January 13, 2014


According to a recent news release, the Financial Industry Regulatory Authority (FINRA) has fined Stifel, Nicolaus & Company, Incorporated and an affiliate $550,000 ordered them to pay approximately $475,000 in restitution to 65 customers for making unsuitable recommendations of leveraged and inverse exchange-traded funds (ETFs). The affiliate is Century Securities Associates, Inc., which is owned by Stifel.

Leveraged and inverse ETFs are complex alternative investments that are usually poorly understood by both the selling brokers and investors. They are designed to be short-term trading vehicles that "reset" daily. Consequently, over time, they fail to track the underlying index or benchmark. The use of leverage magnifies such discrepancies. Thus investors may experience large losses even though the long-term performance of the index may gain.

Securities firms and their representatives and their representatives are required to understand investment products before recommending them to their customers. Firms must conduct reasonable due diligence on complex products, train their sales force to adhere to appropriate sales practices, and supervise them to see that such practices are implemented. As in this case, however, selling firms often fall short of their duties.

Stifel and Century representatives did not have a good understanding of leveraged and inverse ETFs, but the firms allowed them to recommend the products to risk averse customers, who suffered significant losses, according to FINRA. FINRA further found that Stifel and Century failed to put reasonable supervisory systems in place. The time period involved was January 2009 though June 2013.

Stifel and Century consented to FINRA's findings and agreed to pay the fines and restitution.

January 9, 2014

J. P. Morgan Chase Avoids Criminal Prosecution for Hosting Madoff Fraud

Banking giant J. P. Morgan Chase has reached a deal with federal prosecutors to avoid criminal prosecution for its role in the Bernard Madoff Ponzi scheme. According to the prosecutors, J. P. Morgan, which had custody of Madoff accounts, witnessed suspicious money transfers, too-good-to-be-true investment returns, unverifiable trading activity, and the use of a one-man accounting firm. But while the bank connected the dots, filed a suspicious activity report with British officials, and was concerned enough to withdraw its own money from Madoff feeder funds, it failed to protect investors in that it "never closed or even seriously questioned Madoff's Ponzi-enabling 703 account," according to U. S. Attorney Preet Bharara.

The nation's largest bank faced two felony charges of violating the Bank Secrecy Act because it did not file a Suspicious Activity Report after witnessing red flags about Madoff and did not have appropriate anti-money laundering compliance procedures in place. The charges come on top of other legal woes at J. P. Morgan, including a $13 billion settlement with the U. S. government in connection with its mortgage practices that led up to the financial crisis.

Madoff reportedly perpetrated his Ponzi scheme through accounts at J. P. Morgan from 1986 up until his arrest in 2008. Almost all of his clients' funds were deposited at J. P. Morgan, and money flowed into and out of those accounts. In October 2008, one of J. P. Morgan's analysts wrote a memo indicating that the bank could not verify Madoff's trading activities or custody of assets. It also questioned Madoff's "odd choice" of using a small, unknown accounting firm. Also in October 2008, J. P. Morgan filed a report with British regulators that stated in part that Madoff's purported investment returns were "too good to be true."

J. P. Morgan will pay approximately $2.24 billion to settle criminal charges plus another $350 million in civil penalties. In return, the U. S. will defer prosecution of the bank for two years as long as the bank complies with certain provisions, including reforming its anti-money laundering policies and cooperating with ongoing investigations. No individual executives at J. P. Morgan Chase were charged with a crime.

In addition to the criminal case settlement, the trustee for the liquidation of Bernard L. Madoff Investment Securities, LLC ("BLMIS") appointed by the Securities Investor Protection Act (SIPA), Irving H. Picard, announced recovery agreements with J. P. Morgan totaling approximately $543 million for the benefit of BLMIS customers, for which bankruptcy court approval is being sought. The SIPA trustee has recovered approximately $9.783 billion for the BLMIS Customer Fund, or about 56% of the $17.5 billion that was lost in the Madoff ponzi scheme, according to a press release from the office of Mr. Picard.

While $1.7 billion is reported to be the largest bank forfeiture in history, investor advocates have been critical of the criminal case settlement. In particular, they criticize the failure to charge individual bank executives, who may have turned a blind eye to Madoff's fraud, with a crime. They also criticize the leniency of the settlement terms as amounting to an ineffective deterrent.

January 9, 2014


Each year, the Financial Industry Regulatory Authority (FINRA) publishes a letter to the financial services industry identifying its regulatory and examination priorities. FINRA is the industry's "self-regulatory organization," which is charged with policing sales practice violations by its member broker-dealer firms, among other things. According to FINRA, its letter highlights important risks and problem areas in the industry that "could adversely affect investors." While there may be some differences from year to year, the major risks and problems that impact the most investors seem to persist.

The two major categories of violations that concern FINRA are unsuitable recommendations and misrepresentation of the material facts about recommended investments. In general, the suitability rule requires selling firms to have (and be able to demonstrate) a reasonable basis for believing that a recommended investment is both (1) suitable for at least some investors based upon the nature of the investment and its potential risks and rewards, and (2) that the investment is suitable for the particular customer to whom it is being recommended based on that customer's investment profile (e.g., age, investment experience, time horizon, liquidity needs, and risk tolerance).

FINRA has long been, and remains, concerned about sales practices related to a group of investments that share the characteristics of being illiquid, not transparent and hard to understand, and that are extraordinarily costly in that they pay outsized commissions to the agents that sell them to investors. In this regard, FINRA's list includes the following categories of investments: Complex Structured Products, Private Real Estate Investment Trusts (also known as non-traded REITs), Frontier Funds and a group of interest rate-sensitive securities like Mortgage-Backed Securities, Long Duration Bond Funds, Long Duration Bond ETFs, and so on.

These products are typically sold to income-oriented investors, who are often retired people trying to live on a fixed income that consists of social security payments and investment income. Such investors typically have high liquidity needs and low risk tolerance. The low interest rate environment has sharply reduced their income. While these income-oriented investments promise more income, they are largely illiquid, higher-risk investments. For example, a number of non-traded REITs reduced or eliminated distributions in the wake of the real estate market crash, but they cannot be sold like a stock - i.e., they are illiquid, and investors were left holding a non-producing asset that was worth far less than what they paid for it.

FINRA is concerned that the selling brokers neither fully understand nor explain the risks and problems associated with these investments.

According to its letter, FINRA is also concerned about the disproportionate effect that chronic bad brokers, which it calls "recidivist brokers," have on investors. However, if FINRA truly wanted to protect investors from recidivist brokers, it would take action to prevent brokers from expunging or whitewashing their customer complaint histories from the records it makes available to investors (and urges them to check out before investing) known as BrokerCheck. PIABA (the Public Investors Arbitration Bar Association), under the leadership of its President, Jason Doss, has launched a campaign aimed at improving disclosures of brokers' histories to potential investors by placing more appropriate restrictions on brokers' ability to expunge their records posted on FINRA's BrokerCheck. We will keep you posted on those efforts. FINRA's priorities letter can be viewed here.

November 18, 2013

Anonymous SEC Whistleblower Awarded $150,000

On October 30, 2013, the Securities and Exchange Commission announced that is has awarded $150,000 to an anonymous whistleblower. It is the sixth award since the SEC Whistleblower program began two years ago. So far, the largest award is $14 million.

Under the SEC's program, persons who voluntarily provide original information about a possible securities law violation that leads to the collection of monetary sanctions by the SEC of more than $1 million are entitled to an award of between 10% and 30% of the amount collected.

The most common violations reported by whistleblowers have involved corporate disclosures and financials, offering fraud and manipulation, according to the SEC's Annual Report on the Whistleblower Program for 2012. Other categories of violations have included insider trading, trading and pricing, unregistered offerings, municipal securities and public pensions.

The most recent award recipient wished to keep his identity confidential. By law, the SEC takes steps to protect the confidentiality of whistleblowers. In order to submit a tip anonymously, the whistleblower must be represented by an attorney.

Employers are prohibited by law from retaliating against whistleblowers. It is unlawful to discharge, demote, suspend, harass, or discriminate against an employee who provides information under the SEC's whistleblower program. Victims of wrongful retaliation may be entitled to reinstatement, double back pay, expenses and attorney's fees.

Whistleblowers provide a valuable service to financial markets and society in general. If you believe you have information relating to a possible securities law violation by your employer, and would like to submit a tip to the SEC anonymously, The Doss Firm, LLC may be able to help.

April 23, 2013

Co-Directors of SEC's Enforcement Division Named

On April 22, 2013, George Canellos and Andrew Ceresney were named as SEC's Division of Enforcement co-directors. Both have ties to SEC's new chairman Mary Jo White.

Canellos worked as an assistant attorney to Ms. White while she was the U.S. Attorney for the Southern District of New York in the 1990s to early 2000s. Then he worked for six years as a litigation partner at Milbank, Tweed, Hadley & McCloy LLP. In 2009 he headed the SEC's New York Regional Office from 2009 to 2012. Canellos has been serving as the SEC's acting director of enforcement since January 2013.

Ceresney is joining the SEC after his tenure at Debevoise & Plimpton LLP. Ceresney was a partner when White headed the litigation department at Debevoise & Plimpton LLP.

The appointment of the enforcement co-directors is among the White's first moves as head of the SEC.

April 22, 2013

FINRA Approves Proposed Rule Changes to Arbitration for Submission to SEC

On April 19, 2013, the FINRA Board of Governors approved several proposed rule changes that now will be submitted to the SEC for review and approval. Two that center on the FINRA arbitration process are detailed below:

First, the Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 12403 which would simplify arbitration panel selection rules. The proposed rule would allow all parties to see lists of 10 chair-qualified public arbitrators, 10 public arbitrators, and 10 non-public arbitrators. Furthermore, the proposed rule would permit four strikes on each of arbitrator list. Also, a party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list or instead, if the parties leave on the non-public list one or more of the same non-public arbitrators, the parties could have a majority public panel.

Secondly, the Board authorized FINRA to file with the SEC proposed amendments to the Discovery Guide. The proposed amendments would provide general guidance on e-discovery issues and product cases, and clarify existing provisions relating to affirmations. The proposed amendments would cause the Discovery Guide to:
"1. Include guidelines for arbitrators to consider when deciding disputes relating to the form of e-discovery;
2. Add guidance on product cases to explain, among other matters, that these cases are different from other customer cases and that the Document Production Lists may not provide all of the documents parties usually request in a product case; and
3. Clarify that a party may request an affirmation when an opposing party makes a partial production."

April 22, 2013

Rep. Waters Introduces Bill that Allows SEC to Charge User Fees to Investment Advisors

On April 19, 2013, Rep. Maxine Waters introduced legislation that would allow the SEC to charge user fees to investment advisors to fund their oversight. Ms. Waters said that the SEC needs a source of revenue dedicated to regulating advisors and the bill would authorize fees to fund investment advisor examinations.

Under the bill, the user fees would be set by the SEC based on the cost and frequency of inspections, an advisor's size, advisor's AUM, types of clients, and risk characteristics.

Ms. Waters said, "This legislation answers a funding gap which has been largely responsible for the infrequency of investment advisor exams, and represents the simplest and most direct method for achieving the desired result: improved quality and quantity of these exams and another step toward restoration of public confidence in the markets."

The bill faces an uphill climb in Congress though. It will be difficult for Ms. Waters, who introduced the bill with Rep. John Delaney, D-Md., to generate Republican support in the House.

April 19, 2013

Professional Athlete Wealth Management Group Allegedly Involved in Discount Firm's Fraudulent Sales Case

On April 12, 2013, we posted a blog entitled FINRA Charges Discount Firm with Fraudulent Sales, which detailed FINRA's complaint against Success Trade Securities Inc, an online discount firm, and its CEO, Fuad Ahmed alleging fraudulent sales of promissory notes. New details are emerging in this case.

Yahoo! Sports reports that many of Success Trade Securities Inc.'s clients were prominent NFL and NBA players and those investors were led by Jade Private Wealth Management to invest with Success Trade Securities. This will undoubtedly make Jade Private Wealth Management a prime target for investors seeking to recover their losses.

We recommend that all investors who were directed by Jade Private Wealth Management to invest with Success Trade Securities should document all conversations that you had with Jade and preserve all written communications.

In the complaint, FINRA alleged that players were typically introduced to Success Trade by representatives of Jade Management, including prominent Jade adviser Jinesh "Hodge" Brahmbhatt. In turn, Success Trade is alleged to have made at least $1.25 million in payments to Jade Management since March 2009. Furthermore, Success Trade funded Jade Management's business from approximately March 2009 through March 2010.

Brahmbhatt is currently registered in the financial advisors program established by the NFL Player's Association. Brahmbhatt spoke to Yahoo! Sports Wednesday night and said he still does not know whether Success Trade was operating a Ponzi scheme with investor money.

According to multiple sources that spoke to Yahoo! Sports, several professional athletes have either been contacted or been urged to contact investigators from the U.S. Department of Justice, the FBI and the SEC.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

April 19, 2013

CFPB Concerned Older Americans are Confused by the Vast Amount of Financial Advisor Designations

On April 18, 2013, the Consumer Financial Protection Bureau (CFPB) released a report that detailed its view that regulators need to do more to stop older Americans from being confused by "the scores of senior designations that financial advisors use." The CFPB believes the SEC should consider setting up a centralized tool for investors to verify an advisor's designations and a place for seniors to submit related complaints.

The report details that there are more than 50 senior designations used to claim specialized knowledge in helping older Americans with retirement planning and its impossible for seniors to determine which ones are legitimate.

Furthermore, the CFPB believes, with all the above designations being overseen by different state and federal regulators, it is difficult for a senior seeking to file a complaint to know whom to file it with.

Hubert "Skip" Humphrey, assistant director of the Office for Older Americans, said in a CFPB blog post that, "when it comes to these specialty titles, they are anything but transparent...in fact, we found that many consumers don't understand basic differences between brokers, investment advisors, insurance agents, and financial planners, let alone the 50-plus senior designations that many of those financial advisors add to their titles."

April 18, 2013

SEC Commissioner and NASAA Advocate Ending Mandatory Arbitration Clauses

On April 17, 2013, NASAA members visited Washington D.C. to raise support among lawmakers to help their effort to restrict, or end, the use of mandatory arbitration clauses in client contracts with brokers. SEC Commissioner Luis Aguilar agrees with them.

In a speech at the NASAA conference on April 16, 2013, Aguilar called for an end to mandatory arbitration clauses. In addition, he said "I believe the [SEC] needs to be proactive in this important area...we need to support investor choice." Furthermore, he stated in support that, "allowing investors to take their legal claims to court would enhance investor protection and add more teeth to our federal securities laws."

Also at the conference, about 17 NASAA members conducted meetings with more than 40 lawmakers, delivering the same message echoed by Mr. Aguilar and other state securities regulators.

According to state regulators, almost all brokerage contracts include mandatory pre-dispute arbitration clauses, and they're also now appearing in agreements between clients and investment advisors.

Arbitration backers say that the process is more efficient and less costly than a court proceeding. Opponents argue that in many cases, courts provide a better venue than arbitration for resolving disputes.

Mr. Aguilar believes that "investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisors...a client's right to go to court to recover monetary damages is an important right that should be preserved and kept in the client's toolkit."

April 18, 2013

SEC Walter Says SEC Proposed Budget Increase Still Not Enough

On April 12, 2013, we posted a blog entitled In Proposal, SEC's Budget to Oversee Investment Advisors Increased, which detailed the recent federal budget proposal that would increase the SEC's funding by $256 million to allow the SEC to hire hundreds of examiners to increase investment advisor oversight. On April 16, 2013, however, SEC member Elisse Walter commented to state regulators that the proposed budget increase would still not be enough.

Ms. Walter believes that, even with the proposed budget increase, the SEC still would lack the resources to boost investment adviser oversight substantially. Ms. Walter said that "there are simply not enough examiners to go around." She furthermore stated that "the transfer of about 2,240 midsize advisors (with AUM of less than $100 million) from SEC to the states has not given the SEC more capacity to oversee advisors who have remained with the agency."

The SEC has taken on about 1,400 newly registered private fund advisors, who now make up about 37% of SEC-registered advisors. The complexity of their funds has boosted the AUM of registered advisors to $49.6 trillion.

April 15, 2013

Florida Close to Enacting Legislation Making Branch Office Registration Instantaneous

Florida legislation, likely to be enacted Summer 2013, will make broker dealer and investment advisor branch office set-up instantaneous. A bill that would replace the current registration process with one that grants instant approval once an application is filed has been approved by the financial committees in the Florida state House and Senate.

Under current law, financial advisors who switch to a new company, change their office address or open a branch office in Florida have to register with Florida's Office of Financial Regulation. The process can take five days on average for a broker and six days for an investment advisor, potentially resulting in business operations delays.

Florida is one of eight jurisdictions, seven states and the U.S. Virgin Islands, that does not approve a branch office application immediately. Sixteen jurisdictions use notice filing and 29 require neither registration nor notice filing of branch offices.

Under the proposed law, advisors could start conducting business the moment they submit their registration application and a $100 filing fee. Furthermore, the bill would allow the Florida securities regulator to suspend a branch office if its filing is deficient and the adviser fails to make corrections within 30 days.

April 15, 2013

FINRA Charges Discount Firm with Fraudulent Sales

On April 12, 2013, FINRA announced that has filed a complaint against Success Trade Securities Inc, an online discount firm, and its CEO, Fuad Ahmed. The complaint alleges that Success Trade Securities Inc. fraudulently sold more than $18 million in promissory notes to 58 investors, most of them former professional football and basketball players. The notes allegedly promised annual interest rates of 12% to 26%.

Success Trade is a deep-discount firm, based in Washington, which offers stock and options trades for $2.95 to investors who pay a $65 monthly platform fee.

FINRA claims that proceeds from the promissory note sales were used to make personal unsecured loans to Mr. Ahmed, as well as to pay off past investors and fund the firm's operations. Furthermore, FINRA alleges that Success Trade is in "dire financial condition and unable to repay principal...and relies primarily on sales of the notes to keep the firm afloat."

In a cease-and-desist order signed on April 11, 2013, Success Trade agreed to stop selling the notes and use assets only for normal business purposes.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

April 12, 2013

Officers at Private Placement Shop Indicted with Securities Fraud

On April 10, 2013, four top executives of DBSI Inc. were indicted by a federal grand jury in Idaho on 83 charges, including conspiracy to commit securities fraud, wire fraud, mail fraud and interstate transportation of stolen property. Allegedly, DBSI was acting like a Ponzi scheme to continue operations and pay returns to other investors.

The indictment seeks forfeiture of properties and assets totaling $169 million.

The principals charged include Douglas Swenson, 64, co-founder and former president of DBSI; Mark Ellison, 64, co-founder and general counsel; and two sons of Mr. Swenson, David, 35, and Jeremy, 40, who were assistant secretaries.

DBSI raised money by allegedly defrauding investors out of $89 million with sales of high yield notes in 2008. In addition, DBSI raised money through the sale of securities known as "tenant-in-common." Furthermore, the executives falsely represented DBSI as having a net worth of $105 million.

The indictment came one day after federal prosecutors reached a plea agreement with Gary Bringhurst, DBSI's former chief operating officer. Bringhurst agreed to plead guilty to one count of conspiracy to commit securities fraud for falsifying financial statements used to artificially bolster the company's financial standing and mislead investors about how their money would be used.

April 12, 2013

In Proposal, SEC's Budget to Oversee Investment Advisors Increased

Under the recent federal budget proposal by the President, the SEC's funding would increase an extra $256 million allowing the SEC to hire hundreds of additional examiners to increase investment advisor oversight.

Under the proposal, the SEC's budget would rise to $1.67 billion, from $1.42 billion. The SEC wants to use part of the money to "beef up" advisor exams.

In the SEC's budget request document, it said that it examined only about 8% of 11,000 registered advisors in fiscal year 2012 and that 40% of advisors have never been examined. The SEC said that it wants to increase its examination rate to 45% to 55% annually, about the same rate of coverage of about 4,600 broker-dealers each year by the FINRA.

Overall, the $1.67 billion appropriation would allow the SEC to hire 676 additional staff members, 325 of whom would be examiners.