Fraud allegations and failed deals over private placements connected to issuers like Medical Capital Holdings have sullied the reputation of countless broker/dealers this year. Some have closed up shop entirely, while others, like Securities America, are the subject of arbitration claims and lawsuits by investors.

The Securities and Exchange Commission (SEC) now has plans to beef up regulatory oversight of broker/dealers in an attempt to hold them more accountable for their customers’ assets. As reported Dec. 6 by Investment News, the SEC’s efforts would bring in the Public Company Accounting Oversight Board to inspect auditors of all broker/dealers.

The accounting industry will play a crucial role in helping investors regain confidence in the wake of [Bernie] Madoff’s scheme and the 2008 financial crisis, said SEC Chairman Mary Schapiro in a Dec. 6 speech at an American Institute of Certified Public Accountants conference in Washington.

“We will consider increasing surveillance of brokerages in custody by providing information and tools for new examiners regulation,” Schapiro at the conference. “Our markets depend on confident investors – and our efforts will succeed only if those investors believe the numbers that you write on the bottom line.”

JP Morgan Chase, the main banker for the now-jailed Bernie Madoff, is being sued for $6.4 billion by the trustee charged with liquidating the former financier’s business. According to a statement made earlier this week by trustee Irving H. Picard, the lawsuit is based on claims that JP Morgan aided and abetted Madoff’s fraud.

“JPMorgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff,” David J. Sheehan,” counsel to Picard, said in the statement. “JPMC was at the very center of that fraud, and thoroughly complicit in it.”

Any money recovered from JPMorgan will be returned to Madoff’s victims on a pro rata basis, Picard said.

As reported Dec. 2 by Investment News, the lawsuit is the second-biggest filed by Picard in the Madoff bankruptcy. In May 2009, Picard filed a $7.2 billion claim against investor Jeffry Picower, who later died in October 2009.

Last month, Picard sued UBS AG for at least $2 billion, claiming the company also helped Madoff in his fraud.

Madoff currently is serving a 150-year prison sentence after admitting his guilt in the biggest Ponzi scheme – $65 billion – in U.S. history. Meanwhile, investors who were defrauded by Madoff lost some $20 billion in principal.

For the third time in three years, Next Financial Group has been fined by the Financial Industry Regulatory Authority (FINRA). The latest is a $400,000 fine, plus $102,000 in restitution to clients.

According to FINRA’s Broker Check Web site, the action is attributed to Next Financial failing to “have a reasonable system for reviewing the transactions of its registered representatives for excessive trading.”

The allegations by FINRA go on to state that one representative was able to churn client accounts and that Next Financial’s lack of a reasonable supervisory system enabled the activity to go undetected.

In fact, FINRA says Next Financial failed to detect excessive trading by a registered representative in five accounts, resulting in about $102,376 in unnecessary sales charges.

As reported Nov. 30 by Investment News, FINRA also states that Next Financial failed to identify or follow up on other transactions that suggested excessive trading by 13 other reps in 39 additional client accounts.

Even when Next Financial did detect such trades, it took no action, according to FINRA.

Former Morgan Stanley broker Joey Wade Dean is facing regulatory action from the Financial Industry Regulatory Authority (FINRA) in connection to sales of unlisted structured notes.

The action, taken by FINRA on Sept. 10 and outlined on the regulator’s Broker Check Web site, alleges that Dean made significant misrepresentations and omissions regarding the products, as well as failed to disclose certain facts to investors.

Many of the investors apparently were elderly. According to FINRA, Dean told customers that their principal investment was protected and guaranteed a fixed annual rate of return. That didn’t happen. Instead, when the structured notes ceased paying income, Dean, without authorization from customers, sold their shares to raise cash so that they could continue to make withdrawals.

Private placements – from Medical Capital to Provident Royalties – have made a name for themselves this year, producing massive financial losses for unsuspecting investors. Unsuspecting because, in many instances, investors were unaware of the untold risks associated with these largely unregulated investments.

Take Tracy Nye, a 50-year-old Idaho restaurant owner who was forced to come out of retirement after losing $1.5 million on private placements in Medical Capital Holdings and in Shale Royalties, an affiliate of Provident Royalties LLC. Both entities were sued for fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

In total, investors lost more than $1 billion in private placements issued by Tustin, California-based Medical Capital and some $485 million from Dallas-based Provident Royalties, an oil and gas investment firm.

According to the SEC, both Medical Capital and Provident misrepresented their investments, as well as misappropriated investors’ money.

Meanwhile, investors like Nye are paying the price. Many have witnessed their life savings vanish overnight, while others say their money for retirement and children’s college education are now a thing of the past.

As reported in a Nov. 19 article by Bloomberg, private placements were initially marketed and sold to institutional investors and financially savvy individuals. However, because the SEC hasn’t changed the majority of its net-worth requirements for private placements since 1982, the products are being sold to investors even though many may not thoroughly understand what they’re actually getting into. In particular, retirees are a favored target of issuers of private placements because they have access to retirement accounts and equity in their homes.

According to the Financial Industry Regulatory Authority (FINRA), complaints about private placements have increased 35% in this year alone and more than 50% in 2009. Earlier this year, FINRA issued a notice to brokers regarding private placements; it also has launched an investigation into an undisclosed number of broker/dealers regarding sales practices of the products.

If you sustained financial losses related to Medical Capital, Provident Royalties or another private placement investment, contact our securities fraud team. We will evaluate your situation to determine if you have a claim.

The trustee charged with trying to recover money for investors who were swindled by disgraced financier Bernard Madoff is now suing UBS AG and related entities and individuals on allegations they enabled Madoff’s Ponzi scheme.

As reported Nov. 25, 2010, by Investment News, the lawsuit – which alleges 23 counts of financial fraud and misconduct – seeks to recover at least $2 billion for Madoff’s victims. According to the complaint, UBS allegedly was an active participant in Madoff’s scam by serving as the sponsor, custodian and administrator of various affiliated feeder funds.

Madoff’s scheme could not succeed “unless UBS had agreed not only to look the other way, but also to pretend that they were truly ensuring the existence of assets and trades when in fact they were not and never did,” said David Sheehan, counsel for the trustee, in the Investment News story.

Madoff’s fraud, which is said to be the largest Ponzi scheme in U.S. history, was uncovered in December 2008. According to federal investigators, the scam may have begun as early as the 1980s. In total, investors lost some $65 billion.

On June 29, 2009, Madoff was sentenced to 150 years in federal prison.

Structured notes are booming, with sales reaching $45 billion just this year. Despite their growth, structured notes can be a risky venture for investors, especially as more and more brokerages push out structured products with the promise of equity returns and less risk.

As reported Nov. 13 by the Wall Street Journal, some financial advisors are urging their clients to consider structured notes as a way to get back into stocks and avoid taking on too much risk.

Before jumping on the structured notes bandwagon, however, investors need to first consider a few issues. To begin, most of today’s structured notes are not 100% “principle protected” products. Instead, they typically offer only partial or limited protection, meaning they provide a fixed amount of contingent protection. Losses are covered only up until the point that the underlying asset drops below a certain level. Once that happens, the protection is canceled and investors bear the brunt of the losses.

Consider UBS AG’s Return Optimization Securities with Contingent Protection, which was priced in July. According to the Wall Street Journal article, investors receive 100% principal protection as long as the Standard & Poor’s 500-stock index hasn’t fallen more than 30% at the end of the product’s three-year term. If the index does fall more than 30%, investors pay the price by suffering all of the losses. If the markets fall by less than 30%, investors get back their principal at the end of product’s term. If the index rises, investors earn 1.5 times the upside, up to a cap of 58.6%, which they get if the index is up 39%. Fees, also called the “underwriting discount,” are 2.5%, says the WSJ.

The kind of protection might not work for all investors. As reported in the Wall Street Journal article, since 1926, a structured note that protected against a drop of 30% in the S&P 500 would have pierced the downside cap 7% of the time, leaving the investor exposed to the entire loss, while protecting them from a loss 17% of the time on a rolling 36-month basis.

Craig McCann of Securities Litigation & Consulting Group is skeptical of structured products. According to McCann, the vast majority of structured products turn out to be worth substantially less than their face value. Moreover, structured notes can be difficult to sell during a market rout. Investors also have to worry about counterparty risk.

Reverse convertible notes were tied to a $500,000 fine levied by the Financial Industry Regulatory Authority (FINRA) against former Ferris, Baker Watts LLC, acquired by RBC Wealth Management. FINRA imposed the fine in October, citing inadequate supervision of sales of the notes to retail customers, as well as unsuitable sales of reverse convertibles to 57 accounts held by elderly customers who were at least 85 years old and customers with a modest net worth.

“Reverse convertible notes are complex investments that often entail significant risk of loss and also involve terms, features and risks that can be difficult for retail investors to evaluate,” said James Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “Ferris, Baker’s inadequate written procedures resulted in recommendations of sales to customers for whom the purchase of these securities was not suitable, including elderly customers and investors who had very modest assets.”

Reverse convertibles are notes with a coupon interest rate set for a fixed duration of three, six or 12 months. The products themselves are tied to the performance of a particular stock. If the price of the underlying stock drops below a certain level during the duration of the reverse convertible, the customer receives a predetermined number of shares of the stock at maturity of the note.

Conversely, if the underlying security maintains its price level, at maturity, the customer receives return of the dollar amount invested and a final coupon payment. In most instances in which customers received the underlying stock at maturity, they ended up with an investment loss. Reverse convertibles not only come with the risks associated with fixed-income products, such as issuer default and inflation, but also have the added risk that the value of the underlying asset can significantly depreciate.

During the period January 2006 to July 2008, FINRA found that that Ferris, Baker engaged in sales of reverse convertibles to approximately 2,000 retail accounts without providing sufficient guidance to its brokers and supervising managers on how to assess suitability in connection with their brokers’ recommendations of reverse convertibles.

Additionally, FINRA says the firm did not have a proper system in place to effectively monitor customer accounts for potential over-concentrations in reverse convertibles. The firm also made recommendations without a reasonable basis to believe that the investment was suitable for elderly customers and those with modest net worth. Finally, FINRA says the firm failed to detect and respond to indications of potential over-concentration in reverse convertibles.

If you’ve suffered losses in Reverse Convertibles, please contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Sales of specialized exchange-traded funds (ETFs) are on the rise. And so is the risk, including liquidity concerns, hidden costs, and overall structure.

Despite these issues, many investors have become enamored with ETFs – and, in particular, inverse and leveraged ETFs – on the advice of their broker. Inverse ETFs are constructed by using derivatives that, in turn, create a security. This security then profits from a decline in the underlying index or benchmark.

This year, inverse and leveraged ETFs became the subject of scrutiny from the North American Securities Administrators Association, which placed the products on its watch list of “investor traps.”

Similarly, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have both issued notices to investors about the risks associated with leveraged and inverse ETFs.

Leveraged and inverse ETFs typically are designed to achieve their stated performance objectives on a daily basis. Some investors, however, might invest in these ETFs with the expectation they may meet their stated daily performance objectives over the long term, as well. What many investors fail to realize is that the performance of leveraged and inverse ETFs over a period longer than one day can differ significantly from the stated daily performance objectives of the products.

The wealthiest U.S. investors are putting fewer dollars into structured financial products than the less affluent, according to a study by the Securities Industry and Financial Markets Association.

As reported Nov. 11 by Investment News, U.S. investors bought more than a $42 billion of structured notes this year. Nearly every major bank or brokerage sells structured products. Morgan Stanley leads the pack, issuing $10.1 billion, the most of any bank, followed by Bank of America Corp., which issued $7.9 billion.

Because of their complexity, structured products are not for those who don’t fully understand them. Moreover, once an investor puts money into a structured product, he or she is essentially locked in for the duration of the contract.

And, contrary to promises of principal by some brokers, investors can still lose money – and a lot of it – in structured notes.

Case in point: Lehman Brothers Holdings. Investors who invested in principal-protected notes issued by Lehman Brothers lost almost all of their investment when Lehman filed for bankruptcy in September 2008. In total, structured products have been linked to an estimated $1 billion in investor losses in just Lehman notes.

Investors have since filed arbitration claims against UBS, one of the largest sellers of Lehman structured notes.

Other structured investment vehicles like reverse convertibles and equity-linked notes also have become the target of arbitration claims, as well as investigations by state regulators.

Most structured notes are “a hot mess,” said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago in an Oct. 20, 2010, article by the New York Times. “Most professionals can’t analyze them. When I have done it, I find these notes are loaded with hidden fees and hidden risks.”

If you have suffered investment losses in principal-protected structured notes and wish to discuss filing an individual arbitration claim with Financial Industry Regulatory Authority (FINRA), please contact us.