A Financial Industry Regulatory Authority (FINRA) arbitration panel ordered securities firm CL King & Associates to pay $10 million in damages to an investor for losses stemming from the collapse of a trading strategy at a now-defunct investment firm. The estate of John Montfort has brought a claim against CL King for negligence and breach of fiduciary obligations, among other things. CL King had a role as the custodial brokerage for former investment advisory firm NSB Advisors LLC. CL King provided a variety of services, including securities clearing and margin loans to NSB and its customers. NSB used an investment strategy that included holding thinly traded stocks of small companies while shorting a major index, according to people familiar with the firm. Allegedly, Montfort lost a “tremendous amount of money” in 2012 when the trading strategy collapsed. CL King is being accused of aiding and abetting this collapse by improperly providing excessive leverage and failing to disclose to the customer material information about the account. On June 7th, the FINRA arbitration panel awarded the estate $10 million in damages. NSB filed for chapter 11 protection last year. The firm was also involved in a 2012 dispute with CL King. That litigation is continuing.
An arbitration panel ordered Morgan Stanley to pay a retiree more than $8.6 million for losses tied to alleged unauthorized trading and unsuitable investments. One of the risky investments was in a Chinese internet company. The retiree, Dennis Doyle, and his wife, now deceased, had alleged financial elder abuse among other things in their arbitration claim, which they filed last year. The Financial Industry Regulatory Authority (FINRA) arbitration panel awarded Mr. Doyle $6.1 million in damages, along with $2 million in punitive damages and more than $491,700 in legal fees.
Much of their investment was in the Chinese internet company, NQ Mobile Inc. Over $2 million in commissions was generated over three and a half years because of those investments. The Doyle’s recognized a problem with the decline in their account and asked their adult children to investigate. It was discovered the loss of financials was due to NQ Mobile stock, which, at one point, had represented 18% of the couple’s account. While investigating, the family also found shares of a Papua New Guinea oil and gas company, which, at one point made up 43% of the couples’ holdings. The financial advisers named in the case were Wendy Feldman and Peter Joseph Doyle (not related to the couple) out of Morgan Stanley’s Washington D.C. office.
Elizabeth Stancil, a former senior financial advisor at First Citizens Bank, was awarded $985,000 in compensatory damages by a three-person panel of the Financial Industry Regulatory Authority (FINRA). Stancil claimed that she was unjustly fired on a “trumped-up, fraudulent and fabricated charge.” She was terminated in March 2014. The bank claimed that she was fired for paying two assistants a total of $9,000 in unauthorized bonuses out of her own pocket in violation of the bank’s code of ethics and industry regulations. Stencil countered that the bonus program had been approved in advance by two supervisors. Stancil asked for $15.8 million in compensatory damages and she also did not obtain punitive damages and attorney’s fees.
A Financial Industry Regulatory Authority (FINRA) arbitration panel ruled that Wells Fargo and a Wells Fargo advisor were liable for $1.1 million in damages over allegations that he stole client data from UBS. The advisor, David Kinnear, was accused of breaking trade secrets and committing other fraud and abuse laws. The arbitration panel looked into whether UBS retaliated by making false and malicious statements about him. UBS claimed that Kinnear stole confidential data on thousands of their clients, along with proprietary information. Also, after joining Wells Fargo, Kinnear used the stolen information to move the business of his former clients, as well as solicit other UBS ones. Kinnear counterclaimed, saying UBS was attempting to “drive a wedge” between him and his high-net-worth clients.
The Chicago-based arbitration panel found Kinnear and Wells Fargo liable for $1.5 million in compensatory damages to UBS. UBS was found liable for $400,000 in damages to Wells Fargo and the damages offset each other. Currently, according to the Protocol for Broker Recruiting, advisers can bring some information such as client contact details with them when they leave a firm. They are not allowed to tell clients about a move in advance, or take account numbers or social security numbers with them when they leave a firm.
A former Raymond James adviser, Mark Immel’s wife, Kim, has settled a $450,000 settlement with the firm. Immel was terminated from the firm in 2014 for alleged loss of confidence. An arbitration panel then ordered Raymond James to pay him $450,000 for damages related to his termination. Immel had argued that the firm had profited from his termination to the tune of $80 million by keeping his book of business. Raymond James then responded, saying that the arbitrators overextended themselves in their ruling. A hearing date was set for earlier this month, but Immel killed himself before the hearing could take place.
Raymond James was found liable by the arbitration panel on three counts: unjust enrichment, interference with business relations and fraud. The fraud charge was related to Morgan Keegan bond funds in which Immel had invested $540,000. The panel included the fraud charge in its ruling even though Immel withdrew it. The panel said it did not consider any of Immel’s claims relating to the funds, according to the award. Raymond James then argued that “arbitrators went beyond the authority granted by the parties and decided an issue not pertinent to the resolution of the issues submitted to arbitration.”
According to Immel’s Financial Industry Regulatory Authority (FINRA) BrokerCheck record, he was registered with Security First Financial, UR Financial, The Variable Annuity Marketing Company, JMC Financial Corp, Cadaret, Grant & Co., Regions Investment Company, Morgan Keegan & Co. in Inverness, Florida from April 2001 until February 2013, Raymond James in Inverness from February 2013 until February 2014 and G.A. Repple & Co. in Inverness from May 2015 until May 2015. He has 17 customer disputes against him.
This week, the Financial Industry Regulatory Authority (FINRA) posted a notice about a “mutual fund waiver sweep” on its website. FINRA intends to request documents and information from broker-dealers related to waivers, or reimbursements, available to some investors for mutual fund sales charges. Specifically, FINRA is looking into whether firms have a process and supervisory procedures in place to ensure waivers are provided. Failure to provide those waivers means investors are being overcharged for the funds in question. According to FINRA’s website, the information is used to “focus examinations and pinpoint regulatory response to emerging issues.” Notices were sent to 20 firms and the time period in question is January 1st 2011 to December 31st, 2015.
Recently, FINRA assessed penalties for mutual fund overcharges to PNC Investments, and the firm agreed to pay restitution of $225,000 for failing to apply waivers for investors in some mutual funds. Edward Jones, Stifel Nicolaus & Co., Janney Montgomery Scott, Axa Advisors and Stephens Inc. were all ordered last October to reimburse clients a total of $18.4 million for charging them improper fees for mutual funds. Last July, FINRA ordered Wells Fargo, Raymond James and LPL Financial to pay $30 million in restitution for failing to waive mutual fund charges. In this most recent sweep, FINRA stated that the firms must provide documents and information before June 10t, 2016.
Last week, Senator Elizabeth Warren and Tom Cotton sent a letter to the chairman of the Financial Industry Regulatory Authority (FINRA) Richard Ketchum, asking for answers regarding financial advisors. The democratic Senator and Cotton are demanding answers of why the federal government seems to be shirking its duty to prevent shady financial advisers from endangering the life savings of millions of Americans. They are demanding answers as to why transgressions such as bribery, forgery, and extortion seem to be going unpunished by the regulators at FINRA. The letter stated, “The evidence clearly shows that FINRA’s efforts to date have not been enough to address the incidence of misconduct among financial advisers. Each day that FINRA fails to take stronger action is another day that working families will be exposed to an unacceptably high risk of financial adviser misconduct.”
According to a National Bureau of Economic Research paper published in February, one in 13 financial advisers have a “misconduct-related disclosure” on their record. This includes facing criminal charges for bribery, forgery, extortion or fraud, according to formal proceedings with the Securities and Exchange Commission (SEC). The paper also found that sanctions toward bad brokers are almost nonexistent or ineffective. Only half of advisers with misconduct on their record were fired, and, of those, 44% were hired as a financial adviser at a different firm within one year. One third of financial advisers with misconduct records are repeat offenders and these advisers are five times more likely to engage in misconduct than the average adviser. The study also showed that financial advisers are sometimes hired because of their misconduct at firms who tend to cater to unsophisticated customers. At some of these firms, one in five advisers have misconduct on their records and continue to be employed there.
Warren and Cotton pressed FINRA for answers by June 15. By this time, they want to know what specific steps regulators are taking to address unacceptable levels of adviser misconduct across the entire financial advisory industry, and how it plans to prevent recidivism and crack down on firms that seem to prefer shady advisers.
The Financial Industry Regulatory Authority (FINRA) found that Securities America in La Vista, Nebraska allowed one of its brokers to sell preferred shares of an unregistered limited partnership fund without following its own rules for doing adequate due diligence on the product. A Securities America broker, Stuart Horowitz, was sanctioned for recommending the preferred notes to clients and for engaging in unsuitable trading in the fund. FINRA claims that in 2009, Horowitz failed to adequately investigate multiple red flags about the fund’ viability when he asked the firm to let him sell the preferred shares to customers who already were invested in the fund. Securities America then extended approval to Horowitz before receiving an independent evaluation of the fund.
From March 2009 through July 2009, Horowitz’s branch office in Coral Springs, Florida, converted $8 million of existing investments in the fund to the preferred shares, which required $2.5 million in additional money from clients. Horowitz was responsible for all but $137,500 of the conversions and received net commissions of $200,000. The fund invested in real estate and began making late payments to investors holding its preferred notes. By October 2009, it had stopped making payments altogether. Horowitz agreed to a $100,000 deferred fine and a one-year suspension from working with any FINRA member.
In a separate case, FINRA permanently banned a broker, Bahram Mirhashemi, from the industry for churning violations. Mirhashemi formerly worked for Accelerated Capital Group in Irvine, California, cost clients more than $815,000 in overall commissions by churning their accounts. Churning is a tactic used by brokers to garner large commissions for themselves and is when the broker excessively trades in a customer account. From August 31, 2012 through January 28, 2015, FINRA alleged that Mirhashemi placed 2,000 trades for nine clients “For which he rarely obtained the requisite authorization from the customer” before making the trades. He cost clients more than $665,000 in commissions. He also consistently spread mutual fund purchases across multiple fund families, which means clients did not receive discounted sales charges and cost them more than $150,000 in commission.
The Financial Industry Regulatory Authority (FINRA) last week sought approval from the Securities and Exchange Commission (SEC) for a proposed change to the FINRA arbitration rules, under which monetary awards requiring the parties to pay each other damages would be offset, so the party owing the larger award would be required to pay only the net difference. If the arbitrators do not intend monetary awards to be offset, they must specifically say so in the award. The rule changes’ intention is to remedy the situation in which an arbitration panel awards damages to both the claimant and respondent, but one of the parties cannot, or does not, pay its portion of the award. Currently, monetary awards must be paid within 30 days. The proposed change would eliminate any uncertainty as to whether the broker-dealer nevertheless is required to pay the award in favor of the customer even where the customer failed to pay the larger award in favor of the broker-dealer. If the SEC approves the proposed change, FINRA will announce the effective date in a Regulatory Notice within 60 days of SEC approval.
The Financial Industry Regulatory Authority (FINRA) has announced plans to expand the reporting available through its BrokerCheck web tool to include relative concentrations of disciplined brokers in industry firms. Richard Ketchum, FINRA CEO stated “There are firms that hire fro the predatory firms that go out of business. That is the biggest risk.” Studies conducted have shown that brokers terminated for misconduct often are hired by firms having a higher incidence of their own misconduct. FINRA is also considering making its underlying BrokerCheck data available for bulk download for research. The changes were reported in last weekend’s Wall Street Journal.