Florida Securities Fraud Lawyer Blog

The Financial Industry Regulatory Authority ("FINRA") announced it has censured and fined Citigroup $750,000 for the firm's failure to retain millions of e-mails sent by or to approximately 2,800 Citigroup brokers.

Pursuant to a Letter of Acceptance, Waiver and Consent ("AWC") submitted by Citigroup, the failure was the result of a technical glitch that occurred when Citigroup updated its e-mail system from a backup tape-based system to a new journaling-based system. After the upgrade, three of Citigroup's e-mail servers did not function as expected and, as a result, did not transmit e-mails to the archive for any of the individuals assigned to those e-mail servers.

According to FINRA, Citigroup's e-mail retention deficiencies impacted at least five FINRA investigations. The AWC also included a finding by FINRA that deficiencies in Citigroup's supervisory procedures relating to electronic communications resulted in the failure to timely detect the e-mail retention problems.

Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, 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.

Last week, a Financial Industry Regulatory Authority ("FINRA") arbitration panel awarded an elderly California couple $1.4 million for losses in two tenant-in-common ("TIC") investments. TICs are a form of real estate ownership in which two or more parties have a fractional interest in the property.

According to the investors' lawyer, LPL Financial, LLC ("LPL") knew that the TICs boosted their yield with financial "tricks." In their FINRA complaint, investors Heinrich and Araceli Hardt alleged that LPL committed securities fraud, made material misrepresentations and committed elder abuse, among other things. They had sought $8 million in damages.

According to the arbitration testimony, the TICs at issue, Heron Cove, LLC and Braintree Park, LLC, promised investors monthly income checks, purportedly generated by income-producing properties. According to the Hardts' attorney, LPL knew that the Heron Cove, LLC and Braintree Park, LLC properties were not producing any natural cash flow and, after a couple of years, the money ran out.

In addition to the FINRA arbitration matter, the Hardts filed a federal lawsuit against the sponsor of the deals, Direct Invest LLC. The pleadings filed in the pending lawsuit claim that the offering documents for the TICs contained multiple false and misleading statements regarding the property manager, projected cash flows, appreciation potential, superiority of property location, current and projected conditions for the Boston office market, strength of the leases, and use of the investment proceeds.

Investors nationwide who suffered a loss as a result of a tenant-in-common investment purchased through a FINRA member firm, 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 has filed a complaint alleging that Charles Schwab & Company ("Schwab") violated FINRA rules by including a provision in its customer agreement requiring customers to waive their rights to participate in class actions against the firm.

According to FINRA's complaint, Schwab changed its customer account agreement in October 2011 to include the class action waiver language, as well as a separate provision requiring customers to agree that arbitrators in FINRA arbitration proceedings would not have the authority to consolidate the claims of multiple parties.

FINRA claims that both provisions violate FINRA rules governing language that its members may include in customer agreements.

Investors nationwide who have suffered an investment loss, 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") has amended its pending complaint against David Lerner & Associates ("DLA") to add claims against David Lerner ("Lerner"), personally, and to add allegations that DLA continues to make false and misleading claims to potential investors with regard to Apple REITs, non-traded real estate investment trusts.

FINRA's initial complaint against DLA, filed in May 2011, asserted that DLA made material misrepresentations and omissions in the marketing of Apple REITs. The complaint alleged that DLA marketed the Apple REITs to elderly and unsophisticated investors without determining whether the investments were suitable for the investors.

FINRA's initial complaint further asserted that since at least 2004, shares of the Apple REITS have been unreasonably valued at $11 notwithstanding market fluctuations, declines in performance and leverage increases. FINRA claims that, despite the obvious irregularities in valuation, DLA did not sufficiently investigate the valuation of the REITs prior to marketing them to investors and provided misleading information on DLA's website regarding distributions. In addition, it is believed that DLA represented Apple REITs as safe and liquid, when in fact, they are illiquid and inappropriate for investors looking to access their money. FINRA recently issued an investor alert bulletin about the dangers of non-traded REITs such as the Apple REITs.

According to FINRA's amended complaint filed in December, between April and November 2011, DLA and Lerner made false and exaggerated claims regarding the investment returns, market values and performance of Apple REITs to over 1,000 potential investors during at least four investment seminars. According to FINRA, DLA and Lerner made misrepresentations that a past series of Apple REITs would merge and go public at a price of up to $20, well above the initial $11 offering price, and omitted to disclose that the income from the REITs was insufficient to support the promised 7%-8% returns.

According to FINRA, since January 2011, DLA has recommended and sold more than $442 million of Apple REIT Ten, resulting in sales commissions to the firm of $42 million. FINRA also claims that since 1992, DLA has sold almost $7 billion of Apple REITS which generated approximately $600 million in sales commissions to the firm.

Investors nationwide who have suffered a loss as a result of an investment in Apple REITs, and who may have a FINRA arbitration claim, may contact the Florida securities attorneys 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.

A Financial Industry Regulatory Authority ("FINRA") arbitration panel has awarded former Boston Red Sox catcher and two-time World Series winner, Doug Mirabelli and his wife, $1.2 million in their claims against Merrill Lynch, Pierce, Fenner and Smith, Inc. ("Merrill Lynch"). The Award represents $800,219 in compensatory damages, plus $391,474 in attorney's fees and $47,339 in costs.

According to a New York Times article, the Mirabellis' claims related to their investment in the Merrill Lynch Phil Scott Team Income Portfolio, a bundle of 33 dividend-paying growth stocks. The Award stated that the Mirabellis had argued that the recommendation by their broker, Phil Scott, to invest in the income portfolio was unsuitable and that he made misrepresentations to the couple in connection with the investment.

It is the second FINRA award against Merrill Lynch in the past seven months in connection with the Merrill Lynch Phil Scott Team Income Portfolio. The prior award, issued in June 2011, found in favor of the investor and awarded damages of $880,000. Merrill Lynch has moved to vacate the award. It is unknown whether Merrill Lynch will move to vacate the award in favor of the Mirabellis.

According to Mr. Scott's FINRA BrokerCheck record, another investor, alleging $2,500,000 in damages, filed an arbitration claim before FINRA in April 2011. That claim remains pending.

Investors nationwide who have incurred investment losses, may contact the Florida securities attorneys 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") has fined Merrill Lynch, Pierce, Fenner and Smith, Inc. ("Merrill Lynch") $1 million for failing to arbitrate disputes regarding employee retention bonuses. FINRA Rule 13200 requires that firms and associated persons arbitrate any disputes that arise out of the business activities of the member, including those related to the collection of monies owed by associated persons who leave the firm.

According to FINRA, after merging with Bank of America in January 2009, Merrill Lynch implemented a bonus program, in the form of forgivable promissory notes, designed to retain high-producing brokers. Merrill Lynch paid approximately $2.8 billion in retention bonuses to more than 5,000 of its associated persons.

FINRA claims that Merrill Lynch purposely structured the notes to circumvent FINRA's requirement that disputes related to the collection of the unpaid balances of the notes be arbitrated. The notes contained a provision requiring that disputes regarding the notes could be brought only in New York state court, a state that greatly limits the ability of defendants to assert counterclaims. In addition, FINRA asserted that Merrill Lynch made it appear that the bonuses were funded by its non-registered affiliate, allowing it to pursue collection efforts in the name of its affiliate, against brokers who left the firm in New York state court, rather than in FINRA arbitration.

According to FINRA, in late 2009 when Merrill Lynch filed more than 90 New York state court actions against its former associated persons in proceedings to collect monies due under the notes, it violating the FINRA rules requiring arbitration of employment matters.

Last week, the Financial Industry Regulatory Authorized ("FINRA") issued Notice to Members 12-03 ("Notice") informing its members of the traits which may make an investment "complex," requiring heightened supervision and compliance procedures.

FINRA stated that any investment with multiple features that impact its returns under different scenarios is potentially complex. This is especially true if an average, retail investor could not reasonably be expected to discern the existence of these features and to understand the basic way in which the features interact to provide a return on the investment.

In its list of potentially complex products, FINRA included the following: asset backed securities such as collateralized mortgage and debt obligations ("CMOs" and "CDOs"); unlisted real estate investment trusts ("REITs"); structured notes; inverse or leveraged exchange-traded funds ("ETFs"); and hedge funds.

The Notice indicated that firms recommending complex products should have formal written procedures addressing everything from the initial due diligence to post-sale performance. In addition, brokers who recommend complex products must understand all of the features and risks associated with the products. A broker's analysis of a complex product should include the likely performance of the investment in a wide range of normal to extreme market conditions. A lack of product understanding by a broker recommending the product could violate the broker's suitability obligations. The Notice also indicated that brokers should consider whether less complex products would achieve the same objectives.

FINRA cautioned that a firm should not recommend complex products to retail investors until the firm has implemented heightened supervisory and compliance procedures. The extent to which these procedures address concerns raised by the recommendation of complex products to retail investors should be closely monitored. Firms should also scrutinize the sale of complex investments to ensure that the products are only recommended to customers who understand the essential features of the products and for whom the products are suitable.

A Financial Industry Regulatory Authority (FINRA) arbitration panel issued an Award on January 13, 2012 ordering CapWest Securities, Inc. ("CapWest") to pay $7,925,763 in compensatory damages, plus $1,188,863 in attorney's fees to a group of 40 investor claimants. The Award is related to losses in Provident Royalties LLC, Medical Capital Holdings, Inc. and DBSI, Inc. It is believed to be one of the single largest awards based on the sale of the failed private placements. Whether the claimants will be able to collect on the Award remains to be seen. CapWest closed its doors last year and its FINRA membership was canceled in July.

A Colorado federal judge upheld a $54.1 million arbitration award against Citigroup Global Markets, Inc. (Citigroup) issued by a Financial Industry Regulatory Authority (FINRA) arbitration panel in April. In her order, U.S. District Judge Christine Arguello stated that maximum deference is owed to arbitrators because parties have contracted to bring their dispute to binding arbitration.

The FINRA arbitration award ordered Citigroup to pay compensatory damages of $34.1 million, punitive damages of $17 million, legal fees of $3 million and costs of about $80,000 in connection with losses in a series of municipal bond funds Citigroup sold through a group called MAT Finance, LLC. MAT (municipal arbitrage trust) created funds that borrowed at low, short term rates and used the proceeds to invest in longer-term municipal bonds. According to published reports, these investments incurred losses of up to 80% in 2007 and 2008.

The claimants in the FINRA arbitration claimed that Citigroup misrepresented the risks involved in the products.

The Financial Industry Regulatory Authority (FINRA) has fined Barclays Capital $3 Million for misrepresentations it made regarding historical delinquency data in connection with the issuance of residential subprime mortgage securitizations (RMBS) and its failure to adequately supervise the maintenance and updating of relevant disclosures on its website.

Issuers of RMBS must disclose the historical performance information for past securitizations that held similar mortgages to those in the current offering. In assessing the value of the RMBS being offered, the historical delinquency rates are materials to investors.

FINRA found that Barclays made material misrepresentations about the historical delinquency rates for three RMBS that it underwrote and sold from 2007 to 2010. The inaccurate data was posted on Barclays' website and was referenced as the historical data for five subsequent RMBS investments. FINRA found the errors significant enough to affect an investor's evaluation of the RMBS.

Barclays consented to the entry of FINRA's findings without admitting or denying the charges.

The Financial Industry Regulatory Authority (FINRA) has fined Credit Suisse Securities $1.75 Million for violation of Regulation SHO and its failure to adequately supervise its brokers regarding short sale transactions.

A short sale involves the sale of a security the seller does not presently own. When delivery of the security is required, the seller then purchases the security and makes the delivery. Reg. SHO requires a brokerage firm to have a reasonable basis to believe the security will be available for purchase by the seller before the firm accepts a short sale order. Requiring firms to document this "locate" information prior to entry of the short sale reduces the chance that delivery of the security will fail. Reg. SHO also requires that all equity securities sales be marked as long or short.

FINRA found significant violations of Reg. SHO by Credit Suisse. According to FINRA, from June 2006 to December 2010, Credit Suisse placed millions of short sale orders without documenting the locate information, including in securities that were known to be difficult to obtain. In addition, Credit Suisse mismarked tens of thousands of short sale order tickets as "long."

Credit Suisse consented to the entry of FINRA's findings without admitting or denying the charges.

Next Financial Group, Inc. (Next) submitted a Letter of Acceptance, Waiver and Consent (AWC) to settle claims by the Financial Industry Regulatory Authority (FINRA) that Next's due diligence was lacking in connection with its sale of more than $20 million of Provident Royalties, LLC private placements. In 2009, the Securities and Exchange Commission (SEC) accused Provident Royalties, LLC of fraud.

According to the AWC, Next received a specific fee for purportedly performing due diligence on each offering. However, the principal of Next responsible for performing the due diligence did nothing beyond reviewing the private placement memoranda. He did not travel to Provident's headquarters and failed to review any financial information beyond what was contained in the offering memoranda. Due diligence reports prepared by outside sources raised numerous red flags about the Provident offerings which he would have discovered had adequate due diligence been done.

In the AWC, Next agreed to pay $2 million in restitution to investors in the Provident offerings as well as pay a $50,000 fine.

The Financial Industry Regulatory Authority (FINRA) has fined Chase Investment Services Corporation (Chase) $1.7 million and ordered it to pay more than $1.9 million to customers as restitution for losses caused by its recommendation of unsuitable unit investment trusts (UITs) and floating-rate loan funds.

A UIT is an investment which contains a diversified mix of securities which may include risky, speculative products like high-yield, below investment-grade "junk" bonds. Similarly, floating-rate loan funds are mutual funds that generally contain secured senior loans made to companies whose credit quality is rated below investment-grade.

FINRA's investigation revealed that Chase's brokers recommended and sold UITs and floating-rate loan funds to unsophisticated, risk-averse investors without having reasonable grounds to believe that the investments were suitable for the customers. In addition, FINRA found that Chase lacked the proper supervisory controls to oversee its brokers' sales of UITs and floating-rate loan funds.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "With the growing number of complex products in the market today, it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers."

Chase consented to the entry of FINRA's findings without admitting or denying the charges.

The Financial Industry Regulatory Authority (FINRA) has fined Morgan Stanley Smith Barney (Morgan Stanley) $1 million and ordered restitution for excessive markups and markdowns charged to customers on bond transactions.

FINRA's investigation revealed that customers were charged markups and markdowns on corporate and municipal bond transactions ranging from below 5% to 13.8%. FINRA found that this range was higher than reasonable based on several factors including market conditions, the cost of execution and the value of services rendered to the customers.

Thomas Gira, Executive Vice President, FINRA Market Regulation said, "Firms must ensure that customers who buy and sell securities, including corporate and municipal bonds, receive fair and reasonable prices regardless of whether a markup is above or below 5 percent. Morgan Stanley clearly violated fair pricing standards and FINRA will continue to require firms that violate such standards to make their customers whole."

Morgan Stanley consented to the entry of FINRA's findings without admitting or denying the charges.

The Financial Industry Regulatory Authority (FINRA) has fined UBS Securities LLC $12 million for violation of Regulation SHO and its failure to adequately supervise its brokers regarding short sale transactions. A short sale involves the sale of a security the seller does not presently own. When delivery of the security is required, the seller then purchases the security and makes the delivery. Reg. SHO requires a brokerage firm to have a reasonable basis to believe the security will be available for purchase by the seller before the firm accepts a short sale order. Requiring firms to document this "locate" information prior to entry of the short sale reduces the chance that delivery of the security will fail. Reg. SHO also requires that all equity securities sales be marked as long or short.

FINRA found significant violations of Reg. SHO by UBS. UBS placed millions of short sale orders without documenting the locate information, including in securities that were known to be difficult to obtain. In addition, UBS mismarked millions of short sale order tickets as "long." UBS consented to the entry of FINRA's findings without admitting or denying the charges.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "Firms must ensure their trading and supervisory systems are designed to prevent the release of short sale orders without valid locates, and properly mark sale orders, in order to prevent potentially abusive naked short selling. The duration, scope and volume of UBS' locate and order-marking violations created a potential for harm to the integrity of the market."