Monthly Archives: July 2009

Securities fraud. Stockbroker misconduct. Unsuitable investments. Churning. Unauthorized transactions. Investment scams. Did you ever wonder what happens to bad stockbrokers or negligent financial advisors who are charged by regulators of committing these acts against individual and institutional investors? If your guess is they find a new career outside the securities industry, think again. Case in point: California investment advisor Jeffrey Forrest.

Investment News wrote a lengthy article on May 24 about Forrest and how the current lack of information regarding rogue stockbrokers has become a growing disservice to the millions of investors who entrust them with their money.

Forrest’s story began in 2006, when he was asked to leave Associated Securities for making improper sales of a hedge fund called the Apex Hedge Fund. Two years later, the Securities and Exchange Commission (SEC) sued Forrest, accusing him of telling clients that the Apex Hedge Fund was designed to provide safety, security and liquidity of investor principal, while generating 3% monthly returns. In truth, the hedge fund was a highly speculative investment that engaged in risky options trading. 

In August 2007, the Apex Fund collapsed, causing investors to lose millions and millions of dollars.

In addition to levying fraud charges against Forrest, the SEC tried to permanently bar him from working in the investment advisory business altogether. 

That didn’t happen, however. Forrest continued to sell insurance in California, as well as run a registered investment advisory firm called WealthWise LLC in San Luis Obispo, California.

As the Investment News story points out, even though the SEC had initiated action against Forrest, he remained licensed by major insurance companies to sell life insurance.  In addition, in March 2009, a Financial Industry Regulatory Authority (FINRA) arbitration panel found Associated Securities and Forrest liable for their actions in connection to the Apex Hedge Fund and awarded $8.8 million to investors.

In June 2009, the SEC officially barred Forrest from acting as an investment adviser. According to its ruling, Forrest will not be allowed to associate with any broker-dealer or serve as investment adviser for five years. At the conclusion of the five years, Forrest can reapply with the SEC or FINRA to once again work for a broker-dealer or investment advisor.

Forrest’s story highlights the need for better transparency of public records on corrupt stockbrokers and investment advisors. Currently, such information typically is extracted from FINRA’s database two years after individuals leave the securities industry because of customer disputes or regulatory and disciplinary events. According to the Investment News story, records of more than 15,000 brokers who have left the securities business are not publicly available to investors. 

Making matters even worse: Some of these brokers have been involved in recent investment-related frauds that occurred during the market’s financial collapse, according to Investment News.

As for Forrest, his records are no where to be found on the BrokerCheck Reports section of FINRA’s Web site.

For too long, the idea of “anything goes” on Wall Street was the norm, as investment banks concocted and sold individual and institutional investors exotic baskets of untested and speculative financial instruments like subprime mortgage securities, credit default swaps and collateral debt obligations (CDOs). The products themselves were born out of process known as securitization, and critics say abuses in that market have proven to be a main contributor behind the mortgage market meltdown and the credit crisis that followed.

Securitization is everywhere today. Mortgages are securitized. Car loans are securitized. So are credit cards and student loans. Essentially, securitization occurs anytime an interest-earning pool of assets is packaged together and sold as securities.

Lenders were the first to make securitization mainstream when they decided to “sell” home mortgages to big investment banks, which then converted the mortgages into securities. That was more than four decades ago. During that time, investment banks began to securitize many other kinds of debt and lining up retail and institutional investors, pension funds, and others as their buyers.

For a while, the securitization business thrived beyond all expectations. Demand for mortgage-backed securities was so huge that lenders found they could sell almost any type of security, even the most risky and toxic form of debt.

Whatever the securitization market had in demand, however, it lacked in transparency, disclosures and due diligence. Ultimately, the absence of this much-needed regulation led to financial disaster for investors and the nation as a whole. As reported in a July 6 story by NPR, many critics now contend the housing collapse and the recession itself would never have materialized if the securitization market had been better regulated.

Moving forward, it’s likely there will be a substantial overhaul of the securitization market, including implementing key changes to the manner in which investment banks participate. One proposal is to require securitizers to hold on to a piece of whatever financial product they’re selling to investors. In sharing the risk, they may be a little more careful about what they’re selling, according to the NPR story.

Tumultuous upheaval in the financial markets has led to a rash of arbitration claims from retail and institutional investors on charges their financial advisors and brokerages misrepresented the risk levels of certain investment products. Some of the central players in these claims: Morgan Keegan & Company and Charles Schwab.

In the case of Memphis-based brokerage Morgan Keegan, investor complaints involve a group high-yield bond funds that the company allegedly marketed and sold as conservative investment options – products designed to provide high yields without excessive credit risks. Instead, the RMK funds made large investments in illiquid and toxic securities, including asset- and mortgage-backed securities and collateral debt obligations (CDOs).

Other funds responsible for the influx of arbitration claims include Charles Schwab & Co.’s YieldPlus funds. 

For more than a year now, investors nationwide have complained to the Financial Industry Regulatory Authority (FINRA), as well as the Securities and Exchange Commission (SEC), that Charles Schwab represented the YieldPlus funds as investments similar to money-market funds, while failing to disclose the fact they held large concentrations of toxic products like mortgage-backed securities. Ultimately, these holdings caused the YieldPlus funds to lose up to 80% of their value.

As reported July 6 by the Wall Street Journal, aggrieved individuals who do file claims with FINRA for their investment losses are likely to experience a more “investor-friendly” process than in the past because of recent changes to how an arbitration hearing is conducted and the composition of the arbitration panel.

Specifically, FINRA launched a pilot program in October 2008 that allows 276 cases against 11 participating brokerage firms to be heard annually by an all-public, three-person panel versus having one of the panel members associated with the securities industry. The program is a win for investor advocates, who contend having an industry-affiliated arbitrator reside on an arbitration panel not only can create bias but also sway other panel members against the investor.

A group of public Ohio and Texas pension funds will lead a securities class-action lawsuit on behalf of investors against Bank of America (BofA) and the acquisition of brokerage firm Merrill Lynch.

On June 30, Judge Denny Chin of the U.S. District Court for the Southern District of New York granted lead plaintiff status to the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System and the Teachers Retirement System of Texas. They are joined by two European pension funds: Fjärde AP-Fonden and Stichting Pensionfonds Zorg en Welzijn. 

Investors in the case allege Bank of America purposefully misled them about the fiscal health of Merrill Lynch before the purchase on Jan. 1, 2009. In its fourth quarter, Merrill reported a loss of $15.4 billion. 

As reported July 2 by the New York Times, the BofA/Merrill Lynch merger has prompted Congressional hearings into why Bank of America failed to back out of the acquisition or disclose more information about Merrill’s financial status. In addition, lawmakers want to know the extent to which federal regulators may have pushed Bank of America to close the deal.

On June 26, 2009, a Washington, D.C., arbitration panel of the Financial Industry Regulatory Authority (FINRA) ruled in favor of investor David Cutler and his claim (FINRA No. 09-00300) against Charles Schwab & Company and its Schwab YieldPlus Fund.

The panel awarded Cutler $11,400.

Cutler’s complaint against San Francisco-based Charles Schwab is similar to hundreds of other arbitration claims filed with FINRA by investors who allege that Charles Schwab misrepresented the risks of the Schwab YieldPlus fund by failing to disclose important information about the risky securities it held.

Specifically, the Schwab YieldPlus fund was marketed and sold as a safe and conservative alternative investment to money market funds. Later, investors learned the YieldPlus fund was heavily concentrated in high risk and toxic subprime mortgage-backed securities and in even more risky collateral debt obligations (CDOs). Ultimately, Schwab’s failure to diversify the fund’s portfolio caused investors to collectively lose approximately $1.3 billion in 2008.

In 2008, approximately 74% of customer claimant cases filed with FINRA resulted in monetary settlements or awards for the investor.

New York-based Prime Capital Services (PCS) and several of its brokers – Eric J. Brown, Matthew J. Collins, Kevin J. Walsh and Mark W. Wells – face enforcement action by the Securities and Exchange Commission (SEC) for allegedly luring senior citizens and retirees to buy unsuitable variable annuities.

According to the SEC complaint, Prime Capital Services and its parent company, Gilman Ciocia of Poughkeepsie, New York, recruited the majority of clients by offering free-lunch seminars in Florida, encouraging elderly investors to schedule private appointments with PCS representatives. What the meetings reportedly failed to reveal, however, was key information relating to the variable annuities, including their high costs and lock-in periods.

The SEC contends Prime Capital Services and its brokers earned millions of dollars in sales commissions and that many of the variable annuities sold were unsuitable investments for customers due to their age, liquidity, and investment objectives.

In addition, the SEC says representatives from Prime Capital Services told customers that the annuities were “guaranteed” not to lose money, while failing to disclose the fact that the guarantee only occurs upon the death of the person holding the annuity. Prior to that, the value of a variable annuity can fluctuate widely depending on the performance of a portfolio’s securities.

The SEC also named Prime Capital Services’ President Michael P. Ryan in its complaint, along with PCS employees Rose M. Rudden and Christie A. Andersen.

In 2005, Prime Capital Services faced similar allegations and settled with the Financial Industry Regulatory Authority (FINRA). Without admitting any wrongdoing, the company paid a $200,000 fine, replaced the firm’s compliance officer and reportedly enhanced its compliance policies.