Wall Street Investment Fraud Lawyer Blog

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.

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."

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.

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.

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."

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."

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.

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.

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.

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.

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.

With many baby boomers entering retirement every day, FINRA is increasing its focus on how financial advisory firms are selling financial products to seniors. FINRA is gathering data from firms regarding the products firms marketed to seniors, the percentage of revenue firms derived from those sales, and the designations firms are using to market themselves to seniors.

Susan Axelrod, FINRA executive vice president, said that "the data that FINRA is collecting will provide a good reflection point for us to better understand the [financial] world and take steps ... to ensure the appropriate supervision of sales to seniors."

Furthermore, FINRA chief executive Richard G. Ketchum said that seniors are especially vulnerable to offers of yield-chasing and high-risk products.

Investor advocates believe that if efforts to supervise financial advisors are not improved will be in a financial crisis. Mercer Bullard, president of Fund Democracy and Professor of Law at the University of Mississippi, asserted that "the United States is on the verge of a senior crisis posed by the risk of seniors' outliving their assets and their declining ability to manage their money as they age." According to Mr. Bullard, the increasing sophistication of financial products combined with longer life expectancy is creating an environment in which fraud can thrive.

In addition to FINRA, the Consumer Financial Protection Bureau also is targeting financial abuse of the elderly through its Office of Older Americans. In a comment letter last summer, the Certified Financial Planner Board of Standards Inc. urged the CFPB to create a ratings system for financial certifications and designations

On April 8, 2013, the SEC charged ThanhHa Bao, a former employee at Abaxis Inc. a California-based medical device manufacturer, with illegally tipping. Bao allegedly tipped confidential financial data to her brother, Tai Nguyen, who illegally traded in Abaxis Inc.'s stock and enabled his hedge fund clients, at Insight Research, to do the same.

Bao worked in the finance department at Abaxis Inc. and allegedly regularly provided material non-public information to Nguyen. Nguyen would then trade in advance of Abaxis's company quarterly earning announcements. $144,910.00 was generated in illicit profits from this trading.

Furthermore, the SEC charged Nguyen last year with insider trading.

To settle the SEC's charges, Bao agreed to pay $144,910 and consented to a five year ban on serving as an officer or director of a public company.

The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms. The investigations have so far resulted in enforcement actions against 40 entities or individuals that have reaped more than $430 million in alleged insider trading gains.

On April 8, 2013, the Senate confirmed Mary Jo White as chairman of the SEC by voice vote.

According to SEC spokesman John Nester, Ms. White could start in her new job as early as Tuesday, pending the completion of Senate and White House paperwork, but it's not clear when she'll make her first public appearance as the SEC's new chairman.

Ms. White takes over for Elisse Walter as SEC chairman. Ms. Walter was designated chairman by President Obama to succeed Mary Schapiro, when Ms. Schapiro left the agency in December. Ms. Walter's term as an SEC commissioner has expired, but she can remain on the commission until the end of the year. It's not clear how long she will stay.

On April 5, 2013, former FINRA employee Joseph Sciddurlo filed a whistle-blower suit in federal court, claiming he was fired after detecting a flaw in FINRA's risk-rating system that allowed large broker-dealers to be over-leveraged.

Sciddurlo claims in the suit that he worked as a principal examiner for FINRA and in 2010 he discovered that FINRA allowed large firms to circumvent a SEC rule limiting leverage to 15 times net capital.

Furthermore, in the suit, Sciddurlo claimed FINRA illegally discriminated against him on the basis of age and fired him for threatening to disclose the risk-rating flaw to other regulators and to the public. He's seeking at least $25 million in damages.

Sciddurlo claims he was initially "commended for his financial expertise and asked to design a better risk-rating methodology with respect to broker-dealers," but then he was downgraded, placed on probation and fired in May 2011, without a legitimate reason.

The case is Sciddurlo v. FINRA, 13-cv-02272, in the U.S. District Court, Southern District of New York.