Florida Securities Fraud Lawyer Blog

The SEC and FINRA have issued an investor alert to educate investors about the risks of structured notes with principal protection. These products, notwithstanding their names, have substantial risks.

Structured notes with principal protection have a zero-coupon bond - which pays no interest until the bond matures -- with an option or other derivative product with a payoff connected to a certain index, asset, index or benchmark. The underlying index, asset, or benchmark may vary from currencies, commodities and spreads between interest rates.

The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. But the investor needs to know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity usually get back some of their investment, even if the underlying asset, index or benchmark declines. The protection levels vary, however, with some of these products guaranteeing as low as ten percent.

SEC and FINRA warn that structured notes with principal protection can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. Investors further should know that these notes should be aware that they could tie up their principal for upwards of a decade with the possibility of no profit on their initial investment.

In recent years, structured notes with principal protection have the subject of many a FINRA arbitration and often have been recommended by brokers as safe investments, where they were unsuitable for the customer.

NFL players are finding themselves abused by brokers with bad investments in Ponzi and other fraudulent schemes.

Hall of Fame Quarterback, John Elway, recently disclosed that he and his partner gave $15 million to a hedge fund manager, who was allegedly running a Ponzi scheme.
New Orleans Saint, Alex Brown, sued his financial advisors over $3.9 million in losses, alleging they had "abused the trust," including bad investments in airplane hangars.
Broker Mary Wong pleaded guilty to stealing more than $3 million from investors, including Eagles quarterback Michael Vick.

These cases come as the NFL Players Association, the union representing 1,800 players, looks to strengthen the screening process for its financial adviser program, which has come under attack in recent years.

Professional athletes are susceptible to being taken advantage of when it comes to investing their money. They often are unsophisticated investors and have a high net worth.

After adviser William "Tank" Black was convicted of stealing $11 million from players he represented, a program was started that requires advisers have appropriate financial qualifications, such as a certified financial planner mark or FINRA registration to be included on a select list for players.

These advisers must also undergo a background check, and pay $1,500 to be included on the list and $500 annually to remain on it. There are currently about 450 advisers on the list.

Pro athletes are considered targets for investment scams and unscrupulous brokers. Such athletes often place heavy reliance upon their advisors and do not pay attention to, or understand, the details of sophisticated investment products.

Though the Securities and Exchange Commission have yet to set a universal standard of care for brokers and investment advisers, one thing is certain: Investors want a single standard.

Out of 1,319 investors polled, over 90% of investors want a broker and investment adviser to have and follow the same fiduciary duty and investor protection rules, according to a survey released on September 15 by the Opinion Research Corp./Infogroup. In addition, 97% believe that financial professionals should put investor interests ahead of their own, and be forced to disclose fees and conflicts of interest, similar to what investment advisers are required to do.

The survey also revealed that over half of investors do now know the different standards of care that certain advisers must meet. And at least 60% of those surveyed responded that they assume that insurance agents and stockbrokers are already held to a fiduciary duty. This assumption is wrong, as brokers only have to satisfy a suitability requirement, i.e., investments must meet a client's investment objectives, risk tolerance and time horizon.

According to Barbara Roper, the director of investor protection at Consumer Federation of America, "This lack of understanding is not because investors are stupid. It's because the policy itself is stupid."

The supporters of a uniform fiduciary duty hope that the survey results will spur the SEC to clarify the confusion and establish a universal fiduciary standard of care for retail investors. Under the Dodd-Frank financial-reform law, the SEC must submit to Congress by Jan. 2011 a study about the differences between investment adviser and broker-dealer oversight, and any existing regulatory gaps. The SEC is then authorized to create a standard-of-care rule that applies to anyone giving personalized retail investment advice.

Fiduciary duty supporters believe that the investor survey directly answers two questions concerning the SEC study: Do investors know that different standards of care exist, and does this difference lead to confusion about the advice that they receive?

"This study is probably going to be the seminal study to address those issues," said Denise Voigt Crawford, Texas' securities commissioner and president of the North American Securities Administration Association Inc., a sponsor of the survey.

Raymond James & Associates, Inc., and one of the brokerage's advisers must pay $925,000 in damages to a Texas couple that purchased auction rate securities in 2008, a securities industry regulatory panel has ruled.

The Financial Industry Regulatory Authority panel awarded the damages to Rex and Sherese Glendenning, a Texas couple that originally sought $1.4 million in compensatory damages.

The Glendennings opened their account with Raymond James in January 2008, just prior to when the market for the securities collapsed. Milton recommended and invested their money in an auction rate security consisting of sewer revenue bonds, without disclosing the inherent risk that the auctions might fail, a case summary said.

The couple claimed that Milton's actions and conduct created a false impression that there was liquidity in the auction market, leading them to believe that these securities could and would easily be sold. When the couple asked Raymond James to repurchase the securities at full value, their requests were denied, the summary said.

This is the second time in a month that a subsidiary of Raymond James Financial Inc. has been ruled against in FINRA arbitration involving auction rate securities. In July, a panel ordered Raymond James Financial Services Inc. and Raymond James & Associates to repurchase $2.5 million in auction rate securities from an investor who claimed the company failed to warn him about the risks involved.

FINRA recently issued a regulatory notice on Private Placements, reminding broker-dealers of their duty to conduct reasonable investigations in recommending investments in Regulation D offerings.

The notice provides that any broker-dealer recommending securities under Regulation D must the suitability requirement under NASD Rule 2310 and must comply with the advertising and supervisory rules of FINRA and the SEC.

FINRA has found problems in recent examinations and investigations, including sales and fraud practice abuses in Regulation D offerings. FINRA noted that a broker-dealer's customer may be sophisticated does not obviate the duty to investigate.

Broker-dealers also must resolve any conflicts of interest that could impair their ability to conduct a thorough and independent investigation.

Further, a broker-dealer must note any information that it encounters that could be considered a "red flag" that would alert a product person to conduct a further inquiry. When presented with red flags, the broker-dealer must do more than simply rely upon representations by the issuer's management.

Firms must also have supervisory procedures reasonably designed to ensure that the firm's personnel, including its registered representatives engage in an inquiry that is sufficiently rigorous to comply with their legal and regulatory duties.

Finally, a reasonable investigation of the quality of the issuer's assets and facilities is required. Such a reasonable investigation might include visits and inspections of such assets or facilities; examining geological or other reports; and obtaining expert opinions.

For the complete Regulatory Notice 10-22, click the link below:
http://www.finra.org/Industry/Regulation/Notices/2010/P121299