Wall Street Investment Fraud Lawyer Blog
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On September 29, 2015, the North American Securities Administrators Association (NASAA) released for public comment a proposed model to help broker-dealers, investment firms, and employees to better recognize if a senior or other vulnerable adult is being financially exploited.

Judith Shaw, the NASAA President and Maine Securities Administrator, said, “Working together we can and will close the holes in our safety net of support and protection for vulnerable adult investors.”

The model entitled “An Act to Protect Vulnerable Adults from Financial Exploitation” has four key objectives:

  1. Require qualified employees of broker-dealers and investment advisors who reasonably believe that someone has been exploited to promptly notify Adult Protective Services (APS) and their state securities regulator, as well as a third party designated by the vulnerable adult as long as the party is not suspected of be participation in the exploitation.
  2. Allow delay of disbursements from an account of a vulnerable adult if financial exploitation is suspected.
  3. Allow qualified employees—any agent, investment adviser representative or person who serves in a supervisory, compliance, or legal capacity for a broker-dealer or investment advisor—to provide relevant records regarding suspected or attempted financial exploitation to relevant authorities.
  4. Provide immunity from administrative or civil liability for broker-dealers and investment advisors for taking actions permitted under the act.

This act applies to individuals 60 and older as well as people protected under APS.

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Fraud is always a danger in the world of investment advisers. In a recent example of this, the Securities and Exchange Commission announced fraud charges against Arthur F. Jacob, age 56, and his firm, Innovative Business Solutions LLC (“IBS”) of Florida.  Jacob is a disbarred attorney and a Certified Public Accountant whose history includes misappropriation of client funds, among other misconduct.  Neither Jacob nor IBS were registered with the SEC or any state as investment advisers, which is often a tell-tale sign of fraud.

According to the SEC, Jacob and IBS had about $18 million belonging to 30 client households, including Georgia residents, under their control from 2009 through July 2014.  The clients signed a “Durable Power of Attorney / Security Account Limited Discretionary Authorization,” which gave Jacob and IBS the ability to buy, sell and trade in the client accounts.  Jacob and IBS received $517,000 in advisory fees for managing the accounts, which included retirement accounts.  The accounts were held at large brokerage firms, which the SEC did not identify in its Order Instituting Administrative Proceedings against Jacob and IBS.

Jacob and IBS allegedly misrepresented and failed to disclose material information about the risks of his investment strategy and certain exchange traded funds (“ETFs”) that were used.  Clients were told that the strategy and the ETFs was low-risk or no-risk when Jacob had reason to know they were not. The SEC also charged that Jacob made false and misleading statements to clients about the profitability of his investment strategies. The ETFs included high-risk products like Proshares Short S&P500 and Proshares Short Russell 2000, which amounted to speculative bets that the S&P 500 and Russell 2000 would decline in value over the short term.  Clients lost nearly 50% of their investment in these products.

An investment adviser’s registration status can be checked for free on the SEC’s website at http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx, as well as FINRA’s Brokercheck at http://brokercheck.finra.org/.

While Jacob and IBS may or may not have the ability to make whole the victims of their fraudulent scheme, the large brokerage firms certainly do.  Those brokerage firms had a duty to supervise Jacob and are legally responsible for any client losses caused by Jacob’s wrongdoing during his association with those firms.


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On June 29, 2015 the Securities and Exchange Commission announced fraud charges against Wisconsin-based investment advisory firm and owner Mark P. Welhouse of Welhouse and Associates Inc. The firm and owner are being charged with improperly allocating certain options trades that appreciated in value to personal and business accounts, while allocating other trades that depreciated in value to clients.

According to the SEC, the Enforcement Division has engaged in a “data-driven initiative to identify potentially fraudulent trade allocations known as ‘cherry-picking.’” Through this process the SEC Enforcement Division was able to find that Welhouse purchased options in a master account for Welhouse & Associates Inc. and put off allocating the funds into his clients’ accounts until later in the day to determine if the securities would appreciated in value. The SEC claims Welhouse gained about $442,319 in ill-gotten gains allocated to S&P 500 exchange-traded fund. On average, a personal trade made by Welhouse had “a first-day return of 6.28 percent while his clients’ trades in these options had an average first-day loss of 5.05 percent.”

The SEC conducted a statistical analysis to determine if Welhouse’s profits could have been sheer luck or coincidence, but “after running a simulation one million times, the staff concluded it could not.” This process came about because according to Julie M. Riewe, Co-Chief of the SEC Enforcement Division, “Cherry-picking schemes can be extremely difficult to detect without an investor astutely noticing that something may be amiss and coming to us with a complaint about the adviser.”

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In the November 2015 issue of Consumer Reports, light is shed on the fact that roughly 1 in 20 senior adults claim to have been financially abused and why seniors seem to be among the most frequent targets of fraudsters. These perpetrators disguise themselves as government officials such as the FBI or the IRS and claim that the potential victims owe money, they will also offer prizes, sweepstakes, and gifts to give incentive for victims to hand over information such as social security numbers. Some will even use a person’s family as incentive to fork over thousands upon thousands of dollars, such as the case of Beth Baker. Mrs. Baker lost $65,000 in a scheme where she was led to believe her beloved grandson had fallen into legal trouble in Peru and needed her help to release him from prison and pay for legal fees. Baker was instructed not to tell anyone about what was happening and that if she did, terrible things would happen to her grandson and to put the funs on Green Dot MoneyPak cards—these cards are virtually untraceable. Within in the span of five days, Baker lost almost all of her liquid savings.

Fraudsters are able to gain footholds in their senior victims by preying on the elderly’s vulnerabilities such as isolation, loneliness, trusting natures, relative wealth, and in some instances declining mental capabilities. They also use mirroring techniques in order to develop a false bond with their victims and also aid in extracting personal information from their victims. According to Consumer Report the amount of money swindlers have captured is roughly $30 billion annually. Unfortunately only 1 in 44 cases of elderly financial abuse are actually reported. According to the former head of the Manhattan district attorney’s Elder Abuse Unit and current general counsel for EverSafe (a fraud-monitoring service for seniors), “Victims are often deeply ashamed…They worry that if they’re viewed as vulnerable, they’ll lose their independence.” One study that was conducted by the Chicago Health and Aging Project showed that people who fell victim to financial exploitation were hospitalized at a greater rate than people who were not.

Some ways recommended by Consumer Report to avoid falling victim to financial schemes is to sign up for robocall interception services such as Nomorobo, opt out of commercial mail solicitations, have someone trustworthy help you pay your bills, vet all contractors, check financial adviser’s credentials, arrange for limited account oversight, set up an emergency plan and entrust someone to be your power of attorney, visit an elder law attorney. As a loved one visit your elderly often, help set up a limited account, and in extreme circumstances file for guardianship or conservatorship.

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On September 22, 2015 the North American Securities Administrators Association released their Annual Enforcement Report. The study was conducted from 49 jurisdictions throughout the United States and showed that twenty-five percent of enforcements actions taken in 2014 occurred where seniors were the victims. According to NASAA President and Washington Securities Director William Beatty, “This number is conservative, in part, because of a reluctance by victims to approach authorities.” Beatty also noted that an average senior-related case involved roughly three senior victims per case and the issues lying in unregistered securities such as promissory notes, private offerings or investment contracts, and the latter of which being the most common among senior abuse cases.

The NASAA report also shows that in 2014 the state securities regulators conducted 4,853 investigations and took 2,042 enforcement actions. Through such actions approximately $405 million dollars in restitution was returned to victims, $174 million in fines against defendants, and prison sentences totaling 1,629 years were given.

Unfortunately unlicensed individuals and firms are the most common among state securities enforcement with a reported 746 enforcement actions. It has also been found that 230 enforcement actions were taken against licensed broker-dealers, 190 actions against investment advisor representatives, 156 against brokerage firms, and 146 against investment adviser firms.

As of 2014, state action withdrew 2,857 securities licenses and denied, revoked, suspended, or conditioned an additional 728 licenses.

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F-Squared Investments, Inc., a SEC registered investment adviser firm, filed a Chapter 11 bankruptcy petition in July 2015 after paying $35 million and admitting wrongdoing to settle SEC charges that it falsified its advertised track record of investment performance, giving investors the false impression that its performance results were significantly better than they really were. Its AlphaSector investment strategies were used by other investment advisor firms, including Wells Fargo Advisors.

F-Squared’s AlphaSector strategies belong to a group of managed account strategies known as ETF managed portfolios.  According to Morningstar, in the typical ETF managed portfolio, more than 50% the assets are invested in exchange-traded funds.  Money managers like F-Squared package portfolios of ETFs into investment strategies to meet a variety of investment objectives.

Appealing to thousands of individual investors who were burned by the 2008-2009 market declines, F-Squared held out its algorithm-driven AlphaSector investment strategies as a way to manage risk in volatile financial markets.  However, the SEC accused F-Squared of presenting false and misleading performance numbers in its advertising and marketing materials, and also charged its co-founder and ex-CEO, Howard Present, with making false and misleading statements to investors.

F-Squared took in more than $28 billion in assets.  Investment advisor firms, such as Wells Fargo Advisors, that used its AlphaSector strategies had a legal duty to conduct “due diligence” – that is, to take reasonable steps to investigate the “too good to be true” performance numbers put out by F-Squared – before recommending and using them in investors’ portfolios.

The Doss Firm, LLC is currently investigating F-Squared’s AlphaSector strategies, including its flagship AlphaSector U.S. Equity (Premium), as well as the investment advisors that sold them to investors.  If your investment portfolio contained any of the AlphaSector strategies, we would like to talk with you.



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The Puerto Rican bond default is a “slow motion train wreck” that has been occurring now for several years with Puerto Rico having publicly announced its intention not to pay its bond debt. Yet half of U.S. municipal bond mutual funds hold Puerto Rican bond debt, and the exposure of the top ten such mutual funds ranges from approximately 18% to 41%, according to an August 3, 2015 InvestmentNews article entitled “Puerto Rico’s uncertain future leaves muni bond fund investors in limbo.”

According to the article, the top ten U.S. municipal bond funds in terms of Peurto Rican bond exposure are as follows:

1. Franklin Double Tax-Free Income A (FPRTX) 41.15%
2. Oppenheimer Rochester MD Municipal A (ORMDX) 36.76%
3. Oppenheimer Rochester VA Municipal A (ORVAX) 34.89%
4. Oppenheimer Rochester Fund Municipals A (RMUNX) 23.22%
5. Oppenheimer Rochester Ltd Term NY Munis A (LTNYX) 21.14%
6. Oppenheimer Rochester Ltd Term Muni A (OPITX) 20.16%
7. Oppenheimer Rochester AZ Municipal A (ORAZX) 20.03%
8. Oppenheimer Rochester Michigan Muni A (ORMIX) 19.98%
9. Oppenheimer Rochester NC Municipal A (OPNCX) 18.91%
10. Oppenheimer Rochester NJ Municipal A (ONJAX) 18.51%.

Investors in tax-favored municipal bond funds are typically looking for a relatively safe source of income. However, Puerto Rican bonds are extremely speculative, high-risk investments, and municipal bond funds that hold a significant percentage of Puerto Rican bonds may be far more risky than investors were led to believe. Investors in Maryland, Virginia, New York, Arizona, Michigan, North Carolina, New Jersey, and presumably many other states may be surprised to learn that their supposedly home state-oriented municipal bond fund contains a significant percentage of high-risk Puerto Rican bonds.

It appears that these top ten muni bond funds have lost approximately 9% to 24% of their value since 2013. Such losses may be significant for investors looking for tax-favored income with conservative risk.

If you believe your bond fund may have lost value due to exposure to Puerto Rican bonds, we will analyze your portfolio and discuss your options at no cost to you.

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Las Vegas-based MRI International Inc.’s former president/chief executive Edwin Fujinaga, Asia-Pacific executive vice president Junzo Suzuki, and general manager of Japan operations Paul Suzuki, have all been indicted on eight counts of mail fraud and nine counts of wire fraud in connection with a Ponzi scheme that defrauded thousands of victims, according to a Fox News article.

According to U.S Attorney Daniel Bodgen, the men told thousands of overseas investors that their investments were safely managed by a third party escrow agent in Nevada. Nevertheless the men are accused of using investors’ funds to pay for gambling, a private jet, and other personal expenses. The government alleges that this Ponzi scheme preyed on new enrollees’ money that they turned and used to pay early-stage investors and to give other investors incentive to take part.

According to the indictment filed by the U.S. District Court, the scheme was exposed in April 2013 after four years of operation and individually charges Fujinaga with three counts of money laundering. The document also seeks from the defendants the forfeiture of proceeds from the alleged crime. As a result the defendants could also face decades in prison if convicted.

Money placed in a Ponzi scheme is typically difficult to recover directly from the primary wrongdoers, as that money has often been spent. However, Ponzi schemes often involve a number of other players who may have both liability to the victims and the ability to pay damages. Victims should consult with an experienced fraud recovery attorney to discuss their options.

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On May 21, 2015 the Securities and Exchange Commission announced fraud charges against Gray Financial Group, Founder and President Laurence O. Gray, and co-CEO Robert C. Hubbard IV. According to the SEC, the advisory firm and the two executives breached their fiduciary responsibility by swaying Atlanta public pension find clients to invest in alternate investments funds offered by Gray Financial Group, despite knowing the investments would violate Georgia pension laws. The pension fund clients include Atlanta’s police, firefighters, and transit workers pension funds.

The SEC alleges that Gray Financial Group and Gray “made material misrepresentations to at least one client when asked specifically about the investments’ compliance with the law,” as well as, “misrepresented the number and identity of prior investors in the fund.”

Alternative investments are often complex, high-risk, high-fee investments. Georgia law requires that public pension funds invest no more than 20% of their capital in alternative investments; however, the investments sold to two of the Atlanta pension funds in this case caused them to exceed that limit. Georgia law also prohibits public pension funds from investing in an alternative fund unless there are at least four other investors at the time of investment, but there were fewer than four investors in the funds sold to its Atlanta pension fund clients. Georgia law further provides that alternative investment funds must have at least $100 million in assets in order to be purchased by public pensions, yet the funds in this case never reached that amount of assets.

Gray Financial Group collected over $1.7 million in fees from its Atlanta pension fund clients that in connection with the improper investments, according to the SEC.

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The Securities and Exchange Commission announced on May 12, 2015 that fraud charges were being filed against ITT Educational Services Inc., as well as Kevin Modany (chief executive officer), and Daniel Fitzpatrick (chief financial officer).

According to the SEC, the national operators of for profit colleges and its two chief executives fraudulently concealed from ITT’s investors the negative financial impact on ITTof the two student loan programs called “PEAKS” and “CUSO.” ITT had provided guarantees against the risk of loss from non-performing loans that resulted in millions of dollars in liability for ITT. However, instead of disclosing these liabilities to its investors, ITT took steps to mislead them.

Those steps included, according to the SEC, making payments on delinquent student loans in order to “keep the loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice.”

In order to further conceal its liabilities, the SEC alleged that IIT netted its anticipated guarantee payments against recoveries it projected for many years later without disclosing this approach or its near-term cash impact. In addition, the SEC charged, ITT failed to consolidate the PEAKS program in its financial statements despite ITT’s control over the economic performance of the program.” Finally, ITT and the executives reportedly misled and withheld crucial information from its auditor.

After two years of misleading investors, ITT finally disclosed the true extent of its guarantee obligations, which resulted in ITT’s stock value declining by approximately two-thirds, according to the SEC.