement could spur other states to impose similar regulations.

A recent report by the Public Investors Arbitration Bar Association (“PIABA”) shows why Stringer’s proposal is critical. U.S. News describes the PIABA report which contrasted brokers’ advertising campaigns with the legal positions taken by those brokers in litigation against their clients. For example:

• Ad: “It’s time for a financial strategy that puts your needs and priorities front and center.”

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There has been a spate of litigation in recent years over whether broker dealers can contract out of FINRA arbitration and litigate in court instead. Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, 764 F.3d 210 (2d Cir. 2014) is a recent example in the Second Circuit. Since 1989 the courts have blessed industry mandated FINRA arbitration as contained in the industry’s standard form customer agreement. Thus, investors effectively have no choice but to resolve investment disputes through arbitration. The industry has benefited from less costly and efficient arbitration and the avoidance of jury verdicts, and until recently, the FINRA rule requiring an industry representative on every panel. The trade off to enforcement of mandatory arbitration in favor of the industry was supposedly a fair and more efficient dispute resolution process for the investor.

Now, however, as FINRA reforms over the years have made arbitration more fair for investors, and as the cases brought against broker dealers have become larger and more complex, the industry is shifting strategy and attempting to have large and complex cases litigated in court. The means of choice for the industry to accomplish this are court forum selection clauses in contracts brokers obtain from the investor in an effort to trump any FINRA arbitration requirement.

Why would the industry like to be able to escape FINRA arbitration in a large and complex case? The answer lies in the nature of the investment documents usually associated with these cases which investors are required to sign as part of complex investment purchases. These investments typically have standard form risk disclosures which investors must acknowledge before investing. Such disclosures can sometimes be fatal to a court claim where they often form the basis for a motion to dismiss the case before discovery or trial, based on the more stringent pleading requirements of court litigation. In FINRA arbitration, on the other hand, absent rare circumstances, the investor is guaranteed a hearing on her case and motions to dismiss are not allowed.

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On March 30, 2015, the Financial Industry Regulatory Authority (“FINRA”) barred broker Anthony “Tony” Warren Thompson (“Thompson”) and expelled his firm, TNP Securities LLC (“TNP Securities”), for making material misrepresentations and omissions in connection with the sale of private placement securities in violation of various FINRA Rules and securities laws. The securities in question were a series of promissory notes sponsored by three Thompson National Properties, LLC (“TNP”) subsidiaries known as the: TNP 12% Notes Program, LLC (“12% Notes LLC”); TNP 2008 Participating Notes Program, LLC (“PNotes LLC”); and the TNP Profit Participation Notes Program, LLC (“PPP Notes LLC”) (collectively, the entities are referred to as the “Guaranteed Notes LLCs” and the notes they issued are collectively referred to as the “Guaranteed Notes”).

Thompson first became registered with FINRA in 1972 and except for two brief periods in 2008 and 2009, he remained registered until 2013. Previously, Thompson, through TNP, was known for selling private real estate investments know as tenants-in-common exchanges. TNP Securities is a wholly owned subsidiary of TNP that served as a wholesale broker-dealer for the Guaranteed Notes.

On September 18, 2013, FINRA filed its initial complaint (“Complaint”) against Thompson and TNP Securities. Originally, the complaint alleged seven counts against Thompson and TNP. However, pursuant to a stipulation, FINRA agreed to dismiss three of those counts, leaving the remaining four counts as follows: (1) FINRA allged that in connection with the sale of the Guaranteed Notes, Thompson and TNP, intentionally or with reckless disregard to the truth, made material misrepresentations and omissions in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, NASD Rules 2120 and 2110, and FINRA Rules 2020 and 2010; (2) FINRA alleged that those misrepresentations and omissions of material fact were made negligently in violation of Sections 17(a)(2) and (3) of the Securities Act of 1933, NASD Rule 2110, and FINRA Rule 2010; (3) FINRA alleged that Thompson violated FINRA Rule 2010 by sending misleading communications to investors when he circulated a solicitation seeking their consent to increase the level of PNotes LLC proceeds that could be used for investing in TNP; and (4) FINRA alleged that TNP Securities failed to supervise the offering of the PPP Notes in violation of NASD Rule 3010 and FINRA Rule 2010.

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Reuters reported that Mary Jo White, Chair of the U.S. Securities and Exchange Commission, came out in favor of creating of new rules to harmonize standards of care between investment advisers and brokers. Currently, investment advisers must act in a client’s best interest, while brokers may continue to sell products that primarily benefit their or their firm’s financial interests – so long as such products are “suitable” for the clients.

Wall Street has opposed efforts by the Department of Labor to craft rules governing such broker conduct and requiring them to put client’s interest first. White’s comments this week suggest that the SEC may be preparing to weigh in on the issue.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other proceedings against both investment advisers and brokers.

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The New York Times announced today that the nation’s biggest banks, according to certain “stress” tests, appear to be able to survive a serous downturn in the economy, where housing and securities markets severely decline and unemployment rises to 10%. Whether passing the stress test equates to a clean bill of heath for surviving the next serious recession depends on the metrics used to measure the banks’ health under various scenarios. Does that mean we are relying on the “quants” for the proper metrics, the math wizards who were lured away from math and scientific pursuits to help Wall Street create exotic and complicated investment products in the last 15 years? Yes. Remember that quants and their metrics gave Wall Street the cover it needed to classify risky housing securities products as investment grade, resulting in billions in losses for investors in the housing bust. It turned out the models the quants used were flawed: for one thing they sometimes didn’t go back far enough in financial history in building assumptions for the models. The banks’ passing the stress test is only as meaningful as how the stress test models are built, and we are once again in the hands of the financial quants in making that determination.

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Reuters reports that Morgan Stanley’s annual 10-K, filed March 2, 2015, indicates that the New York Attorney General intends to file a lawsuit related to 30 subprime securitizations sponsored by the company. This follows lawsuits and similar allegations by attorneys general in California, Virginia and Illinois. The New York Attorney General indicated that the lawsuit would allege that Morgan Stanley misrepresented or omitted material information related to the due diligence, underwriting and valuation of loans and properties. In the 10-K, Morgan Stanley stated that it does not agree with the allegations.

Morgan Stanley also reached a $2.6 billion agreement in principle last month with the U.S. Department of Justice and the U.S. Attorney’s Office for the Northern District of California to resolve claims related to what it called “residential mortgage matters.”

It remains to be seen whether investors will reap any of the benefits of these government actions seeking to mend the damage done by the subprime mortgage crisis and the proliferation of mortgage-backed securities (MBS), residential mortgage backed securities (RMBS), and collateralized debt obligations (CDOs).

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A Miami-based FINRA arbitration panel has ruled that two former financial advisers of Barclays do not have to repay a total of over $3.8 million allegedly owed by them pursuant to promissory notes executed in connection with signing bonuses, despite the fact that they left the firm.

According to a recent report in the Wall Street Journal http://www.wsj.com/articles/two-ex-barclays-advisers-can-keep-big-bonuses-1424700638, the brokers, Ileana Delahoz Platt and Rafael Enrique Urquidi, joined Barclays in 2012 and received signing bonuses in the form of “forgivable loans”, which is a customary practice in the industry. These loans, evidenced by promissory notes, are typically forgiven over time provided the employee remains employed with the firm. However, shortly after Ms. Platt and Mr. Urquidi went to work at Barclays, the bank eliminated its business in the market where their clients were located, and, according to their attorney, the advisers could no longer service many of their clients, obliging them to leave the firm to seek out other employment.

In the FINRA arbitration proceeding, Ms. Platt and Mr. Urquidi sought compensatory and other damages, as well as a declaratory judgment that any amounts due under their loan agreements would be offset and that they would owe nothing under the promissory notes. Barclays, in a counterclaim, requested compensatory damages against the two advisers in the amounts it claimed were due and owing on the promissory notes at the time they left the firm.

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Are master limited partners unsuitable for some investors? The term master limited partnership sounds like a complicated legal transaction. In fact, master limited partnerships or MLPs are complex investments that have become hugely popular in the last few years in this low interest rate environment. MLPs are tax exempt publicly traded companies that often own infrastructure in the energy field (pipelines, tanks, etc.). Individual and small institutional investors having be loading up on MLPs because they pay a large percentage of their income out to shareholders as distributions. According to Morningstar, investors added almost $12 billion in 2014 into mutual and exchange-traded funds which invest in MLPs. That’s a huge amount of hard earned money looking for higher yields. The question is, do investors understand the real risks? We doubt it.

Brokers commonly market MLPs as low risk, higher yield securities. But that’s not the case. An MLP is a publicly traded limited partnership with two types of partners: the general partner (or GP) who is responsible for managing the MLP and is compensated for performance; and the limited partner (or LP) who is the investor who provides the capital to the MLP and receives periodic income distributions. Unlike most partnerships, shares of MLPs can be bought or sold on a stock exchange. Just like any partnership, the problem with being a limited partner is that an LP has no role in the management of MLP. That’s risk number one.

Risk number two is that most MLPs invest in the natural resources infrastructure. This is normally a risky space, especially with the swings on energy and commodity prices.

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