Category Archives: Broker/dealer

Swiss banking giant UBS has had its share of spotlight moments in recent years – and many have been anything but positive. Last year, the firm agreed to pay $1.5 billion to settle claims that UBS traders and managers had manipulated global benchmark interest rates. The bank also paid nearly $27 million in 2013 to settle accusations by the Securities and Exchange Commission (SEC) that it and two of its executives in Puerto Rico had made misleading statements to investors that the SEC said concealed a liquidity crisis in UBS funds.

Another blight on UBS’ record concerned former UBS trader Kweku M. Adoboli, who was sentenced in 2013 to seven years in jail after having been found guilty of fraud that subsequently led to a multibillion-dollar trading loss at UBS.

Now there appears to be more trouble brewing for UBS. This time it has to do with the bank’s business in Puerto Rico. Puerto Rico has long been a haven for the wealthy because residents do not pay federal income taxes. A number of big investment banks do business in Puerto Rico, but UBS is one of only a handful with a substantial team of brokers on the island. As reported in a recent story by Susanne Craig in the New York Times, UBS maintains five branches in Puerto Rico, with 132 brokers who manage money – roughly $10 billion – for the island’s wealthy investors.

In many instances, UBS put this money into mutual funds that the bank itself managed. Such a practice can be lucrative business as both the broker and the bank receive a commission on each sale, with the bank taking in a fee for managing the fund.

Because of recent economic woes in Puerto Rico, UBS customers have seen the value of their holdings fall dramatically. Many of these investors had bought heavily into highly leveraged bond funds run by UBS and were encouraged by its brokers to borrow even more money to invest in those funds, according to the New York Times story. In some cases, “money was lent improperly, exacerbating current losses, according to UBS employees in the region close to the situation, who spoke on the condition that they not be named because of a company policy against speaking to the news media.”

Now, a number of UBS clients have been forced to liquidate hundreds of millions of dollars in holdings in these funds in order to meet margin calls. UBS, meanwhile, says it has launched an internal investigation regarding the lending practices of some of its brokers in Puerto Rico.

One UBS broker reportedly already has been placed on administrative leave after recent claims came to light he had encouraged his clients to buy securities on lines of credit, which is in violation of the bank’s policy.

As reported in the New York Times story, UBS’ funds had once enjoyed strong returns for years and paid healthy dividends. The Tax Free Puerto Rico Fund II (total assets: $357 million) has a five-year return of 6.8 percent, according to UBS documents.

But in the face of Puerto Rico’s continuing economic downturn, UBS customers have seen the value of their holdings fall. The fund’s shares don’t trade on an exchange, but UBS documents show it had a per-share value of $6.16 in early September, down from $7.75 a share at the end of June. Brokers in the region say the fund’s value has fallen even further in recent weeks, according to the New York Times.

The funds that UBS manages are highly leveraged. According to the New York Times, the Tax Free Puerto Rico Fund II has a leverage ratio of 53%. That means for every dollar of a customer’s assets it holds, it has roughly another dollar of assets bought with borrowed money. UBS’s other Puerto Rico funds are similarly leveraged, according to firm documents.

By comparison, the average leverage ratio on funds similar to UBS’ in the United States is roughly 22%, according to Morningstar.

The New York Times story points out that UBS’ troubles on the island have been exacerbated by the fact that many clients took out margin loans to buy into the funds. (UBS brokers who encouraged the use of credit lines had good reason to do so; they receive commissions for securities bought on the credit lines and make additional money if the customer uses the credit line.)

The New York Times story goes on to report that according to local brokers and a lawyer representing some UBS clients who may sue UBS, some investors were encouraged by their brokers to borrow on credit lines.

You can read the entire New York Times story here.

Eighty percent of Americans have found themselves targeted by investment scammers, according to a new report from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation. Findings in the study also showed that 40 percent of respondents were unable to identify even the most classic red flags of financial fraud.

For example, many of those surveyed lacked an understanding of reasonable returns on investments, leaving them vulnerable to fraudulent pitches that promised unrealistic or guaranteed returns, the study said.  In fact, more than 4 in 10 respondents found an annual return of 110% for an investment appealing and 43 percent found “fully guaranteed” investments to be appealing. In reality,  no investment is without risk and 100% annual returns are highly improbable. Such promises are common pitches of fraudsters.

Con artists are adept at using a variety of tactics to get their hands on consumers’ money. The FINRA Foundation’s survey found that 64 percent of those surveyed had been invited to an “educational” investment meeting that was likely a sales pitch. Additionally, 67 percent of respondents said they had received an email from another country offering a large amount of money in exchange for an initial deposit or fee.

Older Americans are particularly vulnerable to fraud scams. The FINRA study found that Americans age 65 and older were more likely to be targeted by fraudsters and more likely to lose money once they were targeted. Upon being solicited for fraud, older respondents were 34% more likely to lose money than respondents in their forties, the study said.

This quiz from ABC News lets you test your awareness about financial fraud.

Brokers/dealers could soon be forced to reveal recruiting incentives to their clients if the Financial Industry Regulatory Authority (FINRA) has anything to say about it.

As reported Sept. 15 by Investment News, the proposed regulation will be a topic of discussion on FINRA’s agenda this week. Under the original proposal that was developed in January and then postponed for action by FINRA’s board in July, brokers would be required by FINRA to disclose any enhanced recruitment compensation to clients that they had solicited for one year following their transfer to a new firm. The compensation outlined in the proposal included signing bonuses, upfront or back-end bonuses, loans, accelerated payouts and transition assistance, among other arrangements.

According to the Investment News article, FINRA CEO Richard G. Ketchum said the proposed rule is designed to make potential conflicts of interest more transparent to consumers.

Indeed, in a speech given March 14, Ketchum stated that investors have a right to be informed of conflicts involving recruitment packages when deciding to move their account, especially if that decision translates into having to sell off proprietary products and incurring a possible tax hit.

“When a broker moves to a new firm and calls a customer and says, ‘You should move your account with me because it will be good for you,’ the customer needs to know all of the broker’s motivations for moving,” Ketchum said.

The initial proposal generated 65 comment letters, with many independent broker/dealers voicing opposition. If FINRA’s board now gives its approval to the proposal, FINRA staff can then file rules with the Securities and Exchange Commission (SEC).

Investment scams targeting the elderly are a thriving business for some unscrupulous individuals and so-called companies posing as legitimate financial firms. From  Bernie Madoff, to Medical Capital Holdings, to Tim Durham and, more recently, Indiana investment adviser Lynn Simon.

Simon of Evansville, Indiana, was arrested this spring on charges that he swindled more than $1 million from at least a dozen investors. He now faces three counts of securities fraud, Class B felonies, and a charge of unlawful sale of a security, a Class C felony.

Last week, Simon surrendered at the Vanderburgh County Jail.

According to court documents, several investors who lost money in Simon’s “investments” were elderly. One of the investors included a couple who lost $50,000 that they had planned to use for their retirement years.

The investigation into Simon came to a head in May after an Evansville resident filed a complaint with the Indiana Secretary of State’s office stating that he had stopped receiving interest payments on his investment with Simon. Court records show that Simon’s wife told this investor that Simon had been missing for two weeks.

Simon was a registered investment adviser with CFD Securities in Kokomo, Ind., and operated an office in Evansville under the name Financial Security Planning. Court records show that he was the sole owner of Financial Security Planning, as well as The Insurance Shoppe.

As reported by the Evansville Courier & Press, Simon’s arrest affidavit details an investment scheme involving investments for a private fund allegedly operated by Simon. Investors who invested in the fund were reportedly promised higher rates of returns on their investments. In some instances, the return rates were as high as 11%.

Investigators say that as part of the scheme, Simon issued typewritten promissory notes showing a rate of return at a specified maturity date. Simon did not register any of the investments that were sold under the Financial Security Planning name with the state of Indiana.

In addition, bank records did not show any money going to investments or insurance companies as purported by Simon, the Evansville Courier & Press story said. Instead, according to the affidavit, the records showed investor money going in and then either going to other investors or being withdrawn by Simon.

Investigators also say that Simon was the only person who was authorized to use the account. In addition, the records showed more than $42,000 had been withdrawn on the day before Simon’s wife first reported him missing.

Simon’s arrest serves as a cautionary reminder on the importance of thoroughly researching any investment opportunity, as well as the person or company presenting that investment. In the end, the extra homework can go a long way in preventing financial devastation.

The designations used by financial advisers can confuse even the most sophisticated investor, let alone individuals with little knowledge about financial products or investing. This confusion has led the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association to issue an investor notice about the myriad of financial titles circulating today.

The joint bulletin, which was released yesterday, stressed that financial professional designations and licenses are not the same and that investors should never rely solely on a title to determine whether a financial professional has the expertise they need.

Indeed, some financial titles can simply be purchased or even made up by financial professionals who hope to imply that they have certain expertise or qualifications, says NASAA. In most cases, such titles are generally marketing tools and not granted by a regulator.

Earlier this year, the Consumer Financial Protection Bureau released a report focusing on the proliferation of “senior designations.” The report stated that some financial professionals had taken advantage of elderly consumers by using senior qualifications and selling “inappropriate and sometimes fraudulent financial products and services.”

The SEC/NASAA bulletin offers a number of questions that investors can ask to determine whether a financial adviser has the expertise he or she is touting. Among the questions and recommendations:

What is the name of the organization that awards the financial professional title?

What training, ethical, and other requirements were performed to receive the financial professional title?

Did you have to take a course and a test?

Does the financial professional title require a certain level of work or educational experience?

To maintain the financial professional title, are you required to attend periodic continuing education courses?

The notice also suggests that investors confirm any information provided by the financial professional about his or her financial professional title.  This information may be available on the Web site of the organization that awards the financial professional title. Investors also can check the Web site of the Financial Industry Regulatory Authority (FINRA) and the “Understanding Investment Professional Designations” section.

Finally, the notice encourages investors to contact the organization issuing the financial title to confirm that the financial professional is currently authorized to use the title and to determine if they have any disciplinary history.

Massachusetts securities regulators are continuing their focus on the sales practices of broker/dealers that market and sell non-traded real estate investment trusts (REITs), as five firms agree to pay $10.75 million in restitution to Massachusetts investors who bought the products from 2005 to today.

Secretary of the State William Galvin announced the REIT settlements yesterday. The five firms and their respective settlements include: Securities America, $7.6 million; Ameriprise, $1.6 million; Lincoln Financial Advisors Corp., $840,873; Commonwealth Financial Network, $533,500; and Royal Alliance Associates, $125,000.

This is the second round of settlements tied to improper sales of non-traded REITs. In May, the same five broker/dealers agreed to pay $6.1 million in restitution, along with fines of $975,000. In February 2013, Galvin’s office ordered LPL Financial to pay $2 million in restitution to clients in connection to non-traded REITs.

“These investments are popular, but risky,” Galvin said in a statement about the recent settlements. “Our investigation showed widespread problems with adherence to the firms’ own policies as well as the state rule that an investor’s purchase of REITs cannot be more than 10 percent of that person’s liquid net worth.”

A Sept. 1 article titled “Ignorance Is Not Bliss” by Investment News highlights the impending issues facing bond investors  and whether financial advisers are taking appropriate measures to ensure their clients don’t get caught unaware.

Last week, the 10-year U.S. Treasury note yield was 2.78%, slightly down from 2.94% that it stood on Aug. 24. As the article points out, the yield pullback is likely to be short-lived as the Federal Reserve begins to taper its monthly bond purchases under what’s known as its five-year-long quantitative-easing program.

And that’s expected to happen very soon, which means investors need to take careful note. Because bond prices move in the opposite direction of yields, the rise in market yields could spell huge losses for investors. This is especially true for bond mutual funds in which portfolio managers are forced to sell their holdings at a loss in order to meet redemption demands, according to the Investment News article.

The article makes it very clear:  The yield on the 10-year Treasury has gained a full percentage point since mid-May. A 1-percentage-point rise in interest rates translates into about a 1% decline in prices for every year of a bond’s duration. To put it another way, a bond fund with a 10-year duration would fall in value by 10% for every 1-percentage point interest-rate rise.

The question becomes whether investors clearly understand the impact of rising interest rates on their investment portfolio. Unfortunately, several studies indicate that the answer may be “no.”  According to a new study by brokerage firm Edward Jones, 63% of Americans don’t know how rising interest rates will affect their retirement portfolios, including their 401(k)s and IRAs. Moreover, 24% say they feel completely in the dark about what rising interest rates actually mean.

Financial advisers should be paying attention and taking steps to make sure their clients understand the current financial climate, especially the impact of rising interest rates on bonds. In some cases, that’s happening. In other instances, advisers appear to be completely out of touch with the state of the bond market. In that scenario, investors could very well be caught off guard and pay the ultimate price.

“The biggest risks to the clients is the adviser being either oblivious or in denial about how bonds work. And the client has faith in the adviser . . . High-quality bond funds are the worst investments on the planet right now,” said Robert Isbitts, founder and chief investment strategist at Sungarden Investment Research, in an Aug. 27 interview with Investment News.

Every year, more investors watch helplessly as their retirement savings vanish because of investment fraud. Many of these individuals are elderly investors 65 years of age or older. According to researchers, scams from Ponzi schemes to frauds involving bogus private placements and promissory notes cost U.S. seniors $3 billion a year.

Just this week, the Securities and Exchange Commission (SEC) filed fraud charges against an Indiana man accused of stealing millions of dollars in retirement savings from clients. The SEC alleges that John K. Marcum of Noblesville, Indiana, and Guaranty Reserves Trust LLC used clients’ money for personal use and to fund a bounty hunter reality TV show.

Marcum Cos. LLC was named as a relief defendant in the SEC’s case. Marcum is the principal of both Guaranty Reserves and Marcum Cos.

“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, Acting Director of the SEC’s Chicago regional office, in a statement.  “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”

The SEC says that Marcum allegedly raised more than $6 million from at least 37 investors by selling investments in Guaranty Reserves Trust. Clients were allegedly told by Marcum that their principal was guaranteed and their proceeds would earn large returns from day trading. In addition, Marcum allegedly provided investors with account statements showing that he had used their money to achieve annual returns of more than twenty percent (20%), with no monthly losses. Marcum also reportedly told his clients that he would use their money to earn strong returns by day-trading in stocks.

In reality, Marcum did very little actual trading, and when he did, he suffered significant losses. Instead of day-trading, Marcum used his investors’ money as collateral for a $3 million line of credit for himself. Marcum turned to this line of credit to finance several start-up businesses, including a bridal store, a soul food restaurant and bounty hunter reality television show. Marcum also used investor money to finance his lavish lifestyle, which included luxury car payments, airline and sporting event tickets, expensive meals and hotel stays, the complaint states.

In the complaint, the SEC says that Marcum assisted many of his investors in setting up self-directed IRA accounts at several trust companies. The investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts, or by transferring their taxable assets directly to brokerage accounts which Marcum controlled.

Marcum and certain investors then co-signed promissory notes created by Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC says. The notes were securities and stated that the individual is making an “investment” with GRT. The promissory notes also repeatedly stated that the securities are “asset-backed,” “secured” and “guaranteed,” and promise the payment of interest based on “100% of the asset’s performance.”

Marcum’s scheme, which began in 2010, began to unravel in mid-2013, when certain investors began demanding distributions. Marcum could not comply, because virtually all of his investors’ money was gone. Faced with the reality of being unable to honor investor redemption requests, the SEC alleges that Marcum provided investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.

In June 2013, the SEC says Marcum had a phone conversation with three investors in which he admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money, the SEC alleges. According to the complaint, Marcum offered to name these investors as beneficiaries on his life insurance policies, which he claimed included a “suicide clause” imposing a two-year waiting period for benefits.  Marcum suggested that if he was unsuccessful in returning investors’ money, he would commit suicide to guarantee they would eventually be repaid.

The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

The Financial Industry Regulatory Authority (FINRA) filed a complaint on July 30 against real estate investor Tony Thompson, alleging that he deceived and defrauded investors who bought $50 million in high-yield promissory notes sponsored by Thompson National Properties LLC.

Thompson is well known in the independent-broker-dealer industry for his real estate deals, including 1031, or “tenant in common,” exchanges.  He launched Thompson National Properties in 2008, raising $250 million from investors via a series of real estate-related offerings. Among them is a now-struggling non-traded real estate investment trust, TNP Strategic Retail Trust Inc., which eliminated dividends to investors this year.

FINRA’s complaint focuses on the level of disclosure regarding financial difficulties at Thompson National Properties in the PPMs, said Thompson’s lawyer, Thomas Fehn, in an Aug. 6 article by Investment News. Fehn contends those issues were appropriately disclosed.

According to the complaint, Thompson National Properties had provided a purported guarantee of principal and interest for three notes programs sold from 2008 to 2012 through a network of independent broker-dealers.  TNP Securities LLC, which is Thompson’s broker/dealer, also named in the complaint.

The three note programs in FINRA’s complaint include the TNP 12% Notes Program LLC, the TNP 2008 Participating Notes Program LLC and the TNP Profit Participation Program LLC.

As reported in the Aug. 6 story by Investment News, Thompson’s profile on Finra’s BrokerCheck system states that TNP Securities and Thompson “engaged in transactions, practices or courses of business which operated as a fraud or deceit upon the purchaser” of the note securities. In FINRA’s complaint, one of those series of private notes is reported to be in default, while two others have stopped making payments to clients.

Thompson and TNP Securities are allegedly in violation of Securities and Exchange Act of 1934, as well as FINRA’s Rule 2020, which prohibits the use of manipulative, deceptive or other fraudulent devices by registered representatives and broker-dealers. They are also allegedly in violation of FINRA Rule 2010, which requires registered reps and broker-dealers to adhere to high standard of commercial honor and trade.

Thompson and TNP Securities are no strangers to FINRA. Both have been on the regulator’s radar for some time now over allegations of failing to cooperate in a FINRA investigation.

A recent editorial by Investment News addresses a newly introduced bill intended to end the mandatory arbitration clause found in contracts between financial advisers and their clients.  Rep. Keith Ellison, who introduced the bill, says he believes that doing away with mandatory arbitration could begin the process of rebuilding investor trust in Wall Street.

“Investors want to get back in the market, but they’re rightly wary that the game is rigged against them,” Ellison said in a statement after introducing the bill. “Investors shouldn’t have to sign away their rights in order to work with a financial adviser or broker/dealer. By removing some of these unfair advantages, consumers will be more eager to invest, which will create jobs and strengthen the economy.”

The mandatory arbitration clauses are standard in brokerage contracts and often included by registered investment advisers. Specifically, the clauses dictate that any client complaints must be settled in binding arbitration instead of the courts.

As the Investment News editorial correctly points out, there are other reasons to get rid of mandatory arbitration, not the least of which is the fact that investors should not be required, as they are now, to relinquish their legal rights in advance of a future complaint with their broker. Such a requirement does nothing to instill trust and faith in Wall Street.

In reality, as of three years ago, the Securities and Exchange Commission (SEC) has had the authority to end, or at the very least, limit mandatory arbitration under the Dodd-Frank Act. But the SEC has yet to make a move in that direction.

This summer, one SEC member – Luis A. Aguilar – went against the tide and introduced a bill to kick start the process. That bill, the Investor Choice Act of 2013, is strongly supported by several investor protection and financial groups, including the North American Securities Administrators Association (NASAA), which believes that inclusion of mandatory arbitration provisions in broker/dealer and investment adviser customer contracts denies many investors the ability to pursue legitimate claims against fraudsters.

“Investors deserve better than the current ‘take-it-or-leave-it’ approach to securities dispute resolution. Rep. Ellison’s legislation will ensure that investors have the unencumbered right to seek redress in the appropriate and desired forum,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner, in a statement.

The bottom line: If the investment world hopes to restore the trust of investors – and create true financial reform – it needs to act in their best interests. Period. Ending mandatory arbitration is a beginning.