Wall Street Investment Fraud Lawyer Blog
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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.

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On January 6, 2015, the Financial Industry Regulatory Authority (FINRA) published its tenth annual Regulatory and Examinations Priorities Letter. In that letter, FINRA identified five areas, which it described as “recurring challenges,” that have harmed investors and resulted in compliance and supervisory breakdowns at member firms. At the top of FINRA’s list of problem areas is the continuing failure of some brokerage firms and their registered representatives to put customer interests ahead of their own. Here is how FINRA described this recurring problem:

“Putting customer interests first: A central failing FINRA has observed is firms not putting customers’ interests first. The harm caused by this failure may be compounded when it involves vulnerable investors (e.g., senior investors) or a major liquidity or wealth event in an investor’s life (e.g., an inheritance or Individual Retirement Account rollover). Poor advice and investments in these situations can have especially devastating and lasting consequences for the investor. Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers – and reduce their regulatory risk – by putting customers’ interests first. This requires the firm to align its interests with those of its customers.”

This central failing is related to, and sometimes caused by, the other four recurring problem areas that FINRA identified: firm culture; supervision, risk management and controls; product and service offerings; and conflicts of interest. “Many of the problems we have observed in the financial services industry have their roots in firm culture” – i.e., a poor culture in which top management tolerates or even encourages improper sales practices and lax supervision. Fee and compensation structures that incentivize brokers to push certain products continue to lie at the heart of many conflicts of interest, according to FINRA. For example, high-commission, complex investment products with misleading “teaser rates” are often sold to investors by brokers who do not fully understand the risks of the product, and, therefore, do not disclose those risks to the investor.

The financial services industry, by and large, has not addressed these problems to the satisfaction of its own self-regulatory organization (FINRA). FINRA has proposed a rule to help it detect sales practice violations by brokers, called the Comprehensive Automated Risk Data System (CARDS). Under CARDS, firms would be required to periodically submit to FINRA data relating to securities and account transactions, holdings, and account profile information, excluding personal identifying information. The financial services industry is so upset about CARDS that it is going to war with FINRA over the proposed rule. See New York Times article entitled “In Push for Change, Finra Is Opposed by the Wall St. Firms It Regulates.”

Its argument is that CARDS would expose customers’ personal identifying information to security breaches via reverse engineering, even though CARDS would not collect such personal identifying information. Fred H. Cate, a senior fellow at the Center for Applied Cybersecurity Research at Indiana University in Bloomington, was quoted as saying that, while there were some valid concerns about data security, “it felt to me like an industry that doesn’t want to comply with the rules, sort of dragging out every argument it could think of, as opposed to focusing on what practical steps could be included to be sure information is secure.”

The message for the public is clear – the financial services industry does not want to be forced to put investors’ interests ahead of its own, and does not want FINRA to be an effective regulator.

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A just-released government memorandum finds that people investing for retirement have lost billions of dollars as a result of abusive sales practices, and that brokers handling retirement accounts should be held to a stricter fiduciary duty standard to better protect workers’ retirement savings, according to an InvestmentNews article entitled “Brokers under White House scrutiny for costing workers billion in retirement savings.” The memo, which was drafted by the Chairman of the President’s Council of Economic Advisers (“CEA”), Jason Furman, reports that investor losses of between $8 billion and $17 billion are attributable to broker/financial adviser misconduct.

The CEA memo advocates that brokers and financial advisers be governed by a fiduciary duty, which requires them to act in the investor’s best interest, and to place investors’ interests ahead of their own. It states in part: “Consumer protections for investment advice in the retail and small-plan markets are inadequate…,” and only the placement of a fiduciary duty upon brokers and financial advisers offers “meaningful protections” to investors.

The brokerage industry has long objected to and lobbied against the imposition of a fiduciary duty standard of care as being too high and burdensome a duty. For four years, industry representatives have argued that having to act as a fiduciary would be too costly and would eliminate lower cost options for investors. “Any signal that the DOL [Department of Labor’s fiduciary duty] proposal is moving forward would cause us concern,” a brokerage industry lobbyist was quoted as saying.

The InvestmentNews article reports that the CEA memo and debate come in the midst of a “massive shift” away from defined benefit plans (e.g., pension plans) to defined contribution plans (i.e., 401(k) plans). The net effect of this is to shift the risks that retirement plans will not produce sufficient returns to fund a retirement away from professional money managers onto the back of workers who have no experience in the management of retirement plans.

As the CEA memo points out, many workers have been the victims of broker/adviser misconduct that arises out of an inherent conflict of interest. “Academic research has clearly established that conflicts of interest affect financial advisers’ behavior and that advisers often act opportunistically to the detriment of their clients,” the memo was quoted as saying.

For example, a broker who receives payment for the sale of a mutual fund or other investment has an interest in recommending it, even if it is not in the client’s best interest because there are other more suitable investments. Under the current “suitability standard” that the brokerage industry wants to keep, it would be okay for a broker to recommend a less suitable investment that the broker had a financial interest in recommending as long as it was not unsuitable based on the client’s investment profile.

The CEA memo was reportedly circulated to senior White House officials, and it is expected that President Obama will support the proposed fiduciary duty standard for brokers.

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The Securities and Exchange Commission recently filed fraud charges against a Fort Lauderdale, Florida-based investment advisor and related funds in the federal district court for the Southern District of Florida. The SEC’s complaint names Frederic Elm (formerly known as Frederic Elmaleh), his unregistered advisory firm Elm Tree Investment Advisors LLC, and three funds: Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP.

According to the SEC, Elm perpetrated a Ponzi scheme – in effect recycling new investor money to earlier investors, and using investor funds the funds for personal expenses, such as a $1.75 million home, luxury automobiles, and jewelry. In this way, Elm allegedly stole at least $17 million from unsuspecting investors. This kind of misconduct violates the anti-fraud provisions of federal securities laws and SEC rules.

The investors sent their investment funds to Elm by wire transfer or by mailing a check. Elm deposited the funds in various bank account that he controlled. In this way, Elm had custody and control over the investors’ funds, and was able to misappropriate the funds.

Investors should be wary of sending money anywhere other than to an account set up for them at a well-known, trustworthy financial institution. Normal operating procedure is for investment advisors to manage a client’s money held in an account at a reputable firm, which would have actual custody of the funds and safeguards in place to prevent the kind of theft alleged by the SEC.

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The collapse in oil prices was a major shock that took a lot of people by surprise. For years the story line had been that the world was running out of oil and America was dependent on foreign oil produced by governments not friendly to U.S. interests. With dwindling supplies, the price of oil had to be higher in the future. Sellers of energy stocks and other oil and gas investments had a compelling story to tell potential investors.

Despite this oil-depletion story line, however, the sudden and sharp decline in oil prices was not really unexpected. According to Gregory Zuckerman, author of The Frackers, the U.S. experienced the largest crude oil production increase in history in 2012, and, in 2013, the U.S. increased daily output from 5 million barrels per day to 7.5 million – on a track to outproduce Saudi Arabia by 2020. As for natural gas, production increases have led to price declines of 75% since 2008. Better technologies like horizontal drilling and hydraulic fracking – a process for accessing oil and gas trapped in dense rock – have allowed these production increases and price declines to occur.

Oil and gas investment offerings have become more common in these days of low interest rates, as investors have been unable to generate enough income from bond interest and stock dividend payments. Also, state securities regulators have long warned that high oil prices have allowed promoters to generate interest in investments in energy-related business ventures.

Sellers of investments are legally required to be accurate and completely truthful in marketing investments, disclosing all important risks, and are prohibited from recommending investments that are unsuitable for the investor. But sellers do not always do that. Investors who lost money in energy-related investments that were either unsuitably risky for them, or whose sellers misrepresented or failed to disclose important risks, have valid legal claims to recover those losses.

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Investors have filed claims against UBS Wealth Management Americas totaling more than $900 million for losses in its Puerto Rican closed-end municipal bond funds, according to InvestmentNews, citing the company’s third quarter earnings report. The bond funds plummeted in value last year.

UBS had sold more than $10 billion of the funds through 2012, according to the article. Investors have alleged fraud, misrepresentation and unsuitable recommendations against UBS and its brokers in connections with the sales. In addition, at least one UBS broker persuaded some investors to take out loans and invest the proceeds in the funds in violation of UBS policies. UBS has reportedly set aside millions of dollars to cover anticipated liability.

Separately, the Puerto Rican division of UBS Wealth Management Americas, has reportedly agreed to pay $5.2 million to Puerto Rico regulators to settle charges that the firm’s brokers improperly sold these funds to investors. Of the $5.2 million, approximately $1.7 million is earmarked for reimbursing 34 “mostly senior, low-net-worth” investors, who were heavily concentrated in the closed-end funds. The other $3.5 will be deposited into the commission’s investor education fund.

The Doss Firm, LLC is a Marietta, Georgia based law firm with over 40 years combined experience in helping investors recover losses resulting from unsuitable recommendations by brokers and other misconduct. If you have a question about your investments, feel free to give us a call at (770) 578-1314 for a free consultation.