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On March 11, 2021, a FINRA arbitrator awarded expungement relief to George D. Ewins Jr. and Richard J. Kowalski, former Merrill Lynch financial advisors.  Ewins and Kowalski were represented by Robert J. Moses of Lax & Neville LLP.  Ewins and Kowalski sought expungement of a customer complaint from their registration records maintained by the Central Registration Depository (“CRD”).  CRD is the central licensing and registration system for the securities industry and its regulators, which contains information made available to the public via FINRA’s BrokerCheck. Pursuant to FINRA Rules 2080 and 13805, an arbitrator may grant an expungement of customer dispute information from a registered representative’s CRD record.  In the underlying arbitration filed by the customers, the customers alleged that Ewins, Kowalski, Merrill Lynch and Bank of America (“BOA”) sold Merrill Lynch proprietary volatility indices linked to structured notes known as Strategic Return Notes which were unsuitable in light of their investment objectives.  Merrill Lynch and Bank of America settled with the customers which resulted in the customers’ not having any out-of-pocket losses.  Ewins and Kowalski did not contribute to the settlement.

Pursuant to FINRA Rule 13805 of the FINRA Code of Arbitration Procedure (“Code”), the FINRA arbitrator in the expungement proceeding made the following FINRA Rule 2080 affirmative finding of fact: “[t]he claim, allegation, or information is false.”  According to the Award, the arbitrator reached this conclusion “based upon the fact that neither Ewins nor Kowalski was responsible for the failure of Merrill Lynch and BOA to make the requisite disclosures concerning the fixed costs associated with the Strategic Return Notes. Both Ewins and Kowalski testified credibly that they performed necessary due diligence before they recommended the Strategic Return Notes for the customers. There is no reason to conclude that either Ewins or Kowalski could have reasonably questioned the validity, accuracy and completeness of the Strategic Return Notes offering materials prior to the SEC and FINRA actions. One of the customers who filed the underlying arbitration submitted a detailed written response to Ewins and Kowalski’s request for expungement and testified at the expungement hearing that he “personally do[es] not have a problem with a potential expungement of the petitioner[s’] record[s] if they have met the burden for their record to be cleared,” and that he did not want Ewins and Kowalski to have adverse consequences from having the disclosures on their CRDs.

As noted by the arbitrator in the Award, Merrill Lynch agreed to pay a $10 million penalty to settle charges by the SEC that Merrill Lynch violated securities laws and was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.  Merrill Lynch also agreed to a Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA in connection with the same disclosure violations.

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On February 4, 2021, the Securities and Exchange Commission (“SEC”) charged three individuals and affiliated entities with running “a Ponzi-like scheme” that raised over $1.7 billion by selling unregistered, high commission private placements issued by GPB Capital Holdings, an alternative asset management firm.  The SEC alleges that David Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, lied to investors about the source of money used to make the annual distribution payments to investors.  According to the Complaint filed by the SEC in the U.S. District Court, Eastern District of New York, GPB Capital actually used money raised from investors to pay portions of the annualized 8% distribution payments due on private placements sold to earlier investors.  The SEC complaint alleges that GPB Capital, Mr. Gentile, and former GPB Capital managing partner, Jeffrey Lash, manipulated the financial statements of certain funds managed by GPB Capital to give the false appearance that the funds’ income was sufficient to cover the distribution payments – when in fact it was not.

In addition, the SEC complaint alleges that GPB Capital allegedly violated whistleblower protection laws by including language in separation agreements that forbade individuals from coming forward to the SEC, and by retaliating against whistleblowers.

Financial advisors sold GPB Capital private placement investments to their customers, including retirees and unsophisticated investors.  The 8% annual distribution payment appealed to investors.  Those payments, however, stopped in 2018.  In 2019, GPB’s chief financial officer was indicted and GPB Capital reported sharp losses across its funds.  Following the announcement, some broker-dealers allegedly instructed their broker-dealer clients to remove GPB issued private placements from their platforms within 90 days.  Investors of the GPB private placement investments paid as much as 12% of the money they invested to broker-dealers in the form of fees and commissions.   Brokers and financial advisors allegedly touted and pushed these investments onto their clients, thousands of which are retirees and unsophisticated, and in some instances over concentrated their portfolios in GPB Capital.  Private placement investments are risky investments only suitable for sophisticated, accredited investors who understand the risks and can afford to lose their investment.  Financial advisors and brokers have duties to recommend investments that are suitable to their clients and perform due diligence on the investment products they recommend and sell to investors.  If your financial advisor sold GPB Capital investments to you, you may have a claim to recover your investment losses.

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Lax & Neville LLP is investigating claims involving Amarin, a speculative biotech stock recommended and sold to investors by financial advisors. Amarin is a biopharmaceutical company with one significant commercial product, Vascepa, a fish oil drug designed to reduce cardiovascular risk among patients with elevated risks of cardiovascular events and elevated triglyceride levels.  Amarin’s stock skyrocketed from $3 a share to $18 a share in a single day following the release of positive clinical data in September 2018, (and traded in that range, including in the mid to low $20s during the next 18 months), but declined to low single digits in March 2020 after losing a key patent litigation decision.  See Amarin Pharma v. Hikma Pharmaceuticals USA Inc., Case No. 2:16-cv-02525-MMD-NJK (D. Nev. 2016).  The patent litigation was a known risk to the stock, and eventually caused a collapse in Amarin’s share price.

Upon information and belief, financial advisors at Morgan Stanley and other brokerage firms solicited and concentrated customer accounts in Amarin, even while the company was defending its patent on Vascepa in litigation.  This litigation was a material risk in any Amarin investment.  If generic versions of Vascepa could enter the market, Amarin’s sales would be substantially reduced, and even if the introduction of generic versions did not start right away, the perception that their development would create could also materially impact Amarin’s value and stock price.

Upon information and belief, financial advisors failed to adequately disclose the risks of investing in Amarin and in having concentrated positions in one stock.  Financial advisors have duties, including a fiduciary duty, to provide customers with full and fair disclosure of all material facts, such as the risks of litigation, the ongoing risks of overconcentration; and to diversify an investor’s portfolio.  Financial advisors also have a duty to continually update “buy,” “hold,” and “sell” recommendations for any security.  Financial advisors must develop a suitable plan for customers’ investments, and to recommend transactions and investment strategies only where they have a reasonable basis to believe that their recommendations are suitable for the customer based on the customer’s financial needs, investment objectives, investment experience, risk tolerance, and other information that they know and have obtained about the customer.  An investment in Amarin, particularly in concentrated positions is risky and not suitable for all investors.  The failure by a financial advisor to provide suitable investment advice with fair and balanced risk disclosures is a violation of his or her fiduciary duties and other duties.

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On August 31, 2020, the Massachusetts Superior Court confirmed a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award against Credit Suisse for more than $2 million owed to four former Credit Suisse advisors represented by Lax & Neville LLP, including approximately $1.6 million in unlawfully withheld deferred compensation, more than $83,000 in costs and more than $411,000 in attorneys’ fees.

The former Credit Suisse advisors sued Credit Suisse for, among other things, violations of the Massachusetts Wage Act, breach of contract, breach of the implied covenant of good faith and fair dealing and unjust enrichment after it closed its U.S. wealth management business on October 20, 2015 and unlawfully cancelled their earned deferred compensation.  On February 14, 2020, a three-member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay compensatory damages totaling $1,602,609.95 plus costs, interest and attorneys’ fees.

Credit Suisse petitioned the Court to vacate in part or modify the Award, challenging the Panel’s authority to award attorneys’ fees on the basis that the advisors had no contractual right to attorneys’ fees and that Credit Suisse did not agree to submit the issue of attorneys’ fees to the Panel.  In rejecting Credit Suisse’s petition and refusing to modify or vacate the Award, the Court held that Credit Suisse itself had originally submitted a request for attorneys’ fees against its four former advisers, giving the Panel the authority it needed to award attorneys’ fees.  Under New York law, which governed the parties’ agreements, a mutual request for attorneys’ fees forms a binding contract between the parties and authorizes a Panel to award attorneys’ fees.  The Court further noted that given Credit Suisse’s many losses in the Credit Suisse Deferred Compensation Arbitrations, its surprise at, and defense to, the Panel’s award of attorneys’ fees when both parties had requested them was unreasonable, stating that the “theory should have come as no surprise to Credit Suisse, which had already been required to pay the attorney’s [sic] fee of the prevailing party in another arbitration,” referencing the $585,307 in compensatory damages, $131,694 in interest and $146,326 in attorneys’ fees awarded to Brian Chilton, another former Credit Suisse financial advisor represented by Lax & Neville LLP.  Another $1.34 million in attorneys’ fees were also awarded to former Credit Suisse advisors Joseph Lerner and Anna Winderbaum and Richard DellaRusso and Mark Sullivan, all of whom were represented by Lax & Neville LLP, as well as Christian Cram, Andrew Firstman and Mark Horncastle.

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On September 9, 2020, the U.S. District Court for the District of Colorado entered a final judgment by consent against ex-Stifel investment adviser Steven D. Rodemer for allegedly defrauding an elderly widowed client, according to the U.S. Securities and Exchange Commission (“SEC”).

Rodemer, who was registered with the brokerage and investment banking firm Stifel as a general securities representative from November 2011 until his termination by the firm on January 21, 2020, is alleged to have misappropriated $451,889 of his long-time client’s funds from March 2012 through 2019, including $136,098 after May 2015. According to a Financial Industry Regulatory Authority (“FINRA”) letter of acceptance, waiver and consent Rodemer signed on March 23, 2020, Stifel terminated him for taking “money from a client account for his personal use without authorization.” The SEC, which did not name the client in its complaint, alleged that the client had “developed a relationship of trust and confidence” in Rodemer and “relied upon Rodemer for information regarding the balances and transactions in her accounts.” Beginning in March 2012, shortly after he became the client’s power of attorney, Rodemer started misappropriating funds from her and her late husband, using the power of attorney authority to withdraw funds from her brokerage and bank accounts “for a variety of personal expenses, including to cover construction and maintenance costs on his vacation home in Breckenridge, Colorado, to pay insurance premiums, and to fund an undisclosed brokerage account in his wife’s name at another broker-dealer.” Beginning in July 2018, Rodemer then also started using the client’s funds to pay his own personal expenses at gas stations, grocery stores, and hardware stores, as well as to pay his own personal credit card bills.

While Rodemer had initially cooperated in FINRA’s investigation, he ceased doing so in March 2020, and his counsel informed FINRA on March 20, 2020 that he would not appear for on-the-record testimony at any time, in direct violation of FINRA Rules 8210 and 2010. As a result, and upon Rodemer’s signing the previously mentioned letter of acceptance, waiver and consent, FINRA barred Rodemer from the industry, prohibiting him from associating in any capacity with any FINRA member. Subsequently, and immediately after the SEC filed its complaint on September 3, 2020, Rodemer agreed to pay $385,536 to settle the SEC’s claim against him. The final judgment that was entered in the federal district court in Colorado ordered Rodemer to pay this amount as a civil penalty, and according to the SEC’s complaint, he has already returned the misappropriated funds to the client’s account.

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The New Hampshire Bureau of Securities Regulation is reportedly investigating Merrill Lynch and Charles Kenahan, one of its top-producing brokers, over customer complaints alleging “churning” in their accounts that resulted in damages of approximately $200 million. Churning, or excessive trading, occurs when a broker or financial advisor trades securities in a customer’s account at high frequency in order to generate commissions rather than advance the customer’s best interests. According to multiple sources familiar with the New Hampshire securities regulator’s investigation, the churning claims that alerted the regulator stem from two arbitrations filed before the Financial Industry Regulatory Authority (“FINRA”), one by former New Hampshire Governor Craig Benson and the other from Benson’s long-time friend and business partner, Robert Levine.

According to CNBC, which obtained documents from the FINRA arbitrations, Benson’s claim, currently pending before FINRA, names Merrill Lynch, Kenahan, and another Merrill Lynch advisor Dermod Cavanaugh and alleges damages in excess of $100 million due to churning and unauthorized trading. Levine’s arbitration claim sought approximately $100 million in damages based on allegations of churning, unsuitable investment recommendations and misrepresentation.

According to news outlets, Benson and Levine originally met Kenahan through Cavanaugh, who had been the accountant for Cabletron Systems – a company Levine and Benson co-founded out of Levine’s garage. Levine and Benson said they thought they could trust and that Cavanaugh and Kenahan would act in their best financial interests, so they decided to move their individual investment accounts into the care of the two men.

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In October 2019, a Maryland District Court judge sentenced Kevin B. Merrill, a salesman, and Jay B. Ledford, a former CPA, to 22 years and 14 years in federal prison, respectively, each followed by three years of supervised release, arising from an investment fraud Ponzi scheme that operated from 2013 through September 2018 and raised more than $345 million from over 230 investors nationwide. The judge ordered Merrill and Ledford to pay full restitution for victims’ losses, which is at least $189,166,116, plus forfeiture of additional sums still to be determined. Cameron R. Jezierski, a key employee of two companies controlled by Merrill and Ledford, was sentenced in November 2019 to serve 2 years in prison and an additional year of home confinement for his role in the fraud. The criminal charges and recent sentencing stem from an action filed by the U.S. Attorney’s Office for the District of Columbia.

In a parallel action, the U.S. Securities and Exchange Commission’s (“SEC”) filed a complaint in federal district court in Maryland in September 2018 against Merrill, Ledford and Jezierski alleging that, from at least 2013 to 2018, they attracted investors by promising substantial profits from the purchase and resale of consumer debt portfolios. Consumer debt portfolios are defaulted consumer debts to banks/credit card issuers, student loan lenders, and car financers which are sold in batches to third parties that attempt to collect on the debts. Instead of using investor funds to acquire and service debt portfolios—as they had promised— Merrill, Ledford and Jezierski allegedly used the money to make Ponzi-like payments to investors and to fund their own extravagant lifestyles, including $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club. Merrill, Ledford and Jezierski allegedly perpetrated their fraudulent scheme by lying to investors, creating sham documents and forging signature. The victims included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, professional athletes, and financial advisors located in Maryland, Washington, D.C., Northern Virginia, Boulder, Texas, Chicago, New York, and elsewhere.

The SEC obtained an emergency asset freeze and the appointment of a receiver. The receiver is empowered to pursue actions on behalf of the receivership estate to recover assets for the benefit of defrauded investors, victims, and creditors. Avoidance (“clawback”) actions are often brought by a receiver in bankruptcy court after a Ponzi scheme or fraud is revealed. Clawback actions are commenced to recover funds distributed to victims or investors by the fraudster operating the Ponzi scheme or fraud.

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On July 17, 2020, the Supreme Court of the State of New York (Commercial Division) confirmed a FINRA Arbitration Award against Credit Suisse for approximately $6.68 million, including unlawfully withheld deferred compensation, interest, attorneys’ fees, and liquidated damages pursuant to the New York Labor Law.  See Lerner and Winderbaum v. Credit Suisse Securities (USA) LLC, Index No. 652771/2019 (N.Y. Sup. Ct.), Doc. 140.   

The two former Credit Suisse investment advisers, represented by Lax & Neville LLP, sued Credit Suisse for breach of contract, fraud and violation of the New York Labor Law after it closed its US wealth management business in October 2015 and cancelled their earned deferred compensation.  Credit Suisse defended the claims on the grounds that its former advisers voluntarily resigned after it told them they were being terminated, that future compensation by their next employer “mitigated” their damages, and that the New York Labor Law does not apply to deferred compensation.  A three member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay  compensatory damages totaling $2,787,344 and interest, attorneys’ fees, FINRA forum fees, and liquidated damages equal to 100% of the advisers’ unpaid wages pursuant to New York Labor Law § 198(1-a).  The FINRA Panel also recommended that the “Reason for Termination” on the advisers’ Form U-5 be changed from “Voluntary” to “terminated without cause.”

Credit Suisse petitioned to vacate the Award for manifest disregard of the law, “challeng[ing] FINRA’s finding that petitioners’ deferred compensation qualified as wages under Labor Law §198 (1-a).”  Lerner at 3.   Rejecting Credit Suisse’s petition to vacate the Award in its entirety, the Court held:

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On June 4, 2020, the Financial Industry Regulatory Authority (“FINRA”) announced that it ordered Merrill Lynch, Pierce, Fenner & Smith Inc. to pay its customers more than $7.2 million in restitution and interest  resulting from unnecessary sales charges and excess fees incurred by more than 13,000 Merrill Lynch accounts in connection with mutual fund transactions from 2011 to 2017.  FINRA found that Merrill Lynch’s ’s supervisory systems and procedures failed to ensure that certain customers received sales charge waivers and fee rebates that were available to them.

Typically, mutual fund issuers will offer their customers a right of reinstatement, allowing the investors to purchase shares of a mutual fund after previously selling shares of that fund or another fund in the same fund family, without incurring a front-end sales charge, or allowing the investors to recoup some to all of contingent deferred sales charges.

Rather than ensuring that  proper supervisory systems and procedures were in place to identify waivers and fee rebates that were available through rights of reinstatement, Merrill Lynch instead relied on its brokers and investment advisors to manually recognize and apply waivers and rebates for investors and for the financial advisors to manually identify which customers are eligible  for reinstatement rights.  According to FINRA, the manual system was “unreasonably designed… given the number of customers involved, the complexity of determining which customers were due sales charge waivers or fee rebates, and difficulty in calculating the amount of the waiver and rebate.”

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On March 12, 2020, the Securities and Exchange Commission (“SEC”) charged Morgan Stanley with providing misleading information to customers regarding the costs of “wrap fee” programs. Wrap fee programs offer accounts in which customers pay asset-based fees meant to cover investment advice and brokerage services, including the execution of trades. The SEC alleged that nowhere in Morgan Stanley’s retail wrap fee programs was it disclosed to customers that additional fees were charged for certain wrap fee trades that were directed to third-party broker-dealers for execution.

The SEC alleged that Morgan Stanley’s wrap fee practices involved extra costs that were not visible to customers, limiting the customers’ ability to assess the true costs and value of the services for which they were paying.  Morgan Stanley, without admitting or denying the wrongdoing, agreed to pay $5 million to settle the SEC charges. Morgan Stanley’s alleged wrongdoing occurred from October 2012 to June 2017, and the $5 million will be distributed to harmed investors.

Customers of brokerage firms or registered investment advisors are often unaware of all the fees they are charged for the investment advice and services they are receiving. As Melissa Hodgman, associate director in the SEC’s enforcement division, noted, “[i]nvestment advisers are obligated to fully inform their clients about the fees that clients will pay in exchange for services.” If an investment advisor fails to disclose all the fees to his or her customer or charges excessive fees to the customer, the customer may have a claim against the investment advisor, the advisory firm or the brokerage firm where the customer held his or her investments and accounts.

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