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On August 10, 2016, the Securities and Exchange Commission (“SEC”) filed a complaint against Merrill Robertson, Jr. (“Mr. Robertson”), Sherman C. Vaughn, Jr. (“Mr. Vaughn”), and Cavalier Union Investments, LLC (“Cavalier Union”) (collectively the “Defendants”), alleging that they violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (the “Securities Act”), as well as Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder (the “Complaint”).

Mr. Robertson was a professional football player for the Philadelphia Eagles, and is currently a co-owner and Managing Principal of Cavalier Union who previously held Series 7 and 66 securities licenses between April 2008 and December 2009.  He is a resident of Chesterfield, Virginia.  Mr. Vaughn, along with Mr. Robertson, is a co-owner and Managing Principal of Cavalier Union.  Mr. Vaughn has never been registered with the SEC, and has filed for personal bankruptcy four times, which had not been disclosed to investors.  Mr. Vaughn is also a resident of Chesterfield, Virginia.  Cavalier Union is based in Midlothian, Virginia, and was formed in February 2010.  Cavalier Union is not registered with the SEC.

According to the Complaint, the Defendants bilked more than $10 million from over 60 investors by fraudulently inducing them to invest in Cavalier Union promissory notes that purported to pay a fixed rate of return of between 10 and 20 percent by investing in “cash-producing tangible assets”, but were in fact part of a Ponzi scheme that allowed Mr. Robertson and Mr. Vaughn to live lavishly.  These investors were comprised of “unsophisticated senior citizens and former football coaches, donors, alumni, and employees of schools [Mr. Robertson] had attended”, and Mr. Robertson and Mr. Vaughn “lied about their sophistication, the safety and security of the [Cavalier Union] promissory notes, and [Cavalier Union’s] financial condition” and “claimed that [Cavalier Union] used investor money to invest in a broad range of business ventures, such as restaurants, real estate, alternative energy, and assisted living facilities.”

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On March 7, 2016, Lax & Neville LLP, together with a number of other concerned law firms, submitted a letter to Financial Industry Regulatory Authority (“FINRA”) urging it to take action in light of Credit Suisse’s repeated violations.  In particular, the letter sought to address Credit Suisse’s current Employment Dispute Resolution Program (EDRP), which prevents employees from exercising their right to resolve disputes through FINRA arbitrations.  A second letter was sent to FINRA on July 19, 2016.

On July 22, 2016, FINRA released a Regulatory Notice addressing “Forum Selection Provisions Involving Customers, Associated Persons and Member Firms.”  Therein, FINRA stated that it “considers actions by member firms that require associated persons to waive their right under the Industry Code to arbitration of disputes at FINRA in a predispute agreement as a violation of FINRA Rule 13200 and as conduct inconsistent with just and equitable principles of trade and a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).”  FINRA further noted, “a member firm cannot use an existing non-compliant agreement as a basis to deny an associated person the right to FINRA arbitration as specified in FINRA rules, without violating FINRA rules.”   Accordingly, FINRA has determined that the EDRP, which Credit Suisse has insisted its employees follow, violates FINRA rules and cannot be relied upon in resolving disputes with Credit Suisse.

The Regulatory Notice further noted that FINRA has a statutory obligation to enforce compliance by member firms and warned that “[m]ember firms with provisions in predispute agreements that do not comply with FINRA rules may be subject to disciplinary action.” Specifically, “FINRA may sanction its members or associated persons for violating any of its rules by ‘expulsion, suspension, limitation of activities, functions, and operations, fine,  ensure, being suspended or barred from being associated with a member, or any other fitting sanction.’”  In light of this, FINRA recommends that member firms review their predispute agreements to ensure compliance.

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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.

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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.

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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.

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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.

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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.

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On April 29, 2016, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 4C of The Securities Exchange Act of 1934, Section 203(k) of The Investment Advisers Act of 1940, and Rule 102(e) of The Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and A Cease-and-Desist Order (the “Order”) against Santos, Postal & Company, P.C. (“Santos, Postal & Co.”), an accounting firm, and Joseph A. Scolaro, CPA (“Scolaro”), a Santos, Postal & Co. partner since 2004 (collectively the “Respondents”).  The Order involves improper examinations by Santos, Postal & Co. of its clients’ funds, of which it had custody.  Further, Santos, Postal & Co. and Scolaro filed two (2) Forms ADV-E with materially false statements relating to the examinations.  Santos, Postal & Co. has been registered with the SEC’s Public Company Accounting Oversight Board since 2010, and Scolaro regularly conducted public accounting services before the SEC.

The Respondents’ improper examinations relate to the misappropriation of client funds by SFX Financial Advisory Management Enterprises, Inc.’s (“SFX”) Vice President, Brian J. Ourand (“Ourand”).  SFX first engaged Santos, Postal & Co. to perform its examinations in 2004 and continued to engage them until 2012 when SFX withdrew its registration with the SEC.

Santos, Postal & Co. is a certified public accounting and management consulting firm based in Rockville, Maryland, that provides accounting, tax, and auditing services.  Scolaro was one of five partners and owned 25% of Santos, Postal & Co.  He was the only engagement partner for services for SFX.

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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.

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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.