Category Archives: Stockbroker Misconduct

These are scary times for investors. Stories of stockbroker negligence, record Ponzi schemes, investment fraud, and client misrepresentation have become an everyday occurrence. It’s no wonder investors – seasoned pros and novices alike – are increasingly wary when it comes to seeking advice from an investment advisor or financial representative, questioning if anyone associated with Wall Street can be trusted nowadays. I’m reminded of a scene from the 1976 film Network in which fictitious newsman Howard Beale (played by the late actor Peter Finch) delivers his “mad as hell and I’m not going to take this anymore” speech.

Jo L. Wright no doubt felt the way of Finch’s character. Wright, a church secretary from Whitestown, Indiana, lost thousands of dollars in a bond fund formerly managed by Morgan Keegan & Company. Wright’s initial introduction to the Memphis-based brokerage was through her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in what she deemed “safe” and “secure” investments: a certificate of deposit and a savings account.

That all changed based on the recommendation of the bank manager and Morgan Keegan. Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund. Relying on the information provided by Morgan Keegan and her Regions Bank manager, she believed the fund was a safe, conservative investment and that any risk of principal loss was virtually non-existent.

In truth, Wright actually put her money into a high-risk and speculative financial product, one with significant ties to complex structured finance investments that included subprime mortgage securities. In no way was it the kind of investment that a conservative-minded investor like Wright should have been advised to purchase.

Wright didn’t know that, however, because her financial advisor allegedly didn’t tell her. Nor did Wright receive a prospectus about her investment before purchase.

Wright eventually filed a complaint against Morgan Keegan with the Financial Industry Regulatory Authority (FINRA), and in March 2009 was awarded $18,000 for the financial losses she suffered. Her case underscores several important issues, however, when it comes to investing your money and selecting a financial advisor.

First, it’s your money. That means investors need to do some due diligence of their own. This includes asking your financial advisor some tough questions. Chief among them: Where has your advisor worked in the past? Is there a pattern of multiple jobs in a short period of time? If the answer is yes, it could be a red flag.

Another key question concerns compensation. How is the financial advisor paid for his or her services? Is it based on an hourly rate, flat fee, or commission? In addition, find out if the advisor is given bonuses for selling certain investment products. If so, this clearly could be a conflict of interest if one of those products is pushed to become part of your investment portfolio.

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.

Federal prosecutors say former Credit Suisse Group AG broker Eric Butler used bait-and-switch tactics to fraudulently steer institutional and retail clients into millions of dollars worth of auction-rate securities, collateralized debt obligations (CDOs) and other risky debt instead of the safe, conservative investments the investors initially asked for. On Aug. 14, after only two hours of jury deliberations, Butler was found guilty of conspiracy to commit securities fraud, securities fraud and conspiracy to commit wire fraud. He faces a maximum sentence of 20 years in prison on the most serious count.

Butler’s co-defendant is Julian Tzolov, who had fled the country earlier this year. He was returned to the United States on July 20 and has since pleaded guilty to conspiracy, wire fraud and securities fraud. His is awaiting sentencing.

Butler and Tzolov were charged in September of lying to clients about their purchases of nearly $1 billion of auction-rate securities and CDOs from 2004 to 2007. Reportedly, the two men had told customers their investments were backed by federally guaranteed student loans.

During Butler’s trial, Tzolov served as a witness for the prosecution, providing testimony against his former partner.

“We did it together,” Tzolov told jurors. “We were sitting right next to each other. We were meeting with clients together.”

Investors filing claims of misrepresentation, churning, omission of facts, failure to supervise and stockbroker fraud are growing in number. According to the latest statistics released by the Financial Regulatory Authority (FINRA), new case filings through June 2009 were 3,875, compared to 2,129 cases in same period of 2008 and 1,656 in 2007. 

The type of controversy most frequently cited in FINRA’s June 2009 statistics was breach of fiduciary duty, followed by misrepresentation and negligence.  In comparison to 2008, the breakdown is as follows: 

• Margin calls: 64 in 2008; 128 in June 2009.
• Churning: 212 in 2008; 206 in June 2009.
• Unauthorized trading: 248 in 2008; 440 in June 2009.
• Failure to supervise: 1,029 in 2008; 2,552 in June 2009.
• Negligence: 1,602 in 2008; 3,404 in June 2009.
• Omission of facts: 1,201 in 2008; 2,436 in June 2009.
• Breach of fiduciary duty: 2,836 in 2008; 4,432 in June 2009.
• Unsuitability: 1,181 in 2008; 2,508 in June 2009.
• Misrepresentation: 2,005 in 2008; 3,530 in June 2009. 

In addition to an influx of new arbitration claims filed, more investors are coming up victorious. Through June 2009, FINRA arbitration panels ruled in favor of investors 46% of the time, compared to 42% for the same period in 2008. 

The continued surge of arbitration claims is attributed to several factors, including the ongoing turmoil in the nation’s financial markets. Other reasons concern specific investment products such as variable annuities and credit derivatives. A proliferation of several high-profile Ponzi schemes and other investment frauds also has spurred a rise in claims by investors.

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.

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.