Monthly Archives: July 2009

In an agreement with the Securities and Exchange Commission (SEC), Morgan Stanley will pay a $500,000 penalty to settle charges that it misled customers in its Nashville office about various money management firms recommended to clients and from which Morgan Stanley later profited via large commissions. 

Contrary to its disclosures and corporate policies, Morgan Stanley recommended some money managers who were not approved for participation in the firm’s advisory programs and therefore had not been subject to the firm’s due diligence review.

The SEC also charged William Keith Phillips, a former Morgan Stanley investment advisor in Nashville, of steering investors to the unapproved money managers so that he could receive financial kickbacks. The SEC says Phillips’ use of unapproved money managers earned Morgan Stanley at least $3.3 million in extra commissions.

The SEC’s case with Phillips is still pending. 

This isn’t the first time complaints have been lodged against Phillips. As reported July 21 in The Tennessean, Phillips apparently has a lengthy history of previous misconduct accusations, including those from the Chattanooga Pension Fund, the Nashville Electric Service and Metro Nashville Pension Plan. In 2004, the Chattanooga Pension Fund accused him of costing the fund $20 million in losses, undisclosed commissions and fees.

Ultimately, UBS Financial Services, which acquired Phillips’ employer PaineWebber, paid $675,000 to settle the case in 2006, according to the Financial Industry Regulatory Authority (FINRA), according to the article. A much larger payout was made by the Swiss-based bank in 2002 after Metro Nashville complained about the way in which Phillips handled its pension.

UBS paid more than $10 million to settle those issues. UBS also settled with the Nashville Electric Service, agreeing to pay $440,000 for similar accusations levied against Phillips.

TD Ameritrade has become the latest brokerage firm to repurchase auction rate securities (ARS) from retail investors as part of a settlement agreement with state and federal regulators. New York Attorney General Andrew Cuomo announced the deal with Ameritrade yesterday, stating the online brokerage would buy back $456 million of auction rate securities from about 4,000 customers.

The announcement with TD Ameritrade comes on the heels of Cuomo’s plans to sue Charles Schwab for allegedly misrepresenting the safety of auction rate securities to clients.

TD Ameritrade’s settlement, which was jointly made with the New York Attorney General, the Pennsylvania Securities Commission and the Securities and Exchange Commission (SEC), requires the company to repurchase any auction rate securities bought before February 2008 from individual investors, charities and small businesses. 

The company has until March 2010 to return the money to customers, although it could take until late June to fully complete the buybacks. For clients with accounts under $250,000, TD Ameritrade says the buybacks will be done within 75 days.

In addition, TD Ameritrade must reimburse investors who sold their auction rate investments at a discount following the market’s collapse in February.

Thousands of investors across the country initially bought auction rate securities on the basis that the instruments were safe, cash-like investment products. In February 2008, however, the Wall Street firms that once supported the auction market suddenly pulled out, leaving retail and institutional investors holding an illiquid investment.

Over the past year, New York Attorney General Cuomo has spearheaded settlements with more than 20 investment firms and banks to buy back more than $60 billion of auction rate securities from investors. Those institutions include the majority of Wall Street’s biggest firms, including Citigroup, Merrill Lynch, Wachovia, Morgan Stanley and JPMorgan.

Charles Schwab, the “Talk to Chuck” online brokerage firm, has the ear of New York Attorney General Andrew Cuomo. A July 20 article in the Wall Street Journal is reporting that Cuomo warned Schwab on July 17 of his plans to sue the company for civil fraud over its marketing and sales of auction-rate securities to individual and institutional investors.

In the letter sent Friday, the New York Attorney General said he will move forth with the lawsuit unless Schwab agrees to buy back the auction-rate securities from investors. 

Last summer, many of Wall Street’s major investment firms, including Citigroup, Merrill Lynch, and UBS, agreed to repurchase more than $50 billion in auction-rate securities to avoid state and federal charges that they misrepresented the instruments as conservative, liquid investments. In February 2008, the $330 billion market for auction-rate securities came to an abrupt standstill, after the banks and investment firms that once managed the auctions suddenly backed out of the market.

As a result, thousands of retail and institutional investors were unable to sell their securities.

According to the Wall Street Journal article, e-mails and testimony cited in Cuomo’s July 17 letter to Charles Schwab show brokers had little idea of what they were actually selling to investors and then later failed to tell clients that the auction-rate market was on the verge of collapse.

Bank of America reportedly is operating under a secret and strict U.S. regulatory sanction, one that mandates an overhaul of the BofA board and addressing perceived risk-management and liquidity issues. The Wall Street Journal first reported the story on July 16, 2009.

According to the WSJ, the sanction comes in the form of a “memorandum of understanding,” or MOU, which is a formal regulatory statement that gives financial institutions a chance to work out their problems without public scrutiny. For companies that fail to resolve the issues in question, harsher penalties may be invoked, including a cease-and-desist order.

It was two months ago, following results of the government’s stress tests on major U.S. financial institutions, that federal regulators initially informed Bank of America it needed to take immediate steps to address its $34 billion capital shortfall. At the same time, federal officials urged the bank to revamp its board and bring in more individuals with extensive banking experience.

Bank of America now faces a series of deadlines to meet various requests by regulators. Some of those deadlines take place later this month, according to the Wall Street Journal.

Already facing hundreds of arbitration claims and lawsuits over a group of collapsed mutual bond funds, Morgan Keegan & Company is now the subject of Well Notice by the Securities and Exchange Commission (SEC). The notice typically signals the likelihood that the SEC could file civil charges in the near future for possible violations of federal securities laws. 

As reported July 16 by the Memphis Daily News, Morgan Keegan’s parent company, Regions Financial Corp., disclosed in a regulatory filing on July 15 that its investment subsidiary, Morgan Asset Management and three unidentified employees received a Wells Notice from the SEC last week.

“We knew it was just a matter of time before the SEC and probably other state regulators (brought) the hammer down,” said Indianapolis attorney Mark Maddox, in the Memphis Daily News article. Maddox is one of dozens of attorneys across the country who has won arbitration cases against Morgan Keegan in the past year for investor losses connected to the mutual funds.

The claims against Morgan Keegan involve at least seven bond funds (collectively known as the “RMK Funds”) that the Memphis-based company formerly managed and which plummeted in value because of the underlying investments made by Morgan Keegan. The investments included untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments. Losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 2008.

Meanwhile, investors in the RMK funds say Morgan Keegan misrepresented the funds as corporate bonds and preferred stocks, giving them the illusion of diversification and low risk levels. 

Stock brokers and brokerage firms are being warned by the Financial Industry Regulatory Authority (FINRA) to rethink their selling strategies of 529 college savings plans.  At a recent compliance meeting in Florida, FINRA reportedly urged the brokerage community to step up its due diligence of 529 plans, as well as assume responsibility to watch over money managers associated with the plans.

In recent months, 529 plans across the country have faced increased scrutiny from state and federal regulators. In April, Oregon sued OppenheimerFunds, charging the money manager of understating the risks it took with a fund in Oregon’s college-savings plan. The fund was the Oppenheimer Core Bond Fund, and Oregon is suing OppenheimerFunds for losses totaling $36 million. 

The Oppenheimer Core Bond fund lost 36% in 2008, compared with the benchmark index, the Barclays Capital Aggregate Bond index, which rose 5.3%.

Five other states – Illinois, Maine, Nebraska, New Mexico and Texas – currently are investigating whether OppenheimerFunds breached its fiduciary duty to investors in state-sponsored 529 plans when it failed to disclose the fund’s exposure to risky mortgage-backed securities and derivatives.  In June, the Illinois treasurer’s office announced a tentative agreement to recoup $77 million from OppenheimerFunds. All five states are in talks with the company, according to a July 9 story in Pensions & Investments

Ameriprise Financial Services will pay $17.3 million to settle charges by the Securities and Exchange Commission (SEC) that it received undisclosed payments to sell real estate investment trusts (REITs) to customers.  According to the settlement with the SEC, which was announced July 10, sales of certain REITs provided the Minneapolis-based broker-dealer with $31 million in compensation.

“Few things are more important to investors than getting unbiased advice from their financial advisers,” SEC Enforcement Director Robert Khuzami said in a statement. “Ameriprise customers were not informed about the incentives its brokers had to sell these investments.”

REITs are entities that invest in different kinds of real estate or real estate-related assets, including office buildings, retail stores, and hotels. According to the SEC, neither Ameriprise nor the REITs disclosed to investors that additional payments were being made in connection with the sale of the REIT shares or about the conflicts of interest the additional payments created. 

In addition, the SEC found that Ameriprise issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue-sharing payments, making them appear as legitimate reimbursements for services provided by Ameriprise.

Birmingham-based investment firm Aura Financial Services and six of its employees face lawsuits by the U.S. Securities and Exchange Commission (SEC) and the Alabama Securities Commission (ASC) on charges of “rampant churning” of customer accounts,  supervisory failures and other securities violations.

The agencies allege that Aura Financial and its brokers used fraudulent and high-pressure sales tactics as a way to entice clients to open and invest money in brokerage accounts that were later churned by Aura brokers for their personal profit. 

Churning refers to when a broker engages in excessive trading of a customer’s account for the purpose of generating commissions or fees. 

According to a statement issued by the SEC, Aura and the brokers charged pocketed about $1 million in commissions and other fees while largely depleting the account balances of customers through trading losses and excessive transaction costs. 

In addition to the churning charges, the SEC and the ASC say Aura failed to properly supervise its brokers, several of whom had criminal or disciplinary backgrounds and multiple prior customer complaints. 

Aura has 28 days to prove to the ASC why its registration as a broker-dealer and agent in the state of Alabama should not be suspended or revoked.

In 2007, a Dec. 24 article in Barron’s magazine lauded David Steckler, an institutional money manager with LPL Financial Services, for his investing strategies to hone in on supposedly solid-performing stocks. Less than six months after the publication of that article, however, Steckler, who joined LPL in 1989, would be fired from the company.

According to disclosures listed on the Web site of the Financial Industry Regulatory Authority (FINRA), Steckler’s termination on March 12, 2008, was based on “violations of company policy with regards to engaging in a referral arrangement with an LPL Financial client and making a personal investment with an LPL Financial client in a private securities transaction without notice to or approval from the firm.”

Documents filed Sept. 11, 2008, in the U.S. District Court for the Northern District of Illinois shed further light on the issue. According to those documents, the Enterprise Trust Company – for which LPL’s Steckler had brought accounts to – caused tens of millions of dollars in client losses, mostly through unsuccessful speculative trading in margin accounts. In order to engage in trading of this magnitude, Enterprise had to pledge as collateral securities that belonged to clients who maintained custodial accounts with Enterprise. The majority of the assets in the custodial accounts consisted of mutual fund holdings, many of which were held in IRA and other qualified retirement accounts. The custodial clients neither knew of nor approved of the margining of their assets. 

The documents go on to state that Enterprise was able to use the custodial assets as collateral for the benefit of its managed clients because it caused all securities entrusted to it to be placed in Enterprise’s name. The assets were then commingled in omnibus accounts and used as though they belonged to Enterprise. As a result, Enterprise effectively misappropriated securities of custodial clients, ostensibly to make money for its managed clients. Further, statements that were sent to custodial clients disguised the misuse of their assets, their financial losses and the trading activity that caused the losses.

Long before Bernie Madoff made news, there was financial advisor Raymond Londo. In March 2008, Ray Londo was fired from Linsco Private Ledger (now known as LPL Financial, or LPL for short) for failing to follow company policies on lending or borrowing funds from clients. Before his termination, however, Londo allegedly operated a multimillion-dollar Ponzi scheme that entailed converting millions of dollars of clients’ assets.

As with Madoff, Londo’s victims reportedly included neighbors, country club associates and family members. Today, Londo and LPL are at the center of ongoing investigations connected to the alleged fraud, as well as numerous arbitration claims filed with the Financial Industry Regulatory Authority (FINRA) by investors who suffered financial losses.

LPL’s role in the alleged actions focuses on the fact that LPL ignored repeated warning signs concerning Londo and that it failed to properly supervise his actions during his employment with LPL. It was only after Londo had defrauded dozens of clients, bilking millions of dollars from their accounts, that LPL terminated Londo’s employment.

This isn’t the first time LPL has been accused of failing to supervise its brokers. In 2002, FINRA announced a $500,000-plus award (Case Number: 01-05344) in favor of an investor who claimed the company failed to supervise one of its independent brokers, which ultimately caused the claimant to suffer substantial financial losses.

In 2008, LPL Financial and a former broker lost another arbitration claim – this one totaling $1.8 million. The claim alleged that LPL and a former broker, Michael McClellan, violated state and federal securities laws, committed fraud, breached fiduciary duties and made unauthorized trades, among other violations.

As reported July 3, 2009, in the Wall Street Journal, LPL was formed in 1989 through the merger of Linsco Financial Group Inc. and Private Ledger Financial Services Inc. Since then, LPL has experienced explosive growth. It is now the fifth-largest brokerage firm in the United States, with 12,294 financial advisors. The company has headquarters in Boston and San Diego.

One of the key attractions of companies like LPL Financial may have to do with money: Brokers at LPL get to keep 80% to 95% of commissions on their trades, compared with 40% or less at bigger brokerage firms, according to the Wall Street Journal article.