New York Securities Lawyer Blog

Published on: May 26, 2015

LPL Financial LLC Violates FINRA Supervision Rules During Its Expansion

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.

Published on: April 16, 2015

Two Former Brokers Sue UBS For its Management and Sales Practices Related to the Puerto Rico Bond Funds.

By Lax & Neville LLP

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.

Published on: April 6, 2015

FINRA Bars Broker Anthony “Tony” Warren Thompson and Thompson Securities, LLC for Material Misrepresentations in Connection with the Sale of Private Note Offerings

By Lax & Neville LLP

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.

Published on: April 3, 2013

Lax & Neville LLP Investigating Claims Against UBS For Losses In The UBS Willow Fund LLC

By Lax & Neville LLP

Lax & Neville LLP is investigating claims on behalf of investors regarding possible misconduct in connection with UBS Financial Services, Inc.’s (“UBS”) sale and marketing of the UBS Willow Fund LLC (“UBS Willow Fund”). UBS recommended the Willow Fund to its investors as a distressed debt fund. In actuality, contrary to the representations made by UBS, the Willow Fund deviated from that investment strategy, and instead invested in speculative sovereign debt credit default swaps (“CDS”). The Willow Fund’s investment in sovereign debt CDS was much riskier and speculative than the investment strategy that UBS disclosed to its customers. Therefore, UBS customers were never informed of the true nature of the Willow Fund’s investment strategy. Due to this undisclosed strategy, the Willow Fund’s value and worth drastically declined, causing investors to suffer significant losses, which could be as high as 70%.

Published on: March 19, 2012

“ARAVALI FUND LOSSES -TIME MAY BE RUNNING OUT”

By Lax & Neville LLP

Lax & Neville LLP has been retained by several investors who lost money in the Aravali Fund claiming it was inappropriately sold by Deutsche Bank Securities and other brokerage firms in 2006 and 2007. The Aravali Fund was sold to investors who were seeking income and safety of principal as an alternative to a portfolio of municipal bonds. In reality, the Aravali Fund was a very risky interest rate arbitrage hedge fund, and not long after inception, the fund plummeted in excess of 90% in value and was liquidated. A large FINRA arbitration award was rendered against Deutsche Bank for sales practice abuses concerning the selling and marketing of the Aravali Fund. The FINRA arbitration panel found Deutsche Bank liable for the investor’s losses in the amount $803,850, which appears to represent about half of the client’s investment loss in the Aravali Fund. Lax & Neville has been successful in obtaining significant settlements for its clients who invested in the Aravali Fund. Investors only have (6) six years from when they purchased the Aravali Fund to file a claim. Once the (6) six years have elapsed, an investor’s claim is no longer eligible for submission to FINRA arbitration. If you have lost money investing in the Aravali Fund or have information about Deutsche Bank’s marketing of the Aravali Fund, please call Lax & Neville LLP, (212) 696-1999.

Published on: November 23, 2010

Procedures for Madoff Clawback Avoidance Actions Approved

By Lax & Neville LLP

On Wednesday, November 10, 2010, Judge Lifland approved an order outlining the procedures for the soon to be filed Madoff clawback lawsuits. Lax & Neville, LLP, along with other law firms, opposed the Trustee’s motion and asked the Court to stay all proceedings until the Second Circuit ruled on the Net Equity issue. Judge Lifland denied the request. In anticipation of that result, Lax & Neville, LLP, again working with other firms, negotiated with Baker & Hostetler to modify the procedures proposed by the Trustee to better protect the rights of victims. Those procedures were approved by Judge Lifland.

Published on: July 26, 2010

Madoff Trustee To Bring Clawback Actions Against Victims

By Lax & Neville LLP

Today an article appeared in the Wall Street Journal (“WSJ”) indicating that the Trustee for the Bernard L. Madoff Investment Securities liquidation, Irving Picard, intends to sue 1,000 Madoff victims in clawback actions. The clawback actions will be brought through an adversarial proceeding in the Bankruptcy Court before the Honorable Judge Lifland. Mr. Picard stated that he will likely sue what he has incorrectly described as “net winners.” A copy of the article is available with an online subscription to the WSJ here. You can also find some commentary on the story here.

Published on: May 27, 2010

MAT Five

By Lax & Neville LLP

A large FINRA arbitration award was recently rendered against Citigroup Inc. (“Citigroup”) for sales practice abuses concerning Citigroup’s selling and marketing of the MAT Five LLC (“MAT Five”). The MAT Five had a $500,000 minimum investment requirement and was promoted to fixed-income investors who were seeking preservation of capital. Citigroup represented that the MAT Five was designed to produce stable cash flows in a tax-advantaged arbitrage opportunity. In actuality, the MAT Five was a very risky investment. Based on these claims, our firm has filed numerous arbitrations against Citigroup on behalf of investors and customers of Citigroup who invested in the MAT Five.