Florida Securities Fraud Lawyer Blog
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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.

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The Securities and Exchange Commission (“SEC”) has brought its first enforcement action for whistleblower retaliation under the Dodd-Frank Act against hedge fund advisory firm, Paradigm Capital Management (“Paradigm”).  According to Reuters, the SEC’s case stems from Paradigm’s alleged retaliation against its former head trader, James Nordgaard (“Nordgaard”), after Nordgaard made a whistleblower submission to the SEC about Paradigm.

The SEC claims that Paradigm’s owner, Candace King Weir (“Weir”), conducted client transactions between Paradigm and a broker dealer that she owns, C.L. King & Associates (“C.L. King”), without disclosing to the client that she was effectively participating on both sides of the transactions.  Specifically, the SEC claims that Weir’s trading strategy for her client PCM Partners L.P. II (“PCM”) involved Paradigm’s traders, including Nordgaard, selling securities that had unrealized losses from the hedge fund to a proprietary trading account at C.L. King.  According to the SEC, Weir’s intention was for the realized losses to offset PCM’s realized gains in other securities.

The SEC’s Order Instituting Administrative Proceeding states that, because Weir was the advisor to the PCM hedge fund and the owner of both Paradigm and C.L. King, she had a conflicted role in the transactions which was required to be disclosed to PCM.  According to the SEC’s Order, Paradigm established a conflicts committee to review and approve each of the principal transactions on behalf of PCM, purportedly to satisfy the disclosure and consent requirements.  The conflicts committee, however, was itself conflicted, in that, one of its members was the chief financial officer of both Paradigm and C.L. King.

According to Reuters, Nordgaard reported the conflicted principal transactions involving PCM to the SEC in March 2012.  The SEC claims that at least 83 conflicted principal transactions occurred – 47 of PCM’s securities positions were sold to C.L. King and 36 of those were later repurchased for PCM.

After Nordgaard reported the transactions to the SEC as a whistleblower, he was removed from his position as head trader and stripped of his supervisory responsibilities.  Nordgaard ultimately resigned and later sued Paradigm for retaliation.

According to the SEC, Paradigm and Weir have agreed to pay $2.2 million to settle the charges.  Of that amount, $1.7 million will be distributed to former and current investors in the hedge fund, $181,771 represents prejudgment interest, and $300,000 is a penalty.  The whistleblower may be eligible for a monetary reward as well.

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According to InvestmentNews, last month the Financial Industry Regulatory Authority (“FINRA”) announced that it had essentially stopped processing securities arbitration cases involving Puerto Rico municipal bonds.  FINRA claimed it needed to address a number of challenges with the cases such as the fact that the primary language in Puerto Rico is Spanish and FINRA arbitrations are generally conducted in English; and the fact that there were less than a dozen FINRA approved arbitrators in Puerto Rico.

A posting on FINRA’s website states that as of April 7, 2014, 209 cases involving the sales of Puerto Rico municipal bonds, almost all of which involve investors residing in Puerto Rico, had been filed with the regulator. Of those, FINRA says 62 investors are represented by counsel located in Puerto Rico, and 50 cases individually name brokers located in Puerto Rico.

FINRA rules provide that, absent the agreement of all parties to a single arbitrator, a panel of three arbitrators hear cases involving damages over $100,000. The parties in a three-panel case are given a list of 30 potential arbitrators to choose from pursuant to FINRA Rule 12403.  This placed a significant burden on FINRA to find more arbitrators willing to serve on the Puerto Rico cases, either residing in Puerto Rico or willing to travel there.

According to FINRA, it will initially supplement the pool of Puerto Rico arbitrators with approved FINRA arbitrators from other hearing locations within the southeastern United States and Texas. FINRA announced it will pay the travel expenses of the approximately 700 currently eligible arbitrators on the FINRA roster who have agreed to serve in Puerto Rico.

UBS and Merrill Lynch, two of the largest firms named in many of the Puerto Rico municipal bond cases, have agreed to pay the costs of consecutive translation services in the Puerto Rico FINRA arbitration hearings in which either is a named Respondent.

The influx of FINRA arbitration cases involving losses in Puerto Rico municipal bonds follows a February downgrade of Puerto Rico’s credit rating to junk status by Moody’s, Fitch, and Standard & Poor’s.  Puerto Rico has a 14.7% unemployment rate, and an estimated $70 billion in debt.

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According to the Securities and Exchange Commission (“SEC”), a federal judge in Florida has issued a temporary asset freeze against two companies and their owners for allegedly operating a Ponzi scheme that encouraged investors to make purported investments in virtual concierge machines (VCM’s).  According to the government, the companies, JCS Enterprises, Inc. (“JCS”) and T.B.T.I. Inc. (“TBTI”), and the principals, Joseph Signore and Paul L. Schumack, II, located in South Florida touted investments in VCM’s on You Tube, through e-mail solicitations, and investment seminars.  According to the companies’ You Tube video, a VCM is an ATM-like machine that could be placed in businesses such as hotels, restaurants, and stadiums to advertise available products and services via touch screen.  In addition, the machines could provide printable tickets and coupons. 

According to the government, the companies asserted that investors could purchase a VCM for as little as $3,500 and earn income through businesses paying to advertise on the machines. The SEC claims that the investors were promised guaranteed returns on the VCM’s which were to be located, placed and managed by JCS and TBTI.  The SEC’s press release claims the companies raised approximately $40,000,000 since 2011. The government contends that investors were promised that they would be informed as to the location of each VCM they purchased and would be provided online access to monitor the activity of their VCM.   In reality, the SEC alleges that investors’ funds were used to pay earlier investors, were diverted to unrelated business ventures, or used to pay personal expenses of Signore, Schumack and their families.  For example, the SEC claims that Signore diverted $2 million dollars directly to himself and his family members, in addition to $56,000 that was spent at restaurants, stores, and a tanning salon.  Schumack allegedly diverted around $4.8 million, in addition to spending around $23,000 on restaurants, stores, and a nutrition center.

The complaint filed by the SEC alleges violations of the federal securities laws and seeks the return of ill-gotten gains, interest, and penalties.  The order for temporary asset freeze requires the companies and principals to provide accountings and also appointed a receiver for JCS and TBTI.

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According to Reuters and other news sources, a securities arbitrator has been removed from FINRA’s arbitrator roster after it was discovered that he allegedly lied about being a lawyer. A FINRA spokesperson reportedly confirmed to Reuters that securities arbitrator James H. Frank of Santa Barbara, California was removed from FINRA’s arbitrator pool in 2013.  Frank reportedly served as a FINRA arbitrator for 15 years and was involved in rendering approximately 38 FINRA arbitration awards.  

According to Reuters, in August 2013 after a FINRA arbitration hearing concerning an investment in a variable life insurance policy, the investor’s attorney Benjamin Blakeman became concerned about Frank’s behavior and hired an investigator to look into Frank’s background.  According to Frank’s Arbitrator Disclosure Report, he had received his law degree from Southwestern University School of Law and was licensed to practice in Florida, California, and New York.   Frank’s bio on Arias-U.S. reflects that he is Of Counsel with Proresolv Counsel, LLP.

According to InvestmentNews, Blakeman’s investigator discovered that the only California lawyer named James H. Frank was not the gentlemen serving as a FINRA arbitrator.  In addition, there were no lawyers by the name of James H. Frank registered in either Florida or New York.  Blakeman reportedly shared his investigator’s findings with FINRA and requested Frank’s removal from his arbitration case.

FINRA confirmed to InvestmentNews that it removed Frank from its arbitrator roster because he had allegedly misrepresented himself as an attorney.  FINRA declined to comment on whether it has disclosed the alleged misrepresentation to the parties involved in the cases Frank heard.  At this point, it is unclear whether the parties on those cases could attempt to overturn the arbitration awards on the grounds that an arbitrator made fraudulent misrepresentations, given the requirement in the Federal Arbitration Act that motions to vacate be filed within three months after the delivery of the award.

Frank reportedly told Reuters in an e-mail that he was unaware of the specific reasons for his removal by FINRA.  He claimed that he was a lawyer in California, but the state of California must have lost his records.

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George Theodule, formerly of Wellington, Florida, was sentenced for orchestrating a Ponzi-like affinity fraud scheme on fellow Haitians residing in the United States.  In October 2013, Theodule agreed to plead guilty to one count of wire fraud in exchange for the government dropping the other 39 charges against him. 

According to the indictment, Theodule solicited individuals in the Haitian community, primarily in South Florida, to invest with his companies, Creative Capital Consortium and A Creative Capital Concepts.  Theodule allegedly told investors that he could double their money in 90 days by trading in stock options.  Theodule allegedly preyed on members of the Haitian community in a classic affinity fraud.

An affinity fraud is an investment scam that targets members of identifiable groups, such as religious or ethnic communities. Oftentimes, the fraudsters are members of the group. They typically enlist respected members of the group to spread the word about the scheme by convincing those people that a fraudulent investment is legitimate and worthwhile.

The Federal Bureau of Investigation claims that, between 2007 and 2008, Theodule convinced thousands of investors, residing primarily in South Florida, to invest with his companies.  According to the Palm Beach Post, of the approximately $68 million that was invested, Theodule invested about $18 million in stock options and lost it all.  The remaining funds were allegedly used to repay earlier investors to create the appearance of investment success in Ponzi-like fashion.  The government claims that the remaining funds were used by Theodule for his own personal benefit.

At his sentencing hearing, U.S. District Judge Kenneth Marra sentenced Theodule to 150 months in prison.  A separate hearing concerning restitution is scheduled.

The court-appointed trustee, Jonathan Perlman, has indicated that any restitution order against Theodule will likely be worthless as Theodule is either broke or has successfully hidden the illicit proceeds from the fraud scheme.  As such, Perlman has asked the 11th Circuit Court of Appeals to find that Bank of America and Wells Fargo were complicit in Theodule’s scheme.  If the appellate court agrees, Perlman indicated he may be able to recover some money for the victims from the banks.

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The FINRA Board of Governors has accepted several rule proposals that will now make their way to the Securities and Exchange Commission (“SEC”) for review, public comment and final approval.

BrokerCheck FINRA maintains the BrokerCheck database which contains the professional backgrounds of stock brokers, brokerage firms, and investment advisers. BrokerCheck is a free tool to help investors when deciding whether to do business or continue to do business with a particular firm or individual. In addition to information concerning current and past employment, it also reflects the firm/individual’s licensing status, and any reported regulatory, customer dispute, criminal or other matters.

The FINRA Board approved a revised amendment to FINRA Rule 2210 (Communications With the Public) that would require brokerage firms to include an obvious link to BrokerCheck on any of the firm’s websites that are available to public investors. The proposal specifically exempted communications in e-mails and those posted on interactive electronic forums such as Twitter.

A link to BrokerCheck can be found here.

Arbitrator Classification The Board authorized FINRA to submit proposed amendments to the Customer and Industry Codes of Arbitration Procedure to the SEC for approval. The proposed amendments would expand the definition of non-public arbitrators to include attorneys who devote a “significant part of their business” to representing investors, but the attorneys could be considered public arbitrators after a cooling off period. It also states that individuals who were employed in the securities industry for any period of time would always be considered non-public arbitrators.

Expungement of Customer Disputes Proposed FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of Customer Dispute Information) is also headed to the SEC for approval. Currently, FINRA Rule 2080 states that customer dispute information can only be expunged from a broker’s BrokerCheck record if (A) the claim, allegation or information is factually impossible or clearly erroneous; (B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (C) the claim, allegation or information is false.

In October 2013, the Public Investors Arbitration Bar Association (“PIABA”) published its findings that, between January 2007 and May 2009, expungement was granted in 89 percent of settled FINRA cases. This prompted a bi-partisan inquiry by Senators Jack Reed and Charles Grassley to FINRA seeking more information about the frequency of expungement in resolved FINRA cases. The new rule approved by the FINRA Board would prohibit brokerage firms and stock brokers from conditioning settlements on an agreement not to oppose a request for expungement of the case from the stock broker’s BrokerCheck record.

Business Litigation | False Claims Act & Whistle-blower Cases

Posted in: FINRA
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The Financial Industry Regulatory Authority (“FINRA”) announced that it has levied fines against brokerage firm Brown Brothers Harriman & Co. (“BBH”), based in New York, and its former Global Anti-Money Laundering Compliance Officer Harold Crawford. In a Letter of Acceptance, Waiver, and Consent dated February 4, 2014 (“AWC”), BBH and Crawford consented to fines of $8 million and $25,000, respectively. Crawford also agreed to a one month suspension.

According to FINRA, BBH failed to have adequate anti-money laundering (“AML”) procedures in place to monitor and detect suspicious transactions in penny stocks. In addition, FINRA claimed the firm failed to adequately investigate potentially suspicious trading in penny stocks, when the suspicious activity was brought to the firm’s attention. Penny stocks generally refer to securities that trade at less than $5 per share, and are quoted over-the-counter.

According to the AWC, from January 1, 2009 to June 30, 2013, six billion shares of penny stocks were traded by or delivered through BBH, many of the transactions were made on behalf of undisclosed customers of foreign banks in countries known to be bank secrecy havens, such as Guernsey and Jersey, British owned islands off the coast of Normandy, and Switzerland. The AWC claims these penny stock transactions generated approximately $850 million in sales proceeds.

The Securities and Exchange Commission has previously warned that penny stocks may be easily manipulated by fraudsters who distribute false information about the issuer company in order to create demand for the stock. As trading in the stock increases and the stock price rises, the fraudsters sell their own shares at inflated prices. Thereafter, the stock price falls and investors lose their investment.

According to the AWC, federal law required BBH to investigate customer activity on a risk basis. Accounts engaged in frequent suspicious penny stock transactions merited additional scrutiny. However, FINRA claims that BBH completed the suspicious penny stock transactions without obtaining basic information needed to verify that the securities were properly registered or exempt from registration, such as the identity of the stock’s beneficial owner, the seller’s relationship to the issuer, and how the stock was obtained.
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Business Litigation | False Claims Act & Whistle-blower Cases

Posted in: FINRA
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The Financial Industry Regulatory Authority recently published a news release offering general financial guidance to the investing public. The FINRA Investor Education Foundation issued Five Do’s and Don’ts That Can Help You Achieve Greater Financial Security. According to its website, the FINRA Investor Education Foundation was established in 2003 and supports innovative research and educational projects geared to helping the portions of the investing public that could benefit from additional resources, such as seniors and military members.

According to FINRA, it created the tips based on findings from a study done by the FINRA Investor Education Foundation’s National Financial Capability Study. FINRA asserts that heeding the following tips can help investors achieve greater financial security:

Do use college and retirement methods that offer tax breaks – Coverdell Education Savings Accounts and 529 plans both offer tax advantages when setting aside money for your children’s college education. In the retirement arena, traditional 401(k) accounts are not subject to income tax withholding and are not considered as taxable wages. Earnings on Roth 401(k) contributions are tax-free.

Do payoff credit card debt as soon as you can – the FINRA study found that two out of five Americans surveyed thought that they had too much debt – regardless of their income level. The best way to avoid the never-ending cycle of credit card debt is to try to pay off credit cards in full in a timely manner.

Do check your credit report and credit score – even though consumers have the right to obtain a free credit report annually, FINRA suggests that you obtain your credit score as well, even if you have to pay for it.

Don’t chase higher returns – tempting as higher returns in this low yield environment may be, investors should not invest in non-traditional products that are riskier than their financial needs and goals allow, just to get a higher return than obtainable on more traditional investments.

Don’t be part of the 39% percent - According to FINRA, 39% of survey participants said they could not come up with $2,000 in the next month if they had to because of an unexpected situation like a major car repair. FINRA equates that to be “financially fragile.” Avoid being financially fragile by creating a rainy day savings account.

For additional articles on general financial topics, click here.

Business Litigation | False Claims Act & Whistle-blower Cases