Florida Securities Fraud Lawyer Blog

Following the recent announcement by the Federal Reserve that interest rates are expected to remain low until at least 2014, the North American Securities Administrators Association ("NASAA") issued a warning to investors to be cautious about investments offering higher returns. The NASAA cautioned that investors should not abandon their slower growing, safe investments in favor of higher yielding alternative investments without fully understanding the risks and terms of the alternative product.

State securities regulators are concerned that individuals who depend on fixed income investments, especially seniors, may be more easily persuaded by unscrupulous salespeople to invest in inappropriate, risky investments or fraudulent schemes. The NASAA's current list of "Top Investor Traps" includes private placement offerings, promissory notes, securitized life settlement contracts, and investments in energy, distressed real estate and precious metals, which may be frauds in disguise.

Investors should remember that risk and reward are tied together. Investments with higher returns carry a higher degree of risk to investors; the lower the return, the lower the risk.

Before making any investment, investors should do their homework, especially for investments that seem to offer unusually high returns compared to other investment options. Investors can verify the legitimacy of many investments through the SEC's online database (http://investor.gov/). Investors can also review the employment and complaint history of a stockbroker through the Financial Industry Regulatory Authority (FINRA)'s BrokerCheck database
(www.finra.org/Investors/ToolsCalculators/BrokerCheck)
and investment advisors at the SEC's Investment Adviser Public Disclosure database (www.adviserinfo.sec.gov).

Investors nationwide who have incurred investment losses, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to kelly@mccaberabin.com.

The Financial Industry Regulatory Authority (FINRA) announced that is has fined Wells Fargo Investments, LLC (Wells Fargo) $2 million related to the sales of unsuitable reverse convertible notes to elderly customers. The sales were made by one of Wells Fargo's former brokers to 21 customers, most of whom were in their 80's and 90's.

Reverse convertible notes are complex structured products that consist of a short-term, interest bearing note in which repayment of the principal is linked to the performance of an unrelated asset such as a stock or basket of stocks. If the underlying asset falls below a certain level, an investor risks incurring a substantial loss.

According to FINRA, the investigation revealed that the broker recommended hundreds of unsuitable reverse convertible notes to 21 unsophisticated, elderly clients with a low-risk tolerance which exposed the customers to risk inconsistent with their investments profiles. FINRA also stated that the sales of the reverse convertibles generated in excess of $1 million in commissions to the broker and firm. According to FINRA, Wells Fargo failed to review the reverse convertible transactions to make sure they were suitable for the customers.

Wells Fargo consented to the entry of FINRA's findings but neither admitted nor denied the allegations.

The Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 11-52 (Notice) reminding its member firms of their supervisory obligations regarding the use of designations by their brokers that imply expertise, additional training or a specialty in advising elderly investors (senior designations).

In early 2011, FINRA surveyed 157 brokerage firms regarding the use of senior designations and the supervisory procedures in place regarding the use of such designations. 68% of the firms surveyed indicated that they permit the use of senior designations. Of those, only 66% required approval and verification of a broker's credentials prior to the use of the designation. The remaining 34% of firms did not verify the credentials of the brokers using the senior designation. In some instances, widely used senior designations did not require rigorous qualification standards.

According to the Notice, FINRA is particularly concerned that "the existence of qualification standards to obtain a designation did not ensure that those registered persons holding the designation possessed financial services skills that were unique or valuable to senior investors."

The Notice reminds brokerage firms that they must have supervisory procedures in place to ensure fair dealings with senior investors, as well as to prevent the unethical or misleading use of senior designations.

It is estimated that one out of every five Americans over the age of 65 have been the victim of a financial scam.

Now, help for potential financial swindle victims has arrived. A national toll-free hotline for seniors and adult children of the elderly will be launched on November 10 to provide seniors with advice on general financial matters as well as ways to prevent becoming the victim of financial fraud. Of particular concern are seniors with mild cognitive impairment who can perform most daily functions, but have trouble with managing their finances.

The hotline is a collaboration of the National Adult Protective Services Association (NAPSA), the Financial Planning Association (FPA), the Investor Protection Trust (IPT) and the Investor Protection Institute (IPI).

The toll-free hotline will operate from 9:00 a.m. to 6:00 p.m. EST.

For general finance questions: (888-227-1776) Callers can speak to experts from the Financial Planning Association about their family financial security.

For financial abuse questions: (888-303-3297) Callers to this number will speak with an adult protective services professional about elder financial abuse and strategies for keeping themselves or older loved ones independent.

"The FPA and its members are pleased to participate in a national hotline initiative that will help protect our vulnerable senior population,'' said FPA Executive Director and CEO Marvin W. Tuttle, Jr., "We applaud the Investor Protection Institute for recognizing a serious issue in our society and bringing us together to provide much needed assistance to the elderly.''

On Aug. 29, 2011, the SEC charged two Florida men for running a Ponzi scheme set up as an alleged private equity fund that fraudulently raised over $22 million from more than 100 investors, including many Florida teachers or retirees.

The SEC's complaint alleges that James Davis Risher of Sanibel handled the fund's trading operations, and Daniel Joseph Sebastian of Lakeland marketed the fund, including distributing offering materials and soliciting investors. Risher falsely informed investors that he had years of experience in trading equities and providing wealth and asset management services. Instead, Risher had no such experience but rather a vast criminal history, spending 11 of the last 21 years in prison.

The SEC claims that Risher and Sebastian falsely told investors that the "fund" generated annual returns between 14% and 124% percent by purchasing public equity securities. They sent investors fabricated account statements showing these inflated returns to support their misrepresentations. Indeed, only a small portion of the raised capital was actually invested, as Risher instead spent investor funds on personal, lavish gifts, such as jewelry, and property in North Carolina and Florida. Moreover, Risher and Sebastian also paid themselves millions of dollars in fake management and performance fees.

Based on the SEC's complaint, Risher and Sebastian solicited the "fund" using the names Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. They described themselves in offering documents as "two unique individuals" who had the necessary expertise to "create an investment vehicle that would allow investors to capitalize from both bull and bear markets."

On December 29, 2010, the Financial Industry Regulatory Authority (FINRA) announced that it expelled APS Financial Corporation (APS), barred the firm's former President, George Conwill, and the firm's former broker, Peter Aman, for engaging in a scheme which overcharged an elderly investor by $1.2 million.

FINRA found that Aman charged mark-ups ranging from 4.15% to fraudulently excessive mark-ups up to 67% when executing forty-five transactions for APS customers. Forty-three of these excessive or fraudulent mark-ups were related to transactions involving a single elderly investor's accounts. Aman overcharged this investor by over $1.2 million through undisclosed mark-ups, including $767,000 in fraudulently excessive mark-ups.

FINRA also barred Conwill and expelled APS for rule violations relating to trading in corporate high yield bonds, collateralized mortgage obligations and collateralized debt obligations. APS and Conwill were also cited for charging excessive mark-ups and supervision violations.

According to Thomas Gira, the Executive Vice President of FINRA's Department of Market Regulation, "FINRA is committed to ensuring that firms charge their customers reasonable fees in connection with the purchase and sale of fixed income and other debt securities. There is no room in the securities industry for those who prey upon elderly investors."

In total, APS overcharged customers on fifty-nine transactions. Conwill approved all fifty-three mark-ups over 5%, including forty-two of the forty-three excessive or fraudulent mark-ups for the elderly investor's accounts.

FINRA also determined that APS did not establish or maintain an adequate supervisory system and also did not reasonably and properly supervise the firm and its registered representatives so that it would detect and prevent the mark-up violations. FINRA found that Conwill, as the president of APS, did not take reasonable steps to ensure that APS established and maintained an adequate supervisory system, and failed to reasonably and properly supervise the firm's registered representatives.

Robert Barnes, attorney for Sarasota resident Beau Diamond, has appealed his client's conviction to the U.S. Court of Appeals for the Eleventh Circuit. As a result of a Ponzi scheme where he defrauded nearly 200 investors by convincing them they were trading in foreign currency, Diamond was convicted on 18 felony counts. On December 22, Judge James Moody of Tampa sentenced Diamond to 15 ½ years in prison, as well ordering him to pay $23 million in restitution.

While Barnes has maintained his client received an unfair trial throughout the litigation, Judge Moody actually did not sentence Diamond to the 22-year prison sentence recommended by the prosecution. Judge Moody reduced the sentence to 15 ½ years because he did agree with the prosecution's argument that Diamond abused the trust of in investors. Instead, Judge Moody found that many of Diamond's clients chose his services because they trusted his father.

Neil Greenberg, an investment advisor in Boulder, Co., invested $174 million of his clients' money in funds run by Ponzi schemers Bernie Madoff and Tom Petters. Now, Greenberg is facing repercussions of his own after being charged by the SEC for fraud and breach of fiduciary duty. No redemptions have been allowed on Greenberg's funds since 2008, and the SEC does not expect investors to get much, if any, of their investment money returned.

Greenberg sold his clients on the safety and security his investment strategies would create, and convinced investors, primarily retirees who should have been focused on income-producing investments, to sell their annuities and invest in much riskier funds. Greenberg, in turn, received millions of dollars in fees. A class action suit filed against Greenberg describes many of the victims as "older, hardworking citizens of Colorado." While Greenberg generally had a specific type of clientele, two of Greenberg's more prominent clients included a former United States Congressman and a well-known radio talk show host.

Ironically, one of Greenberg's funds was named "Agile Safety Variable Fund."

The SEC has charged a New Jersey investment adviser and 3 firms she ran with operating a multi-million dollar offering fraud, including the sale of fraudulent promissory notes to clients. Investment advisor Sandra Venetis told clients the notes were guaranteed by the FDIC and would earn interest of 6-11 percent annually and would be tax free.

Venetis used investor funds to pay business debts and personal expenses and gave investor money to her relatives. In the consent order, Venetis agreed to freeze assets and monetary payments including financial penalties to be determined at a later date. She also agreed that she will be barred her from future association with any investment adviser or broker-dealer.

Venetis' statements to investors were false and the promissory notes and other offerings were unsupported by any investments, assets, or related revenues. She further fabricated the names and signatures of "doctors" or forged signatures of other people she claimed were recipients of the loans.

The SEC's complaint also names three relief defendants for the purposes of recovering investor assets now in their possession: Jennifer Venetis (Venetis's daughter); Kevin Persley (Venetis's brother); and Venetis LLC (an entity owned and controlled by Venetis).

The SEC, FINRA, and North American Securities Administrators Association (NASAA) today have issued a 2010 Addendum to their report of best practices for financial services firms to improve their policies and procedures for serving senior-citizen investors. The 2010 Addendum focuses on the following categories of practices:

• Communication with seniors;

• Training brokers on senior-related issues;

• Creating a process for escalating issues and taking action;

• Securing accurate information at account opening;

• Making sure investments are suitable; and

• Supervision and compliance reviews.

Securities regulators are publicizing this updated report to ensure that broker-dealers will serve senior investors in an ethical, respectful and informed manner.

On June 2, 2010, the SEC charged Luis Felipe Perez in a $40 million Ponzi scheme who raised funds to purportedly support jewelry businesses and pawn shops.

Perez arranged "no-risk" loans with mostly Hispanic investors and promised to pay them guaranteed annual returns of 18 percent to 120 percent. Perez misrepresented to investors that their investments were collateralized by diamonds.

Instead of financing his jewelry businesses, Perez misappropriated new investor money to pay prior investors and stole at least $6 million for lpersonal spending.

Perez spoke of his track record in providing risk-free investments in order to solicit new investors through word-of-mouth from existing investors.

Perez told some investors that diamonds from the pawn shops had specifically been set aside for them as collateral securing their investments. In some instances, Perez placed them in a bank safety deposit box to which he and the investor had access. The diamonds, however, were fake.

Perez told other investors that he added them as beneficiaries on his life insurance policy. He omitted, however, that he defaulted on his policy premiums and let the policy expire.

Why does South Florida remain the Ponzi Scheme capital of the United States? It appears that a combination of cultural and demographic factors make our area fertile ground for fraud.

Local police in Boca Raton, Florida are investigating an investment scam that cost an 86 year old woman $70,000 of her life's savings. Edith Schneider apparently gave the money to a Jamaican man named David McAllister. Schneider's niece called police to report the scam. Police are investigating the case and would not give further details of the alleged investment fraud.

This is another example of unscrupulous people preying upon Florida's elderly. Some of these investment scams are born in the United States; others derive from foreign countries.

Investors and their investors need to be diligent and careful only to invest their money with traditional firms and after proper investigation. If an investment sounds too good to be true, it is.