Last week, Craig L. Josephberg, a Meyers Associates, LP stockbroker, was arrested for engaging in a penny stock fraud scheme involving many securities including CodeSmart Holdings, Cubed, Inc., StarStream Entertainment, Inc. and The Staffing Group, LTD. He was indicted along with A.J. Discala, Marc E. Wexler, Kyleen Cane, Victor Azrak and Ira Schapiro for allegedly defrauding investors and potential investors in several public companies. The scheme in which Mr. Josephberg allegedly participated was "built on lies, deceit and manipulated trading activity to defraud the securities markets and investing public," according to the US Attorney's office for the Eastern District of New York. Mr. Joesphberg's alleged "pump and dump" scheme included false and misleading press releases and SEC filings, stock market manipulation techniques such as "wash trades," "matched trades," "marking the close," and unauthorized trading for clients who entrusted the stockbrokers with their life savings. As in all such schemes, the price of the various public corporations climbs for no real reason and then falls from the sky with the investors holding worthless stock. Mr. Josephberg's clients were allegedly on the dumping side of the scheme. According to the FBI, some of the victims had no idea that the stock was being purchased in their accounts by the stockbrokers. The fraudulent scheme purportedly took place in 2013 and this year.
The Law Offices of Robert Wayne Pearce, P.A. has filed yet another arbitration claim against Santander Securities, LLC (Santander). A summary of the clients' allegations against Santander Securities is below.
This arbitration arises out of a Santander stockbroker's unsuitable investment decision with regard to the Claimants' Santander investment account which was reinvested and overconcentrated in Puerto Rico, resulting in the Claimants suffering substantial monetary losses.
The Claimants were retired and only suited for a diversified portfolio of conservative, income producing investments which would supplement their social security income. The Santander stockbroker first contacted the Claimants in November of 2010, presenting himself as their new financial advisor due to their previous advisor's leaving Santander to work with Merrill Lynch. The Claimants transferred nearly $600,000.00 in cash and securities to their new Merrill Lynch account, leaving one Santander closed-end fund, the First Puerto Rico Tax-Exempt Fund because it could not be transferred to Merrill Lynch. At the advice of their Santander broker, the Claimants simply held the First Puerto Rico Tax-Exempt Fund for several years.
After their Santander account had remained inactive for several years, the Santander broker decided to sell the Claimants' entire position in the First Puerto Rico Tax-Exempt Fund and to then purchase 3 speculative Santander closed-end funds: First Puerto Rico Tax Exempt Maturity Fund III, First Puerto Rico Tax Exempt Target Maturity Fund IV, and First Puerto Rico Tax Exempt Maturity Fund V. He neglected to explain to the Claimants the reason for the investment switch and failed to provide them with any prospectus, offering memorandum, or other documents to explain the nature of the newly purchased funds.
Last week, Matthew A. Bell, a former WFG Investments, Inc. stockbroker was arrested for engaging in a penny stock fraud scheme involving many securities, including CodeSmart Holdings, Cubed, Inc., StarStream Entertainment, Inc. and The Staffing Group, LTD. He was indicted along with A.J. Discala, Marc E. Wexler, Kyleen Cane, Victor Azrak and Ira Schapiro for allegedly defrauding investors and potential investors in the 4 public companies. The alleged scheme was "built on lies, deceit and manipulated trading activity to defraud the securities markets and investing public," according to the US Attorney's office for the Eastern District of New York. The defendants alleged "pump and dump" scheme included false and misleading press releases and SEC filings, stock market manipulation techniques such as "wash trades," "matched trades," "marking the close," and unauthorized trading for clients who it entrusted the stockbrokers with their life savings. As in all such schemes, the price of the various public corporations climbs for no real reason and then falls from the sky with the investors holding worthless stock. According to the FBI, some of Mr. Bell's victims had no idea that the stock was being purchased in their accounts by the stockbroker.
Mr. Bell has a history of customer complaints. A recent FINRA report indicates over 25 customer disputes, some of which are still pending, and two terminations by stock brokerage firms. It appears that during the relevant period Mr. Bell was working for WFG Investments, Inc. and Securities America, Inc. However, Securities America reports that none of Mr. Bell's clients ever actually transferred their accounts to the brokerage firm and that he did no business there because the State of Texas did not approve him being licensed. Most of the customer complaints are for unsuitable recommendations, breach of fiduciary duty, misrepresentations, and unauthorized trading in many different securities products. Several complaints relate to the offer and sale of private placements known as California Proton Treatment Center, Maryland Proton Center, Virtus Student Housing, LP and Pamaz Scientific, Inc. which were of illiquid and unsuitable investments for many customers. The most recent claims, however, relate to purchases of small, high risk penny stocks, such as those stocks which are the subject of the indictment.
John Warren DuBrule, a former Orlando, Florida registered principal employed by Altamonte Springs, Florida-based Merrimac Corporate Securities, Inc., submitted an Offer of Settlement in which he consented to, but did not admit to or deny, the entry of the Financial Industry Regulatory Authority's (FINRA) findings that he engaged in securities fraud by knowingly causing the distribution of summary quarterly statements that contained false information about the valuation of a hedge fund in willful violation of industry rules and regulations. FINRA found that Mr. DuBrule allegedly inflated the value of the fund's assets on its quarterly statements by including the face value and promised interest of defaulted promissory notes as assets of the fund. FINRA found that the quarterly statements falsely inflated the value of investors' interests in the fund. Further, that the summary quarterly statements contained false and misleading statements that the fund utilized the services of an independent firm to prepare statements and tax reports, and that they were prepared in accordance with generally accepted accounting principles (GAAP). According to FINRA, Mr. DuBrule allegedly failed to disclose that the valuation of the fund was also based on defaulted and cancelled promissory notes. Mr. DuBrule allegedly misappropriated investor funds by withdrawing the funds despite knowing that the promissory notes had been cancelled and the fund's value had decreased substantially. Mr. DuBrule allegedly made materially false and misleading statements and omissions to customers to entice them to invest $3.8 million into the fund. Consequently, John DuBrule was barred from association with any FINRA member in any capacity.
The Securities and Exchange Commission (SEC) has charged hedge fund advisory firm Weston Capital Asset Management LLC (Weston Capital), of West Palm Beach, FL, and its founder and president, Albert Hallac, for allegedly shifting money from one investment to another without informing investors and investing contrary to the hedge fund's stated investment strategy. The SEC complaint states that Albert Hallac, with the assistance of Weston Capital's former general counsel Keith Wellner, allegedly drained over $17 million from a hedge fund they managed, Wimbledon Fund SPC Class TT Segregated Portfolio (TT Portfolio) and transferred the funds to Swartz IP Services Group, Inc. (Swartz IP), a consulting and investment firm.
According to the SEC's complaint, Weston Capital's TT Portfolio was required to invest all of the investor monies in a diversified hedge fund, Tewksbury Investment Fund Ltd. Weston Capital allegedly went against its stated investment strategy by transferring funds to Swartz IP and failed to disclose this to investors, who allegedly received false account statements portraying their investment as performing as well or even better than before. The SEC complaint states that Albert Hallac, Keith Wellner, and Mr. Hallac's son allegedly collectively received $750,000 in payments from Swartz IP. The complaint further states that Weston Capital and Albert Hallac allegedly wrongfully used $3.5 million to pay down a loan from another firm-managed fund.
Salomon Whitney LLC of Farmingdale, New York consented to, but did not admit to or deny, the described sanctions and to the entry of the Financial Industry Regulatory Authority's (FINRA) findings that it failed to establish a supervisory system with regard to the sale of non-traditional exchange-traded funds (ETFs), including leveraged, inverse and inverse-leveraged ETFs. FINRA's findings stated that despite the risks involved with holding non-traditional ETFs for longer time periods, numerous Moloney Securities customers held the ETFs for extended periods. Some even allegedly held the ETFs for several months. FINRA found that Moloney Securities failed to adequately train its registered representatives and supervisors with respect to the features, characteristics, and the risks involved with non-traditional ETFs, especially the risks associated with longer-term holds of the ETFs. According to FINRA, Salomon Whitney made unsuitable ETF recommendations and failed to conduct an adequate suitability analysis of the non-traditional ETFs before offering them to its customers. Consequently, Salomon Whitney was censured and fined $30,000.
Ricky Eugene Bell, a former Fayetteville, North Carolina-based registered representative with Cape Fear Securities, Inc., was named a respondent in a Financial Industry Regulatory Authority (FINRA) complaint alleging that he solicited firm customers to invest in an outside "lending program." Mr. Bell allegedly offered the investment opportunity to his "select customers and closest friends," according to the FINRA complaint. The complaint alleges that Mr. Bell received a total of approximately $247,500 from customer investments and that he also borrowed approximately $19,650 from firm customers without permission or firm approval.
According to the FINRA complaint, Mr. Bell told customers that the "lending program," referred to by Mr. Bell as HLT Investments, would use investor funds, which would be pooled together, to provide high-interest loans to small businesses. These high-interest loans would allegedly generate profits to the investors. FINRA's complaint states that Mr. Bell allegedly made interest payments to the customers by writing checks which he then asked customers to refrain from cashing, and to consider them as collateral in case the lending program failed. To date, Mr. Bell has not returned any of the $247,500 of principal received from investors.
Moloney Securities Co, Inc. of Manchester, Missouri consented to, but did not admit to or deny, the described sanctions and to the entry of the Financial Industry Regulatory Authority's (FINRA) findings that it failed to establish a supervisory system with regard to the sale of non-traditional exchange-traded funds (ETFs). According to FINRA, Moloney Securities permitted its representatives to recommend and sell non-traditional ETFs to customers even though the firm neglected to provide its supervisors or its representatives with training or guidance as to whether these complex and risky investments were suitable for the investors. FINRA's findings stated that Moloney Securities neither utilized nor made available to supervisory personnel reports or other tools to monitor length of time the ETFs were held or the losses which occurred in those hold positions. Consequently, Moloney Securities was censured and fined $20,000.
ETFs have become more complex in recent years. Wall Street, in its efforts to generate more profits, has created numerous ETFs that utilize leverage and focus on narrower market sectors, which increases risk for investors. Therefore, investors considering ETFs should evaluate each ETF investment individually and not assume all ETFs are alike. Two types of ETFs that pose a significant risk to investors' portfolios are leveraged and inverse leveraged funds. Leverage is a technique used in the financial industry to multiply investment gains by using borrowed money. If, however, an investment is generating losses, money can be lost at a multiple rate due to the amount of money owed. Leveraged ETFs seek to deliver multiples of the performance of an index by using borrowed funds. Inverse leverage funds also use borrowed funds to achieve multiples of the opposite of the movement of an index by employing a range of investment strategies such as swaps, futures contracts, and other derivative investments. Thus, leveraged and inverse leverage funds can lose many times their value in a single day, which could ultimately lead to significant losses for investors.
Duncan Comrie DeWahl, a broker formerly employed by Maitland, Florida-based Waddell & Reed, Inc., submitted a Letter of Acceptance, Waiver and Consent in which he consented to the described sanctions and the entry of the Financial Industry Regulatory Authority's (FINRA) findings that he improperly signed the suitability update forms of at least 5 customers without their knowledge, authorization or consent. Waddell & Reed's written supervisory procedures specifically prohibit registered representatives from signing customers' names, even if the customer requests that they do so. Mr. DeWahl, of Maitland, Florida, was found by FINRA to have disregarded the firm's rules nonetheless. Consequently, Duncan DeWahl was fined $5,000 and suspended from association with any FINRA member in any capacity for six months. The suspension is in effect from May 5, 2014 through November 4, 2014.
Stockbrokers, registered representatives, and other financial industry professionals have been known to engage in many types of fraudulent and unlawful behavior which violate industry rules and procedures. In order to protect investors from such misconduct, FINRA rules require broker-dealers to establish and implement a reasonable supervisory system. The implementation of the rules requires supervisors to monitor employees to ensure they comply with federal and state securities laws, securities industry rules and regulations, as well as the brokerage firm's own policies and procedures. If broker-dealers and their supervisors do not establish and implement these protective measures, they may be a liable to account holders for losses flowing from the misconduct. As a result, account holders who have suffered losses stemming from a broker or registered representative's fraudulent and unlawful misconduct can bring forth claims to recover damages against broker-dealers like Waddell & Reed, which have a duty to supervise its employees in order to prevent these types of stockbroker misconduct.
Infinex Investments, Inc. (Infinex) of Meriden, Connecticut consented to, but did not admit to or deny, the described sanctions and to the entry of the Financial Industry Regulatory Authority's (FINRA) findings that it neglected to perform reasonable due diligence regarding the sale of non-traditional exchange-traded funds (ETFs). According to FINRA, Infinex failed to properly review non-traditional ETFs prior to offering them for sale to customers. FINRA found that the firm allowed its representatives to recommend the ETFs to customers even though those representatives had minimal training on the risks and features of non-traditional ETFs, thereby making unsuitable recommendations and putting customers at unnecessary risk for investment losses. Consequently, Infinex Investments was censured, fined $75,000 by FINRA, and ordered to pay more than $287,000 in restitution to customers.
Much like stocks, ETFs are investment funds that are traded on stock exchanges. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index and are attractive investments because of their low costs, tax efficiency, and stock-like features. By owning an ETF, investors benefit from the diversification of an index fund as well as the ability to purchase as little as one share. In addition, expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors pay the same commission to their brokers that they would pay on any regular stock order. Leveraged and inverse exchange traded funds are designed to magnify short-term returns of a fund's underlying assets by a factor of 2 or more. They employ derivatives and are generally considered to be unsuitable for ordinary buy-and-hold investors.