Category Archives: Investor Beware

Lured by false promises of big yields and high returns, investors often make the mistake of putting their money into one investment basket – one that contains risky and obscure financial products that fail to live up to their hype.

On July 25, the Financial Industry Regulatory Authority (FINRA) issued an Investor Alert on this very subject. In the alert, FINRA offers insight on why more investors are “chasing returns,” meaning they are putting their assets into more and more riskier investments.

Many investors do not realize they could be taking on more risk if they invest in products with higher returns, FINRA says. Those investments include non-traded real estate investment trust (REITs), high-yield bonds, structured products and floating-rate loan funds.

Before investors consider moving their assets to another investment, FINRA suggests that they ask themselves the following questions:

• Does the higher return from the investment come with increased risk? In most cases, the answer is “yes,” FINRA says.
• Do you thoroughly understand how the investment operates? A number of investments come with an unwanted surprise, such illiquidity, exit fees, loss of principal or the return of the investment in a form other than cash.
• Are there costs and fees associated with the new investment? Not only is the promise of higher return associated with greater risk, but some of these investments have higher costs, as well.
• Is the product callable? A callable investment means that after a period of time, the issuer can redeem the investment prior to the investment reaching maturity.
• Could the new investment be fraudulent? Legitimate investments that promise returns of 30, 50 or even 100% annually without any risk to your principal exist only in fantasy land. To confirm the status of an individual broker or firm, use FINRA’s BrokerCheck. To check the status of an investment adviser or firm, use the Investment Adviser Public Disclosure database.

The bottom line: It’s important to read and understand the fine print about an investment before deciding to put your money into it. In almost every instance, a product that promises high yields and returns also comes with considerably more risk – and a greater potential for financial loss.

To learn more about various investments that investors are turning to as a way to “chase returns,” go to tiny.cc/z6kty.

Oren Eugene Sullivan is the disgraced South Carolina broker who recently pled guilty to mail fraud in connection to a multimillion dollar, decades-long Ponzi scheme. In January, Sullivan admitted in federal court that from 1995 through 2008 he ran the Ponzi scheme, selling fake investments to individuals and groups of investors, according to the U.S. Attorney’s Office in South Carolina.

So why does the Web site of the Certified Financial Planner Board of Standards still list Sullivan as a CFP in good standing, with no public disciplinary history? It’s a question that was first raised in a Feb. 14 article in Investment News.

As the story aptly points out, designating authorities are finding it more and more difficult to keep up with the bad deeds and misconduct of financial representatives like Sullivan.

Monitoring conduct is an arduous and difficult task. The CFA Institute, which says that 85% of its investigations begin as a result of self-disclosures and 10% from news reports and regulatory Web sites, has two investigators who monitor professional conduct. Most of that work is primarily done via the Internet, according to the Investment News article.

Other designation groups follow similar investigative routes, as well as perform internal investigations before deciding upon punishment. The process, however, can be a lengthy one, ranging from several weeks to a year or more.

Case in point: Oren Eugene Sullivan.

Records with the Financial Industry Regulatory Authority (FINRA) state that Sullivan sold clients nearly $4 million of fake promissory notes between 1995 and 2008. He repaid about $1.5 million before getting caught by authorities. In August 2009, Sullivan was barred by FINRA. In January 2010, he pled guilty to one fraud charge and faces a maximum of 20 years in prison and a fine of $250,000.

Somehow Sullivan’s actions didn’t mar his CFP designation with the CFP Board, however. Investment News did note that the CFP Board was aware of the allegations against Sullivan, but wouldn’t confirm whether they were actually investigating him.

Thousands of institutional and retail investors of Fannie Mae (FNM) and Freddie Mac (FRE) preferred stocks have witnessed the collapse of their investment portfolios following the government’s takeover of the two mortgage giants on Sept. 6, 2008. Many of these investors initially purchased huge concentrations of Fannie Mae and Freddie Mac preferred stock based on misleading information from their brokerages or financial advisers.

In some instances, investors were never told about the potential risks associated with investments in Fannie Mae or Freddie Mac. Instead, the stocks were described as conservative – investments designed to provide investors with consistent income via above-average dividends. After all, Fannie Mae and Freddie Mae stood as the nation’s mortgage giants. They were too big to fail. And, as so-called government-sponsored entities, investments in Fannie Mae and Freddie Mac were guaranteed or implicitly guaranteed by the federal government. At least that’s what many investors believed.

Instead, on Sept. 6, 2008, the federal government seized control of the too-big-to-fail lending companies, placing Fannie Mae and Freddie Mac into a government conservatorship under the Federal Housing Finance Agency (FHFA). In turn, the government’s bail-out wiped out Fannie Mae and Freddie Mac’s common and preferred stockholders. All dividends for the two companies were eliminated.

Several months prior to the near-collapse of Fannie Mae and Freddie Mac, on May 13, 2008, Fannie Mae announced plans to raise some $6 billion in capital by issuing an offering of 8.25% Non-Cumulative Preferred Stock, Series T. In reality, that amount could never sufficiently address the lender’s overall deteriorating financial health, which had nosedived as a result of mortgage-related losses, poor underwriting standards and risk management procedures. The full extent of Fannie Mae’s capital deficiencies was never disclosed to investors, however. Moreover, many investors were advised that the Fannie Mae Preferred Stock, Series T was a safe and stable investment suitable for conservative portfolios.

When the Treasury Department announced takeover plans for Fannie Mae in September 2008, the price of the Fannie Mae Series T Preferred Stock dropped dramatically, falling more than 88% from its initial offering price of $25 per share on May 13, 2008, to $3 per share on Sept. 8, 2008.

If you are an institutional investor or retail investor and were misled about your investments in Fannie Mae or Freddie Mac preferred stocks, we want to hear your story. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA). Leave a message in the Comment Box below or via the Contact Us form.

The fate of the Columbia Strategic Cash Portfolio Fund was sealed on Dec. 10, 2007, when losses on investments in mortgage and certain asset-backed securities combined with a $20 billion withdrawal from a single institutional investor forced Bank of America to shutter one of the largest U.S. short-term funds catering to institutional investors.

The Columbia Strategic Cash Portfolio Fund is run by Columbia Management, a unit of Bank of America. Described as an enhanced cash fund and a suitable substitute for money market accounts, the Columbia Strategic Cash Portfolio Fund went from $40 billion in assets to about $12 billion in a matter of months.

The reasons behind the forced liquidation of the Columbia Strategic Cash Portfolio can be traced to its exposure to risky asset-backed securities and structured investment vehicles (SIVs) tied to real-estate mortgages. Some of the SIVs associated with the fund were later downgraded by credit-ratings agencies, creating more losses for the fund.

Unlike traditional money-market funds, the Strategic Cash fund didn’t provide investors with a guarantee to maintain a $1-per-share net asset value.

At the time the Columbia Strategic Cash Portfolio was shuttered, only a few investors found themselves able to liquidate their positions. Other investors were given a pro rata share of the fund’s underlying securities in lieu of cash. And still other shareholders were told they could cash out at the fund’s current share price at a loss.

The liquidity problems associated with enhanced cash funds like the Columbia Strategic Cash Portfolio are reminiscent of those found in auction rate securities, investments once deemed as a safe haven for individual and institutional investors to park their cash. When the market for auction rate securities collapsed in February 2008, however, investors quickly discovered that their investments were far from cash-like.

And that’s exactly what many investors in the Columbia Strategic Cash Portfolio Fund have discovered. Case in point: Costco Wholesale Corporation. As reported May 16, 2008, by the Puget Sound Business Journal, Costco unsuccessfully tried to pull out of several enhanced cash funds in 2008, with $371 million that remained frozen in the Columbia fund and two similar funds. In turn, Costco was forced to report a $2.8 million write-down on investments in those funds because of the decline in their value, according to the company’s 2008 10-K filing with the Securities and Exchange Commission (SEC).

Other companies affected by the Columbia fund include Getty Images. As of March 31, 2008, Getty had $20.4 million invested in the Columbia Strategic Cash Portfolio Fund. According to the Puget Sound story, Getty reported a $400,000 loss because of the decline in the value of the fund.

Another company, SonoSite, Inc., had $8.2 million tied up in the Columbia fund as of March 31. Ultimately, the medical devices company reported $300,000 in losses from that investment.

In September, the Financial Industry Regulatory Authority (FINRA) announced that Robyn Lynn O’Hara, formerly of WFG Investments, had been barred from FINRA for securities violations. According to FINRA’s findings, O’Hara engaged in multiple trades in customers’ accounts at her member firms without customers’ authorization or consent. The findings further stated that O’Hara continued unauthorized trading in one account even after the customer instructed her to cease all trading.

Information posted in FINRA’s BrokerCheck provides additional insight into O’Hara’s professional background, with allegations of unauthorized trades and unsuitable investments dating as far back as 1992 when she working as a broker at J.W. Gant & Associates. In that particular case (FINRA Case No. 92-01617), FINRA eventually ruled O’Hara and J.W. Gant jointly liable for their actions, awarding some $6,500 in damages to the claimant.

That same year, 1992, O’Hara again faced allegations by FINRA of using high-pressure sales tactics and failing to execute a client’s instructions to sell certain securities in his account. O’Hara was fined $20,000 and suspended from association with FINRA for 20 days.

In another case (FINRA Case No. 09-02650) filed in July 2009. O’Hara is again accused of misrepresentation by a former client. The investor also is suing WFG Investments for failing to supervise O’Hara. The case is still pending with FINRA.

In total, O’Hara’s CRD shows at least five regulatory events related to securities violations. In addition, she’s been named in at least three customer complaints tied to securities fraud.

If you have questions about investments made with Robyn Lynn O’Hara or WFG Investments, please fill out the Contact Us form or leave a comment below. We want to hear your story and consult with you about your options.

Breach of fiduciary duty. Misallocated portfolios. Misrepresentation. In a nod to the growing dissatisfaction felt by investors over the actions – or inactions – of their financial advisers and stock brokers, new arbitration cases filed with the Financial Industry Regulatory Authority (FINRA) soared 65%, to 4,991, through August 2009, after climbing to 3,018 for the same period last year. The latest figures put new filings with FINRA on track to hit 7,000 by year end, up from 4,982 in 2008.

“I don’t anticipate it slowing down this year or next,” said Linda Fienberg, president of dispute resolution for FINRA, in a July 14, 2009, story appearing in the Washington Post. Fienberg added that more investors are prevailing in their cases this year than they had in the past.

The No. 1 complaint in investors’ claims through August 2009 is breach of fiduciary duty, followed closely by misrepresentation.

Frank Bluestein, a Detroit-area financial adviser, has been charged by the Securities and Exchange Commission (SEC) of luring elderly investors into refinancing their home mortgages in order to fund investments in a $250 million Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M). Bluestein’s latest run-in with authorities isn’t “new” news, however. More than two years ago, Michigan state securities regulators and the SEC were investigating Bluestein for the very crime he now is alleged to have committed. Bluestein denied similar allegations in a 2008 class-action lawsuit filed by investors who allege Bluestein bilked them out of millions of dollars. That case is still pending.

According to the SEC’s Sept. 28 complaint, regulators allege that Bluestein acted as the single largest salesperson in May’s Ponzi scheme and that Bluestein’s “role” was to specifically target retirees and elderly investors into attending so-called “investment seminars” held in Michigan and California. The purpose of the seminars was to lure potential investors into putting their money into May’s company, E-M.

“Bluestein convinced elderly investors to refinance their homes to invest in securities that he falsely claimed were safe,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “His lies, false assurances, and unscrupulous tactics put many investors at risk of losing not only their life savings, but also their homes.”

Bluestein’s past gets even more sordid. A Nov. 27, 2007, article by Registered Rep reports that after Bluestein was fired from the brokerage firm GunnAllen Financial in October for reportedly selling unregistered securities, Bluestein set up shop down the street and began working under a new name, “Frank Julian,” as part of a so-called “research team” at a company called Freedom Road. (The name listed now, however, on Freedom Road’s Web site is, in fact, Frank Bluestein.) According to the Web site, Freedom Road provides stock selection and market education to individuals. Its advertising moniker is: Luck is not an investment strategy.

Information posted by Freedom Road on its Web site touts Bluestein as “picking hot stocks for over 40 years,” with a “unique approach [to finding] big opportunities in both dividend paying stocks and growth stocks with limited risk.” “After many years as one of the nation’s leading financial advisors, Frank is now sharing his million dollar secrets exclusively with members of Freedom Road. Frank’s vision is to share his hard earned experience and success with investors on a global scale.”

It’s what Freedom Road didn’t say about Frank Bluestein that has come back to haunt investors. Bluestein isn’t even registered with the Financial Industry Regulatory Authority (FINRA). According to the Registered Rep article, Bluestein’s CRD report shows that in October 2007, 10 customer disputes had been logged against him totaling some $1.6 million in alleged damages. On Oct. 12, the Michigan Office of Financial Regulation notified GunnAllen, Bluestein’s former employer, that Bluestein was under investigation. Shortly thereafter, Bluestein was fired from GunnAllen.

Fast forward to Sept. 28, 2009. The SEC charges Bluestein of civil fraud, sale of unregistered securities and other violations in connection to helping orchestrate a multimillion-dollar Ponzi scheme. Specifically, the SEC alleges that Bluestein facilitated May’s fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period. Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.

Based on the SEC’s complaint, Bluestein, 59, allegedly misrepresented to investors that the investments he pitched were low-risk and falsely claimed he had conducted adequate due diligence about the investments. He also apparently left out one other key detail: Bluestein received at least $2.4 million in commissions from May and E-M, in addition to the $1.4 million in disclosed compensation he received from investor funds.

Tell us about your relationship with E-M Management Company. We want to hear your story. Please fill out the Contact Us form, or leave a comment below. We can consult with you regarding your options.

Bernie Madoff’s sons and other Madoff family members may soon be putting their over-the-top, extravagant lifestyles on the permanent backburner. Irving Picard, the man in charge of recovering assets from their convicted father for defrauded victims, stated in a Sept. 27 episode of 60 Minutes that he plans to sue Mark and Andrew Madoff, Madoff’s brother, Peter, and a niece for nearly $200 million.

Picard and David Sheehan, chief counsel, told 60 Minutes correspondent Morley Safer that the latest lawsuits will include charges of negligence and breach of fiduciary duty. In addition, the lawsuits will allege that family members personally profited tens of millions of dollars while working at Madoff’s New York investment advisory business.

According to the 60 Minutes interview, Sheehan believes about $36 billion went into the Madoff’s scheme. “About $18 (billion) of it went out before the collapse. And $18 (billion) of it is just missing. And that $18 billion is what we’re trying to get back,” Sheehan said.

Last December, Madoff confessed to one of the biggest frauds in Wall Street history when he admitted to conducting a decades-long $65 billion Ponzi scheme. He currently is serving a 150-year prison sentence.

The controversy surrounding leveraged exchange traded funds (ETFs) shows no sign of letting up, and on Sept. 1, the Financial Industry Regulatory Authority (FINRA) announced plans to raise margin requirements for leveraged ETFs beginning Dec 1. FINRA’s Regulatory Notice 09-53 states that the “inherent volatility” of leveraged ETFs is one of the reasons for the new requirements.

The change in regulations comes on the heels of a lawsuit filed by a group of investors in August against ProShares and one of its leveraged inverse ETFs. The investors allege that ProShares misrepresented the UltraShort Financials ProShares Fund and that they were never informed shares in the fund should not be held for more than one single trading day.

Leveraged ETFs are considered a subset of traditional ETFs and attempt to generate multiples (i.e. 200%, 300% or greater) of the performance of the underlying index or benchmark they track. Some leveraged ETFs are “inverse” funds, which means they try to deliver the opposite of the performance of the index or benchmark they track. Leveraged ETFs can include among their holdings high-risk derivative instruments such as options, futures or swaps.

The complexity and potential risks associated with leveraged ETFs have garnered both the media spotlight and the attention of regulators who contend many retail investors do not fully understand how the products work. Both FINRA and the Securities and Exchange Commission (SEC) recently issued warnings highlighting the risks for investors in leveraged ETFs, particularly those who invest for the long term. In response, some brokerage firms announced new sales limits on client investments in leveraged ETFs, while others halted sales altogether.

In July, Massachusetts’ Secretary of State William Galvin launched an inquiry into how three leveraged ETF providers – Rydex, ProShares and Direxion – marketed and sold leveraged ETFs, as well as what they were telling brokers who sold the funds to clients. Detractors of leveraged ETFs, including FINRA and the Securities and Exchange Commission (SEC), contend retail investors may not fully understand the complexity of ETFs nor realize the products must be monitored on a daily or near daily basis.

Three years ago, there were no leveraged ETFs in existence. Today, there are more than 140 leveraged ETFs with about $30 billion in assets.

The widow of a 77-year-old man has filed an arbitration claim with the Financial Industry Regulatory Authority (FINRA) against Ameriprise Financial Services on allegations an Ameriprise broker failed to appropriately advise her elderly husband about a variable annuity purchase and further botched the beneficiary designation on the investment.

According to the claim, Deborah Amilowski, a broker with Ameriprise’s Hauppauge, New York office, recommended an unsuitable RiverSource variable annuity as an initial investment to the woman’s husband. As reported Aug. 27 by Investment News, when the client purchased the annuity in 2005, he was over the maximum age allowed for the guaranteed death benefit. As a result, any heirs would only be eligible to receive the market value of the annuity at time of his death, according to the claim.

The investor placed $850,000 into the annuity over a one-year period, according the Investment News article.

The original beneficiary on the annuity was an irrevocable trust, according to the claim, but the investor had instructed the Ameriprise broker to change the beneficiary designation to a revocable trust. Ameriprise reportedly informed the client (whose name has not been released) that his change request had been fulfilled. However, at the time of his death in March 2008, his family discovered that the change never made it to processing.

During the time that Ameriprise investigated the beneficiary designation issue, the account’s value went from more than $1 million to a little more than $750,000. The annuity was liquidated in October, 2008.

The widow is seeking damages for the unsuitable annuity recommendation, as well as for Ameriprise’s alleged negligence in failing to either pay out the benefit in a timely manner or to protect the annuity’s value.