The Financial Industry Regulatory Authority (FINRA) announced today that it has fined LPL Financial LLC $950,000 for supervisory deficits related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “In order to sell alternative investments, a broker-dealer must tailor its supervisory system to these products. LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complies with suitability requirements imposed by the states, the product issuers and the firm itself – and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”

As part of the sanction, LPL must also conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures.

On Monday, FINRA confirmed that it had removed a Santa Barbara, CA arbitrator  James H. Frank from its roster of arbitrators. Arbitrator Frank had sat on nearly 40 arbitrations in California over the past 15 years. A FINRA spokeswoman confirmed that Frank claimed to be a lawyer and member of the bar in several states, when in reality he was not. It is unlikely that Frank’s revelation will have any effect on the many cases in which he presided, as parties have only 90 days after an arbitration award is issued to appeal such results to a court.

Five of Bernie Madoff’s former employees have been found guilty of aiding and profiting from the largest Ponzi scheme in American history, estimated at $20 Billion. A New York City jury rejected their defenses that they were duped by Bernie Madoff and didn’t know about the scam. As the clerk read the 31-count indictment, the jury foreman replied with “guilty” 59 times. The sentencing hearing has been scheduled for the week of July 28^th, where these 5 could face sentences of decades in prison.

A one in five ratio, is today’s survival rate for trainees across financial firms. They quickly eliminate candidates from their large pool of trainees who can’t keep up the pace. With these facts, the long term does not look appealing to most candidates. So how does the Financial Industry identify and attract the next generation of advisers?

With the ever changing role of the financial adviser, it is hard to specifically define the skill set and behaviors of the ideal adviser candidate. Important traits such as hunger, drive, resilience are traditionally used, but new terms are developing. Candidates should be able to collaborate, problem solve, and provide a new level of customer service. Successful brokers come from varying employment and educational backgrounds and there hasn’t seemed to be a specific source of talent.

To narrow the field, firms should start looking at a new breed of advisers developing in over 200 colleges, who offer degrees or certification programs in personal financial planning. These students upon graduation should have several career options and the high risk, high reward potential model that exists at many firms could be a deterrent. During the hiring process firms will need to understand the appeal of the positions they offer over other choices.

A Wall Street Journal article recently highlighted the significant problem of stock brokers omitting bankruptcies, unpaid debts, and criminal charges from their regulatory records.  FINRA, the organization that regulates brokers and brokerage firms, requires members to disclose these events on their records so investors can know the type of person handling their money.  However, the Journal looked at a database and discovered that, out of 500,000 brokers, the regulatory records of over 1,500 failed to report personal bankruptcies.  Furthermore, the records of 150 brokers omitted criminal charges or convictions.  The Journal found that brokers with unreported bankruptcies typically had more customer complaints.  While a broker’s bankruptcy or criminal convictions can raise red flags for their clients who trust the broker with their money, ignoring the regulatory requirements and failing to reports these events can raise even larger issues.

The Journal also found some disturbing instances where the brokerage firms failed to discover a broker’s criminal convictions during the hiring process.  Moreover, there was at least one instance where a brokerage firm was a named defendant in a broker’s bankruptcy, but failed to report it.  These instances demonstrate that the reporting process is far from perfect and FINRA needs to be tougher in enforcing certain omissions from brokers’ records.

Avoiding brokers who have bankruptcies and criminal convictions may help you avoid scams and unsuitable recommendations.  Despite the fact that bankruptcies and convictions may not be disclosed on a broker’s regulatory record, it is still important for investors to research their brokers.  FINRA’s BrokerCheck is a useful tool on the organization’s website to help investors to do just that.  FINRA’s BrokerCheck.  Additionally, if an investor believes that they’ve been wronged by their broker, it is best to contact an attorney who can conduct more thorough research into the broker’s background.

A Wall Street Journal analysis shows more than 1,600 stockbrokers have bankruptcies or criminal charges in their past that weren’t reported. Brokers and the firms that employ them are required to report these issues to the regulatory body commonly called FINRA. Investors can look up brokers on a FINRA website called “BrokerCheck” and discover a broker’s professional history. The Securities and Exchange Commission, oversees the Wall Street self-regulator, has said in rulings on disciplinary proceedings that FINRA, “must depend on its members to report to it accurately” because its membership of over 4,000 firms and 635,000 brokers means it “cannot investigate the veracity of every detail in each document filed with it.”

FINRA, the “first line of defense” to protect investors, can impose penalties including fines and exclusion from the industry for reporting failures. Last year FINRA took disciplinary action against 129 brokers and firms for “reporting and filing violations.” A FINRA spokeswoman said for the year 2014, “They will ensure the database is updated and will focus on bringing disciplinary actions where appropriate.” said a spokeswoman. Reporting gaps aren’t confined to brokers at small firms. The 10 largest brokerage firms in the Journal’s analysis employ at least 450 people with bankruptcy filings that should have been reported, but weren’t.

Monday, FINRA fined broker-dealer Berthel Fisher & Co. Financial Services Inc. and an affiliate $775,000 for compliance failures, including nontraditional exchange –traded funds and inappropriate sales of alternative investments.

Berthel Fisher, is saying that “The investigation was a result of a sweep done by FINRA throughout the industry, and that the firm settled the case to eliminate any on-going legal expenses.” Securities regulators have fined many broker-dealers that allegedly failed to conduct due diligence to ensure proper training in selling complex products for their employees and investment offerings.

According to FINRA, Berthel Fisher exposed clients to overconcentration in the asset class and their reps recommended $49.4 million in nontraditional ETFs to more than 1,000 clients. Resulting in net loses, the products were sold to customers who preferred a conservative investment approach and sometimes the investments were held for years.

Generally not considered suitable for conservative investors, leveraged and inverse ETF’s can deviate greatly from their benchmark s over periods longer than a day and magnify exposure to market movements.

In addition to the FINRA fine, Berthel Fisher will have to pay nearly $13,293 in restitution to investors and retain a compliance consultant. Berthel Fisher stated, “That it has removed leveraged and inverse ETFs from its platform.”

A December 9, 2013 article in Fortune Magazine (“The Perils of Floating-Rate Funds”), once again illustrates that, while the allure of these investments may be appealing, their volatility and risks may outweigh their potential rewards which would have serious implications for scores of investors.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, many of these floating-rate ETFs and funds not only have a limited track record by which their performances can be evaluated, but some of their investment portfolios have focused on purchasing concentrated and/or leveraged positions in “speculative grade” debt that could potentially get “hammered” under certain economic scenarios.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, please contact us. 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).

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A November 15, 2013 article in The Wall Street Journal (“Dangers in ‘Floating Rate’ Funds”), notes that some popular floating-rate funds might have to cut their dividends when interest rates start to rise because of their use of leverage or borrowed money to purchase securities in their portfolios which has been the mechanism that has enabled them to offer enhanced yields.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, the use of leverage by many of these floating-rate ETFs and funds means that, if and when interest rates rise, their cost of borrowing will similarly increase which could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, please contact us. 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).

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A September 17, 2013 article posted on CNBC.com (“The Bond Market’s Ticking Time Bomb”), notes that despite their recent popularity, floating-rate funds have potential unknown minefields that do not adequately compensate investors for the risks that they are being exposed to.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, “taking on more credit risk to mitigate interest rate risk is not logical” and could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, please contact us. 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).

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A September 13, 2013 article in The Wall Street Journal (“Floating-Rate Funds: Choose Them Wisely”), notes that while the growing popularity of floating-rate bond funds has led to a boom in the issuance of these short-term securities,” many financial advisors are cautioning investors to be more choosy before committing their financial assets to this category of investments which can involve risky levels of borrowing or leverage.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, “greater market turbulence is likely to leave floating-rate funds that hold below-investment grade bonds more vulnerable to increasing downward pressure on prices” which could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, please contact us. 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).

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A September 2013 research report issued by The Vanguard Group, Inc. (“A Primer on Floating-Rate Bond Funds”), notes that while floating-rate funds can potentially reduce interest rate sensitivity, this potential advantage is often associated with investors having to incur “significant” credit risk which is much greater than that for money market and short-term bond funds.

Floating-Rate ETFs/Funds are investments whose theoretical “floating” rates of interest rise or fall in tandem with other more established interest rate indicators such as Libor or the federal funds rate. Their typical investment portfolios often consist of leveraged investments in secured and/or unsecured loans, derivatives, structured products, collateralized loan obligations (“CLOs”) and other types of alternative products.

For the twelve (12) month period ended June 30, 2013, assets in floating-rate funds (including both open-end funds are ETFs) are estimated by Morningstar Inc. to have increased by more than 70% to $120.3 billion.

While presented by many financial advisors as an alternative to other more traditional “interest producing” investments, a “principal-protected” investment and/or as a hedge if and when the long-anticipated increase in interest rates finally occurs, as noted in this article, the “returns of floating-rate funds are inherently tied to the considerable credit risk associated with ‘junk’ rated loans” and may have “above-average liquidity risk” – both of which could have serious implications for scores of investors.

If you are an institutional or retail investor and believe you may have been misled regarding an investment in a Floating-Rate ETF/Fund, please contact us. 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).

In the movie, “The Wolf of Wall Street,” disgraced broker Jordan Belfort and owner of the now-defunct brokerage firm, Stratton Oakmont, is portrayed by Oscar-nominated actor Leonardo DiCaprio. DiCaprio’s good looks and sharp wit create an image of Belfort that is both motivational and over the top. Belfort, if we are to believe what we see in the film, is a phenomenal salesman – a self-made man committed to making lots of money for himself and his friends.

What isn’t shown in the Hollywood movie is the carnage that Belfort and his minions unleashed on thousands of his unsuspecting investors. Belfort ultimately scammed these investors out of more than $100 million. My law firm represented many of Belfort’s victims. In 1999, Belfort pled guilty to charges of international securities fraud and money-laundering. Facing 20 to 30 years in jail, he cut a deal with federal authorities by agreeing to gather evidence against friends and colleagues in exchange for a much lighter sentence. When the case finally went to trial in 2004, Belfort was convicted and sentenced to four years in federal prison. In the end, he only served 22 months at a fairly cushy federal prison camp in California, sharing a cell with comedian Tommy Chong. It was Chong who encouraged Belfort to write his book. As is the case with most white-collar criminals, his penalty didn’t fit his crimes, as much more prison time was warranted.

Missing in the Hollywood screen version of Belfort’s life are the victims who became caught in his web of fraud and lies. Stratton Oakmont was a so-called “boiler room” operation; employees used their telephones and call lists to cold call potential investors and then push them into buying shares in companies that Stratton Oakmont held positions in. When the price of one of those stocks rose, Stratton would sell its own holdings at a huge profit, leaving thousands of smaller investors holding falling stocks – many of which became worthless.

The majority of Stratton Oakmont customers were unsophisticated investors who had little or no knowledge about the complicated world of Wall Street investing. They were hard-working individuals – people like Peter Springsteel, a Connecticut architect who was just starting a business, when he was contacted by a Stratton Oakmont broker in the early 1990s. Springsteel bought into the sales pitch and ended up losing about half of his life savings.

Belfort’s fraud is far from isolated. Similar investment schemes continue to be daily news fodder today. Only the ringleaders and companies have changed – Bernie Madoff, Tim Durham, Medical Capital Holdings, Provident Royalties. Indeed, the fraud itself is even bigger than Belfort’s swindle. Stratton Oakmont was a $100 million scam. Madoff’s Ponzi scheme produced $18 billion in losses for investors.

The fact that investment scams like Belfort’s continue to exist raises a number of questions, not the least of which is the relatively minor punishments given to those like Belfort who perpetuate these crimes of fraud. Another big issue is the safety of investors and the extent to which they are actually protected from bad brokers or firms by the various securities regulators who are supposed to be the cops on the beat. This is especially relevant given that fact that many brokers today are able to simply wipe their public records clean of any negative comments or regulatory citations by seeking “expungements” and thereby deleting the bad information against them.

In the end, the story of Jason Belfort and Stratton Oakmont may best serve as a reminder for all investors to take the time to investigate their broker’s professional background and, even more important, to try and thoroughly understand the investments in which they are putting their hard-earned money into. If the story or sales pitch sounds too good to be true, you may be dealing with a wolf in Gramma’s negligee.

Mark E. Maddox is the Managing Partner of  Maddox Hargett & Caruso, P.C. A former Indiana Securities commissioner, Maddox represents investors in securities litigation and arbitration matters.

Partner Mark Maddox participated in  the WFYI Public Radio’s weekly news and public affairs program, “No Limits”,  a discussion of fraud against the elderly with guests Indiana Secretary of State Connie Lawson, Nancy Stone of Senior Medicare Patrol and attorney Mark Maddox on January 23, 2014.