Wells Fargo and Banc of America were ordered by the Financial Industry Regulatory Authority (FINRA) to pay fines totaling $2.15 million, as well as pay more than $3 million in restitution to customers for losses tied to unsuitable sales of floating-rate bank loan funds.

FINRA ordered Wells Fargo Advisors, LLC, the successor for Wells Fargo Investments, LLC, to pay a $1.25 million fine and to reimburse approximately $2 million in losses to 239 customers. The regulator ordered Merrill Lynch, Pierce, Fenner & Smith Inc., as the successor for Banc of America Investment Services, Inc., to pay a $900,000 fine and reimburse approximately $1.1 million in losses to 214 customers.

Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. Specifically, the customers wanted to preserve principal and had conservative risk tolerances, yet brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for those customers.

FINRA also says that the firms in question failed to train their sales forces regarding the unique risks and characteristics of the funds, as well as failed to reasonably supervise the sales of the products.

“As investors continue to look for yield in a low-interest-rate environment, these actions should serve as a reminder that brokers and their firms need to ensure that investment recommendations are consistent with customers’ investment objectives and risk tolerances,” said Brad Bennett, FINRA’s Vice President and Chief of Enforcement, in announcing the settlement.

“Wells Fargo and Banc of America allowed their brokers to sell floating-rate bank loan funds to investors for whom the positions were unsuitable, resulting in significant losses to many customers,” he added.

As is the case in most FINRA settlements, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

 

Investors in some states have a lot to learn when it comes to investing and financial literacy, says a recent study by the Financial Industry Regulatory Authority (FINRA).

According to the study, residents of California, Massachusetts and New Jersey are the best at handling their money. By comparison, individuals in Mississippi, Arkansas and Kentucky rank at the bottom of the list.

“This survey reveals that many Americans continue to struggle to make ends meet, plan ahead and make sound financial decisions – and that financial literacy levels remain low, especially among our youngest workers. No matter how you slice and dice it, this rich, new data set underscores the need for us to continue to explore innovative ways to build financial capability among consumers,” said FINRA Foundation Chairman Richard Ketchum.

Overall, the number of respondents demonstrating a high degree of financial literacy – meaning they correctly answered four or five of the five questions about financial knowledge – dropped to 38% in 2012, from 42% in 2009.

About half of survey respondents said they worked with a financial professional in the past five years. However, they still lacked knowledge of key financial market concepts, the study found.

For example, only 28% correctly answered a question about the movement of bond prices, compared with interest rates. Less than half correctly answered a question about the risk of a single company stock versus a diversified mutual fund.

Study responses were collected through an online survey of 25,509 American adults (approximately 500 per state, plus D.C.), over a four-month period from July to October 2012. The sample used in the study was weighted by age, gender, ethnicity and education. The full data set, questionnaire and methodology are available here.

A former adviser affiliated with LPL Financial LLC has been charged by the Securities and Exchange Commission (SEC) of defrauding investors and stealing $2 million from at least six clients.

According to the civil complaint, former LPL adviser Blake Richards misappropriated client money that “constituted retirement savings and/or life insurance proceeds from deceased spouses.”

In once instance, Richards allegedly tried to gain an investor’s trust by delivering pain medication during a snowstorm to a client’s husband who had been diagnosed with terminal pancreatic cancer, according to the SEC complaint.

As reported May 23 by Investment News, the charges against Richards follow recent negative news about LPL. Earlier this week, the Financial Industry Regulatory Authority (FINRA) fined LPL $7.5 million in connection to 35 separate e-mail system failures.

One day later, Secretary of the Commonwealth of Massachusetts William Galvin announced that LPL had been ordered to pay $4.8 million in restitution to investors over improper sales of non-traded real estate investment trusts (REITS).

LPL is not named in the recent SEC complaint against Richards.

According to FINRA’s BrokerCheck Web site, Richards worked as an LPL broker from May 2009 until May 2013.

Reportedly, when investors approached Richards with funds to invest from a retirement account rollover or proceeds from a life insurance policy, he allegedly instructed them to write out checks to an entity called “Blake Richards Investments” or “BMO Investments.”

 

Alternative investments like non-traded REITs and private placements have levied financial havoc on many investors in recent years. Now, facing pressure from regulators, some broker/dealers are making changes to how they sell these kinds of products.

Earlier this year, VSR Financial Services, Berthel Fisher & Co. Financial Services and the Cetera Financial Group Inc. announced revisions to their policy guidelines and procedures regarding sales of certain alternative investments.

As reported May 16 by Investment News, such action could lessen the amount of alternative investments that clients can hold in their accounts at any one time.

The changes particularly impact illiquid alternative investments. Because these types of investments are not traded on a national securities exchange, investors have little or no ability to sell their shares if they need immediate access to cash.

The changes that some B-Ds are making in regards to illiquid investments are not entirely unexpected. The Financial Industry Regulatory Authority (FINRA) has heightened its scrutiny of these products in recent years, issuing several bulletins warning investors about the hidden risks they may pose.

Recent news concerning alternative investments occurred in February 2013, when broker/dealer LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs, as well as a $500,000 administrative fine. In December, Massachusetts Commonwealth Secretary William Galvin had charged LPL with failure to supervise registered representatives who sold the non-traded REITs in an alleged violation of both state limitations and the company’s rules.

For now, some broker/dealers, including VSR, are scaling back the amount of illiquid alternative investments that clients can hold in their accounts, particularly the elderly, said Don Beary, VSR chairman, in the Investment News article. “FINRA in the past year did a ‘senior sweep,’ and we’ve had guidance that we have to be careful about what seniors buy,” he said.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

 

A May 7 story by NPR highlights some of the ways in which bogus financial advisers use the “art of confusion” to siphon money from unsuspecting elder Americans. A contributing factor to this type of elder fraud is the myriad of senior designations that exist in the financial industry and the fact that it’s almost impossible to discern if an adviser’s designation actually translates into proper training and education to advise seniors about their investments.

NPR guest Stacy Canan, deputy assistant director at the Office for Older Americans, cites a recent study conducted by the Consumer Financial Protection Bureau on senior designations. The report found that more than 50 different senior designations currently are used today, with senior designees recommending or selling everything from securities, to investment opportunities, to financial products and annuities and long-term care insurance.

Meanwhile, consumers are more confused than ever by the array of designations and have no simple way to determine if the designations themselves required rigorous college-level coursework or simply showing up at a weekend seminar.

“Seniors in particular often mistakenly believe that their financial adviser is looking out for their best interest. That is rarely true. Often, they are trying to sell a particular product, or they may be using – advising or recommending a product that is perhaps suitable but not necessarily the best product. So that’s why we would encourage investors to ask, ask their adviser: Are you looking out for my best interest? What duty of care are you bound,” said Canan on NPR.

You can read the Consumer Financial Protection Bureau report on senior designations here.

The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Kimberly Springsteen-Abbott, owner, chief executive and head of compliance for Commonwealth Capital Securities Corp., for allegedly misusing investors’ money to pay for personal expenses, including home improvements, trips, meals, holiday decorations and tools.

Initially reported May 14 in a story by Investment News, FINRA’s complaint says Springsteen-Abbott allegedly misused $345,000 in investors’ funds between December 2008 and February 2012. FINRA also says Springsteen-Abbot allegedly was involved in falsifying and backdating a memo accounting for “Disney Tickets” that was given to FINRA staff members while they were conducting an exam in 2011.

Commonwealth Capital Securities, which packages and distributes illiquid equipment-leasing funds, is the broker/dealer of Commonwealth Capital Corp. It employs about 22 registered reps and is involved in private placements and direct investments.

FINRA’s complaint goes on to state that the broker/dealer has distributed 13 different equipment-leasing funds from 1993 to the present, raising more than $240 million. Each fund acquires equipment involving information technology, medical technology, telecommunications and other categories; proceeds from the offerings are invested primarily in equipment that is subject to operating leases with durations of 12 to 36 months.

“Ms. Springsteen-Abbott “directed the misuse of investor funds to pay for various American Express credit card charges that were not related to legitimate business purposes of the funds,” FINRA’s complaint reads.

The complaint includes 27 pages of alleged purchases from Springsteen-Abbott and other company executives. Among the purchases listed: $63.43 for a meal at a Hooter’s restaurant in 2009; $1,971.11 for a family vacation in 2010 that included Ms. Springsteen-Abbott’s husband, daughter, ex-son-in-law and two grandchildren at the Animal Kingdom Lodge in Orlando, Fla.; and $12,414 for a board of directors meeting, also in 2010, at the Princeville St. Regis Hotel in Kauai, Hawaii.

This isn’t the first time Commonwealth Capital has faced the scrutiny of regulators. In 2012, a sexual discrimination suit was filed by a former Commonwealth Capital employee, Shannon Givler, who previously contacted the Securities and Exchange Commission (SEC) in 2010 as a whistleblower. In that complaint, Givler accused Springsteen-Abbott and other company executives of “misrepresenting investor return rates and misappropriating investor funds for lavish personal expenses.”

It’s become an increasingly common crime: Elder investment fraud. Every day, there are more stories about elderly individuals – many suffering from dementia – who have been taken advantage of financially by an unscrupulous family member, stranger, friend, or even an investment adviser.

Fortunately, more attention is being paid to the issue of elder investment fraud. After a recent fact-finding initiative spearheaded by the Consumer Financial Protection Bureau (CFPB) last year, the non-profit Investor Protection Trust produced a survey about elder exploitation. Among the report’s findings: About 20% of Americans 65 years of age and older have been the victim of a financial swindle.

Criminals often target senior citizens because they manage a significant percentage of the nation’s liquid assets. They also are more likely to be vulnerable to fraud and deception because of age-related medical-conditions such as dementia, memory loss or Alzheimer’s disease. In many cases, the assets stolen from victims of elder fraud represent the individual’s life’s savings.

The scam artists behind these schemes and swindles often pose as “friends,” gaining the elderly victim’s trust. The perpetrators may be strangers or have a relationship with their targeted victim. The intent, however, is the same: To scam the intended victim out of his or her money.

Scammers who target the elderly can be difficult to detect. That’s because many of these fraudsters sound knowledgeable about the bogus product, scam or investment they are touting.  Moreover, they often have official-looking documents about the so-called investment, as well as information regarding the supposed professional credentials they possess.

Examples of common elder fraud schemes and investment scams include the following:

• Telemarketing or mail fraud. Every year, thousands of people lose money to telemarketing scams – from a few dollars to their life savings.  Fraudulent telemarketers are good at what they do. According to the Federal Trade Commission, dishonest telemarketers make an estimated $40 billion each year off of their victims. In many cases, scammers who operate by phone don’t want to give victims time to think about their pitch; their goal is just to get you to say “yes” to whatever they’re selling. Other unscrupulous telemarketers may ask for more personal information, such as checking and credit card numbers. Never provide this information via the telephone.
• Charity scams. Older Americans are especially generous when it comes to helping someone in need. And that generosity is exactly what appeals to scammers who call on unsuspecting consumers and ask for a donation or credit card information in order to help victims of recent natural disasters or tragedies. Case in point:  Type in “Boston Marathon Bombings,” and you’ll see a myriad of Web site pages appear. Some of these pages are legitimate; others may not be. Following the Boston Marathon tragedy, the Massachusetts Attorney General warned the public not to give into emotional appeals without first checking the charity in question and ensuring that any Web site visited actually belongs to a legitimate, established and registered charity.
• Redemption/strawman/bond fraud. Perpetrators of this fraud typically claim that United States Government or the Treasury Department holds a bond on every U.S. citizen and that  by submitting the proper paperwork, you can access to these “U.S. Treasury Direct Accounts.” Individuals promoting this scam frequently cite various discredited legal theories and may refer to the scheme as “Redemption,” “Strawman,” or “Acceptance for Value.” Trainers and Web sites will often charge large fees for “kits” that teach individuals how to perpetrate this scheme. They will often imply that others have had great success in discharging debt and purchasing merchandise such as cars and homes. Failures to implement the scheme successfully are attributed to individuals not following instructions in a specific order or not filing paperwork at correct times. According to the FBI, this scheme predominately uses fraudulent financial documents that appear to be legitimate. These documents are frequently referred to as “bills of exchange,” “promissory bonds,” “indemnity bonds,” “offset bonds,” “sight drafts,” or “comptrollers warrants.” In addition, other official documents are used outside of their intended purpose, like IRS forms 1099, 1099-OID, and 8300. This scheme frequently intermingles legal and pseudo legal terminology in order to appear lawful.

Part II of our blog features more scams and schemes targeting the elderly, plus how to avoid these crimes and what to do if you or loved one becomes a victim.

Choosing a financial adviser is a big deal. These individuals are responsible for giving you advice about how to save, invest, and grow your money. A good financial adviser can put you on the path to a solid financial future, while others may steer you in the wrong direction.

As with anything that relates to your investments, it’s important to thoroughly do your homework so that you choose a financial planner who is right for you and your financial future.

Anyone can advertise themselves as a financial adviser.  But simply saying you are a financial adviser doesn’t make you a legitimate expert. One of the most reliable credentials to look for is the CFP designation (which stands for certified financial planner). CFP means a person has successfully passed a rigorous test administered by the Certified Financial Planner Board of Standards.

Other tips to consider when choosing a financial planner is to ask about the adviser’s pay structure.  In most cases, investors should avoid commission-based only advisers because these individuals may not always have a client’s best interests at heart. Rather, some may push certain financial products that benefit them via hefty commissions.

Conduct personal interviews with three or four prospective financial planners. Have a list of questions ready, including inquiries about the adviser’s investing philosophy. Be sure to ask  if the adviser has ever faced an investigation by regulatory groups such as the Financial Industry Regulatory Authority or the Securities and Exchange Commission (SEC). You can check the compliance record of advisers and firms here.  Also, ask for references of current clients whose investment goals are similar to yours.

Be on the lookout for red flags. This includes marketing hype by advisers who tout so-called investment guarantees. No one can make a guarantee when it comes to investments. Every investment contains some level of risk. If a financial adviser says he or she can outperform the market each and every time with a particular investment, it’s probably best to walk away.

The SEC offers several resources and additional questions to ask about selecting financial advisers. You can view that information here.

A PBS documentary had harsh words for financial advisers, blaming them for many of the struggles facing Americans today as try to save for their retirement. In The Retirement Gamble, Frontline correspondent Martin Smith investigates what happened to retirement in America and the role that financial services companies may be playing in draining your savings year after year.

Among other things, producers of The Retirement Gamble cite fees that financial advisers charge investors in their 401(k)s – largely made up of mutual fund fees and commissions – as one of the biggest obstacles behind the retirement savings crisis.

The documentary also criticizes advisers for boosting their own income by steering investors into high-fee investments like actively managed mutual funds. In an April 24 article by Investment News, Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, says the term “financial adviser” means almost nothing in today’s investing world. “It could be a financial planner,” she says in the article. “Or it could be a broker who is a salesman.”

Indeed, a recent AARP study showed that 70% of mutual fund savers were unaware that they were paying any fees at all.

Teresa Ghilarducci, an economist at The New School, was equally condemning of financial services representatives and their firms. “Basically, your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund,” she said in the documentary. “They try to sell you the most profitable products.”

More on The Retirement Gamble can be found here.

Daniel M. Gallagher, a member of the Securities and Exchange Commission (SEC), is not backing down from recent comments regarding what he called “Armageddon risks” in the municipal bond market.

“I made the comment in the context of credit risk plus interest rate risk being two major factors that maybe investors don’t fully understand,” Gallagher said in an April 23 article by Investment News. “The population of investors in this space means we have to double down on investor education.”

Gallagher made the Armageddon reference last week at a round-table discussion sponsored by the SEC on fixed-income markets. Specifically, Gallagher stated that combining rising rates with the recent California muni bankruptcies could translate into potential “Armageddon.”

What concerns Gallagher, as well as others, is the trend of credit quality in the municipal bond arena, combined with an environment in which rates can only go up and thus drive down the value of existing bonds.