Florida Securities Fraud Lawyer Blog
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The Department of Justice announced that high-ranking officials of the governing body for soccer worldwide – referred to as “football” outside of the United States – the Fédération Internationale de Football Association (“FIFA”), and others have been charged with racketeering, wire fraud, money laundering, and bribery.  According to the Justice Department, the soccer officials allegedly conspired to solicit and receive in excess of $150 million in bribes and kickbacks from sports marketing executives and others in return for their official support.  The alleged kickbacks relate to the commercialization of the media and marketing rights for various soccer events including, FIFA World Cup qualifying matches, the CONCACAF Gold Cup, and the CONCACAF Champions League, as well as the sponsorship of the Brazilian national soccer federation by a major U.S. sportswear company.

FIFA is comprised of more than 200 member associations globally, each representing a particular nation or territory, including the United States and four U.S. territories overseas.  Six continental confederations assist FIFA in governing soccer in different regions of the world.  The U.S. Soccer Federation is a member of a group of 41 associations known as CONCACAF which stands for the Confederation of North, Central America and Caribbean Association Football and is headquartered in Miami, Florida.  Other CONCACAF member nations include Canada, Mexico, Jamaica, Cuba and the Bahamas.

The Justice Department alleges that 14 defendants, including two current FIFA vice-presidents and the current and former presidents of CONCACAF, have participated in a 24-year scheme of corruption and bribery.  Swiss authorities arrested seven of the defendants in Zurich at the request of the United States, Jeffrey Webb, Eduardo Li, Julio Rocha, Costas Takkas, Eugenio Figueredo, Rafael Esquivel, and Jose Maria Marin.  In addition, the Department of Justice announced that four individuals and two companies have already pleaded guilty they include Charles Blazer, the former general secretary of CONCACAF, and Jose Hawilla, the owner and founder of Traffic Group, a multinational sports marketing group based in Brazil.

The statement by the Justice Department indicates that the indicted and convicted defendants face maximum sentences of 20 years for the charges of RICO conspiracy, conspiracy to commit wire fraud, conspiracy to commit money laundering, and obstruction of justice.  In addition, the government also claims that Eugenio Figueredo could have his U.S. citizenship revoked if convicted of naturalization fraud.

Acting U.S. Attorney Kelly Currie stated that the 47-count indictment is not the “final chapter” in the government’s investigation – insinuating that additional indictments may be coming.

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According to the Securities and Exchange Commission (“SEC”), it has filed suit against a Texas retirement planning firm and its principals in connection with their practices in the sales of life settlement investments.  The SEC’s Complaint filed in the United States District Court for the Northern District of Texas names as Defendants NFS Group, LLC d/b/a Novers Financial a/k/a Safe Retirement Experts and its owners Christopher A. Novinger and Brady J. Speers, both residents of Mansfield, Texas.

According to the Complaint, the Defendants made false and misleading statements to investors to induce them to purchase fractional interests in third-party life insurance policies known as life settlements. Investors in fractional life settlements receive a portion of the future benefits payable on the life insurance policy when the insured dies. Typically, life settlements can only be sold to “accredited” investors who meet specific income or net worth requirements (i.e. individual net worth of $1,000,000, not including primary residence, or income of $200,000 in each of the 2 most recent years.) According to the SEC, the Defendants improperly qualified some of the investors by including anticipated income that the investors had not yet received such as 20 years-worth of future Social Security and pension benefit payments.

The SEC alleges that, between February 2012 and January 2014, Novinger and Speers fraudulently misrepresented investments in life settlements as “safe, guaranteed investments” that were “risk free” and “federally insured.” The Complaint also alleges that Novinger and Speers held themselves out to the public on their radio show “Retirement Experts Radio Show” as licensed financial consultants and “experts”, when the SEC claims that they actually have little to no training or expertise in securities and financial products.  In addition, the pair has previously been sanctioned by securities regulators in Oklahoma, Texas, and California.

The SEC’s Complaint states that the life settlements at issue were issued by Conestoga International, LLC, a Puerto Rico company, and EDU Financial Strategies, LLC, an Indiana company.

In the SEC’s Complaint, it is seeking a permanent injunction against violations of federal securities laws, disgorgement of ill-gotten gains, pre-judgment interest, civil penalties, and other relief as the court deems appropriate.

Before making any investment, investors should research the potential investment and the broker. Some helpful sites offering free information for investors are FINRA.org, Investor.gov, and NASAA.org.

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According to the Financial Industry Regulatory Authority (“FINRA”), it has entered into a Letter of Acceptance, Waiver and Consent (“AWC”) with brokerage firm LPL Financial LLC for supervisory failures in a number of areas.  The AWC reflects that LPL neither admitted nor denied FINRA’s charges, but consented to the entry of FINRA’s findings.  According to the AWC, LPL will pay a fine of $10 million and approximately $1.7 million in restitution to the effected purchasers of non-traditional ETFs.

According to the AWC, from 2007 to 2013, the number of LPL’s registered representatives increased from around 8,300 to 17,500.  In that same time frame, LPL’s revenue nearly doubled from $2.28 billion to $4.05 billion.  FINRA claimed that LPL didn’t dedicate sufficient resources to meet its increased supervisory obligations resulting from this growth.

FINRA asserted that LPL failed to have adequate supervisory systems in place with respect to the sales of complex, synthetic exchange traded funds, such as leveraged, inverse, and inverse-leveraged ETFs (“non-traditional ETFs”); variable annuity contracts; non-traded real estate investment trusts (“REITs”); and Class C mutual fund shares.  In addition, FINRA found that LPL failed to send more than 14 million trade confirmations to its customers.

Some of the specific findings by FINRA:

Non-traditional ETFs:  LPL failed to monitor the length of time non-traditional ETFs were held in its customers’ accounts.  Most non-traditional ETFs are designed to meet their stated objections on a daily basis and are typically inappropriate for a buy-and-hold investment strategy.   FINRA’s review found that some LPL customers held these securities for more than a year.  LPL did not have a system in place to monitor compliance with its written procedures that required brokers to monitor non-traditional ETFs held in customer accounts on a daily basis.  In addition, the firm also failed to monitor compliance with its established allocation limits concerning the maximum allowable allocation of non-traditional ETFs per client which ranged from 0 percent (accounts with an investment objective of “income”) to 15 percent (accounts with investment objectives of “growth” or “trading”).   The firm also did not monitor compliance with its requirement that brokers complete an ETF training course before engaging in non-traditional ETF transactions.

Variable Annuities:     LPL brokers were required to disclose whether customers would incur fees or sacrifice benefits when switching annuity contracts.  According to FINRA, LPL failed to identify that some of its brokers did not disclosure that customers lost death benefits on surrendered annuities or did not disclose to customers the surrender fees they would incur for the annuity switch.

Non-traded REITs:     LPL failed to have adequate procedures to identify accounts that would be eligible for volume price discounts.

Class C Shares:           LPL’s thresholds for determining whether Class C shares were appropriate were set too high to be effective.

 

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According to the Financial Industry Regulatory Authority (“FINRA”), RBC Capital Markets, LLC (“RBC”) has agreed to a Letter of Acceptance, Waiver and Consent (“AWC”) concerning its sales of complex reverse exchangeable securities commonly called “reverse convertibles.”  RBC is a brokerage firm that is indirectly owned by the Royal Bank of Canada.

A reverse convertible is a structured investment product that typically consists of a high-yield, short-term note that is tied to the performance of some other asset, typically a stock or basket of stocks, an index, or some other instrument.  The underlying asset is usually unrelated to the issuer.  Most reverse convertibles have a $1,000 minimum investment, with maturity dates ranging from three months to one year.  Reverse convertibles carry considerable risk, because if the value of the underlying asset falls below a certain level, the investor could receive an amount that is less than the investor’s original investment upon maturity.  Because of the added risk, the coupon rate on the note component of a reverse convertible is usually higher than the yield on a conventional debt instrument of the issuer with a similar maturity, or of an issuer with a comparable debt rating.

According to the AWC, RBC consented to FINRA’s findings that RBC did not have an adequate surveillance system in place to ensure compliance with securities laws and its own internal guidelines concerning the suitability of transactions in which reverse convertibles were sold to RBC’s customers. According to FINRA, RBC had written supervisory procedures establishing the suitability guidelines for the sale of reverse convertibles.  Specifically, RBC’s guidelines restricted reverse convertible sales to investors with the following profile: $100,000 or more in annual income; at least $100,000 in liquid assets; a net worth of $250,000 or more; and at least two years of prior investment experience. The problem, according to FINRA, was that RBC’s electronic surveillance system did not flag the reverse convertible transactions where the customer did not meet RBC’s established criteria for purchasing reverse convertibles.  FINRA identified 364 unsuitable transactions of reverse convertibles in 218 customer accounts during the period between 2008 and 2012.  The customers incurred losses in those transactions of $1.1 million.

RBC did not admit or deny the findings in the AWC, but consented to the entry of FINRA’s findings and to payment of a $1,000,000 fine and $434,000 in restitution to its customers.

 

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The United States Court of Appeals for the Eleventh Circuit recently held that “clawback actions brought by court-appointed receivers are not categorically exempt from the Federal Arbitration Act.”  Wiand v. Schneiderman, 2015 WL 525694 (C.A. 11 (Fla.)).  The appellate court affirmed the district court’s decision to decline to vacate an arbitration award in a clawback action.

The lower court case was one of approximately 150 clawback actions brought by the court-appointed receiver of six hedge funds involved in a Ponzi scheme orchestrated by Arthur Nadel.  The receiver initiated the clawback suits to recover “profits” received by an investor in Nadel’s Ponzi scheme so they could be redistributed among all the investors who lost money in the scheme.  Nadel, a former Florida fund manager was dubbed a “mini-Madoff” after admitting to defrauding investors out of $168 million in February 2010.  In October 2010 he was sentenced to 14 years in prison.  In 2012, Nadel died in prison at the age of 80.

The clawback action at issue was initiated in January 2010 in the U.S. District Court for the Middle District of Florida against the estate of Herbert Schneiderman.  Schneiderman invested $100,000 with Victory Fund, Ltd., one of the hedge funds connected with Nadel’s scheme.  Schneiderman received total payments from the fund in the amount of $263,660.  The receiver filed suit against Schneiderman’s estate to recover the fake “profits” of $163,660.  The estate moved to compel arbitration based on an arbitration provision contained in the Subscription Agreement and Limited Partnership Agreement between Schneiderman and the Victory Fund.  The district court granted the motion to compel arbitration.  The parties agreed to arbitrate before the American Arbitration Association (“AAA”). Thereafter, the AAA arbitrator granted the summary judgment motion filed by Schneiderman’s estate and entered a Final Order and Award dismissing the receiver’s claims as barred by the Florida probate statutes.  In addition, the arbitrator denied the receiver’s motion declaring the agreement containing the arbitration provision void.   Subsequently, the receiver moved to vacate the Award which was also denied.

In his appeal of the denial of the motion to vacate, the receiver argued that: 1) the receivership statutes creating his position preclude the use of arbitration in clawback actions; 2) the contract containing the arbitration provision is void; 3) the district court erred in sending all of the claims to arbitration, even those with entities with which the investor had no agreement whatsoever; and 4) the arbitrator exceeded his powers.

The Court of Appeals found all of the receiver’s arguments to be flawed and affirmed the judgment of the district court.   The Court of Appeal’s full decision in Wiand may be read here.

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According to the Department of Justice, rating agency Standard & Poor’s Financial Services, LLC (“S&P) and its parent company McGraw Hill Financial, Inc. have agreed to settle multiple lawsuits brought by the federal government, 19 states, and the District of Columbia concerning ratings S&P gave to certain mortgage securities just before the 2008 financial meltdown.  The press release issued by the Justice Department said the ratings at issue were given to residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) during the period 2004 to 2007.  RMBS are created when a bank or other financial institution pools together mortgage loans. CDOs pool together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors.

The lawsuit filed by the Justice Department in 2013 alleged that S&P had engaged in a scheme to defraud investors by knowingly inflating the credit ratings it gave to RMBS and CDOs which resulted in substantial losses to investors and ultimately contributed to the worst financial crisis since the Great Depression .  The government claimed that S&P’s rating decisions were based, in part, on its business concerns, rather than independent and objective as they were required to be.   Reportedly, lawsuits filed by Arizona, Arkansas, California, Connecticut, Colorado, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington, and the District of Columbia contained similar allegations.

As a part of the settlement, S&P agreed to a statement of facts that contained an admission by S&P that its ratings for CDOs were partially made based on the effect they would have on S&P’s business relationship with issuers.  It also admitted that, despite knowledge within the S&P organization in 2007 that many loans in RMBS transactions it was rating were delinquent and losses were probable, it continued to issue and confirm positive ratings.

S&P agreed to pay $1.375 billion to settle the allegations by the federal government, 19 states, and the District of Columbia.  Of that, $687.5 million will be paid to the federal government as a penalty.  The remaining $687.5 million will be shared by the 19 states and the District of Columbia in an allocation agreed to by the states.   It is the largest penalty of its type ever paid by a ratings agency.

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According to Regulatory Notice 14-49 (“RN 14-49”) issued by the Financial Industry Regulatory Authority (“FINRA”), FINRA is increasing the pay for arbitrators assigned to hear FINRA cases and passing the costs of the increase on to the parties.  The new rule applies to all cases filed on or after December 15, 2014, it is not retroactive.

FINRA states that the arbitrator pay increase will be funded through higher surcharges and processing fees assessed to FINRA member firms, as well as, an increase in the claim filing fees paid by investors, FINRA member firms, and associated persons of FINRA member firms who initiate claims seeking more than $500,000 in damages or an unspecified amount of damages.  In addition, the per session cost of hearings with three arbitrators in claims of more than $500,000 will also be raised.

Currently, the honoraria paid to FINRA arbitrators is $200 for each hearing session in which the arbitrator participates, either by telephone or in-person.  One hearing session is any hearing lasting up to 4 hours.  Therefore, a full day of hearings lasting 8 hours is considered by FINRA to be 2 sessions. Under the new rule, the arbitrators will be paid $300 for each hearing session or $600 for a full day consisting of 2 sessions.  In addition, the Chairperson of the arbitration panel will be paid an additional $125 per day, up from the current $75 per day.  The pay for deciding a simplified case in which no hearings are conducted has also been increased from $125 to $350.

In order to fund the honoraria increase, RN 14-49 indicates that the surcharge and process fees assessed against FINRA members only will increase in cases seeking damages over $250,000.  Member firms currently pay a pre-hearing process fee and a hearing process fee.  The amended rule combines both into one processing fee that will be due at the time the parties are sent the arbitrator lists.

All FINRA claimants, regardless of type, will pay an increased claim filing fee for all cases over $500,000 or with an unspecified amount of damages.  Each hearing session fee, which is based on the non-refundable portion of the claim filing fee, will also increase as a result.

The new fees will not apply to cases filed prior to December 15, 2014.

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According to his BrokerCheck Report, Jeffrey Brian Grove of Melbourne, Florida has been permanently barred from the financial services industry by the Financial Industry Regulatory Authority (“FINRA”).   According to FINRA, Grove was employed as a registered representative at the Melbourne, Florida branch office of Charles Schwab & Co., Inc. from 1999 until he was terminated on August 29, 2014.   According to his Central Registration Depository (“CRD”) report maintained by FINRA, at the time he was terminated, Grove held securities licenses 7, 9, 10 and 63.  On September 25, 2014, Schwab reported to FINRA that the firm discharged Grove on August 29, 2014 for allegedly purchasing unauthorized office equipment through Schwab’s corporate procurement system then re-selling the equipment to other third party individuals and pocketing the sale proceeds.   At the time of his termination, Grove handled approximately 250 customer accounts according to Schwab.

On November 17, 2014, a Letter of Acceptance, Waiver and Consent (“AWC”) was entered into by Grove and FINRA.  Grove neither admitted nor denied the findings set forth in the AWC.  According to the AWC, between February and August 2014, Grove submitted orders for office equipment for his branch office through Schwab’s equipment procurement system which were automatically approved by Schwab upon purchase.  The AWC reflects that, in reality, the equipment was taken from Grove’s office and sold to unknown third party individuals for approximately $1 million.  FINRA alleged that Grove then converted the sale proceeds to his own personal use and benefit.  According to FINRA, the conversion of funds was a violation of FINRA Rule 2010 which states “a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

In the AWC, Grove agreed to a permanent bar from associating with any FINRA member firm in any capacity, including clerical or ministerial functions.  In addition to the FINRA allegations, a review of the Orange County court records reflects that a first-degree felony charge of conspiracy to traffic in oxycodone is pending against Grove.  A $50,000 bond was filed on September 30, 2014.  The court docket reflects that trial has been set for the three-week trial period beginning January 5, 2015.  The relation, if any, of the pending criminal allegations to the Schwab allegations is unknown.

To review the BrokerCheck report of any broker, click here.

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The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s (“FINRA”) proposed revisions to NASD Rule 2340 regarding per share estimated valuations of unlisted REITs held by customers.  FINRA first submitted the proposed rule changes in January 2014.  This week the SEC announced its approval of the proposed rule changes.   No effective date for implementation of the amended rule has been announced.

A real estate investment trust (“REIT”) is company that owns, and may also manage, income producing real property, such as apartment buildings or shopping centers.  To generate funds to purchase its portfolio of real estate, a REIT will pool the capital of many investors.  This permits smaller investors who may not be able to individually purchase real estate properties to participate in the real estate market.

There are two types of REITs: those that trade on a national securities exchange and those that do not. The amended rule specifically addresses REITs that do not trade on a national securities exchange, commonly referred to as “non-traded REITs.”  Because a non-traded REIT has a very limited secondary market, it is generally illiquid for long periods of time. Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return.

The lack of an open market for non-traded REITs makes them difficult to value.  Typically, brokerage firms have historically listed a per-share price for non-traded REITs as $10, without regard to their true value.  The newly approved rule amendment does away with this arbitrary valuation pricing.  Amended NASD Rule 2340 requires brokerage firms to develop and reflect on customer account statements a per-share estimated value for an unlisted REIT that is reasonably designed to ensure that it is a reliable value.

Brokerage firms can use either of the two methodologies proposed by FINRA, to wit: the net investment method or the appraised value method.  The net investment method requires that firms state the “net investment” amount revealed in the issuer’s most recent periodic report based on the “amount available for investment” percentage contained in the REIT’s offering prospectus.  If the prospectus does not reflect the “amount available for investment,” the net investment number should be based on another equivalent disclosure showing the estimated percentage deducted from the total amount of shares registered for sale to the public to cover commissions, fees and other expenses.

The appraised value method will depict the appraised value of the assets and liabilities of the REIT’s portfolio shown in the issuer’s most recent report.   The valuations must be performed at least annually in accordance with standard industry practice, and be conducted or verified by a third-party valuation expert.

The newly approved rule also mandates that brokerage firms disclose on customer account statements that non-traded REITs are not listed on a securities exchange, are illiquid, and if sold, the per-share price received may be less than the per-share estimated value reflected on the account statement.

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A Financial Industry Regulatory Authority (“FINRA”) hearing panel has expelled brokerage firm Success Trade Securities and ordered $13.7 million in restitution for alleged securities fraud and for running a Ponzi scheme.  In addition to expelling the Washington, D.C. based firm, the FINRA hearing panel also barred Success’ President and CEO, Fuad Ahmed, from any association with any FINRA member firm in any capacity.  Success and Ahmed were jointly and severally ordered to pay $13.7 million in restitution to 59 investors, the bulk of which are current and former professional athletes.

According to FINRA, it filed a complaint against Success and Ahmed in April 2013 asserting fraud in connection with the sales of $19.4 million worth of promissory notes issued by Success Trade, Inc. (“Success Trade”), Success’ parent company.   According to the hearing panel’s decision, the offering documents omitted material facts that would have shown that Success Trade was in financial trouble, having lost money every year for more than a decade, except for 2007.

FINRA claimed that Success and Ahmed also misrepresented to investors that the proceeds from the sale of the promissory notes would be used to promote Success Trade’s business when, in reality, investors’ funds were used to make unsecured personal loans to Ahmed and to make interest payments to earlier investors, in true Ponzi-scheme fashion. FINRA’s press release also reflects that Ahmed falsely represented to investors that the businesses were thriving and about to be listed on a European exchange and that he was soon going to acquire an Australian company for $15 million.

According to Reuters, some of the harmed investors include Detroit Pistons guard Brandon Knight, Cleveland Browns cornerback Joe Haden, a defensive tackle for the Miami Dolphins, Jared Odrick, and former Redskins running back Clinton Portis.  FINRA claimed that many of the athlete investors were financially inexperienced, just beginning their careers out of college.

The FINRA decision will become final in 45 days if not appealed to or called for review by FINRA’s National Adjudicatory Council.

In November, a former Success Trade broker, Jinesh “Hodge” Brahmbhatt, was barred from FINRA for failing to appear and give testimony.

If you believe you have been harmed by a FINRA brokerage firm, click here to see if you may have a case.