California Securities Fraud Lawyer Blog

California Stockbroker Discipline Report for September - December 2011

Mon, 16 Jan 2012 16:42:25 -0800

The following information regarding broker misconduct and disciplinary actions taken against California stockbrokers was released by the Financial Industry Regulatory Authority (FINRA) for the period September through December 2011:

September 2011

John-Eric Bonilla, formerly with U.S. Bancorp Investments Inc., in Sacramento, California, was barred from association with any FINRA member in connection with finding that Bonilla failed to respond to FINRA requests for information related to a claim that Bonilla falsified documents in which he overstated an investor's net worth, annual income, and investment experience and misstated the fee associated with investor's security instrument.

Jerry Jason Rice, formerly with WAMU Investments, Inc., in Fresno, California, was barred from association with any FINRA member in connection with a finding that Rice failed to respond to FINRA requests for information related to allegations that he made misrepresentations and engaged in unauthorized and unsuitable trades.

October 2011

Vikas Goel, with Newport Cost Securities, Inc., in Irvine, California, was fined $7,500 and suspended from association with any FINRA member in connection with findings that Goel placed a customer's signature on statements he prepared without the customer's knowledge, authorization, or consent as a rationale for recommending the customer sell mutual funds to invest the proceeds in various annuities.

Jo Ann Marie Head, formerly with Morgan Stanley Smith Barney in Whittier, California, was barred from association with any FINRA member and ordered to pay restitution to a customer in the amount of $19,000, which represented a loan granted Head by a customer. FINRA further found that Head conveyed false and exaggerated account values to customers, exercised discretion in customer accounts without authorization, and mischaracterized unsolicited trades as solicited in customers' accounts.

Yaman Huseyn Sencan, formerly with Mercator Associates, LLC, in Rancho Santa Fe California, was fined $20,000 and barred from association with any FINRA member in any principal capacity and suspended from association with any FINRA member for six months in connection with a finding by FINRA that Sencan failed to reasonably supervise the activities of firm personnel engaged in charging excessive commissions, sharing commissions with a non-member and misusing funds on deposit with the firm.

November 2011

UBS Financial Services Inc., in Weehawken NJ was censured and fined $300,000 in connection with a finding by FINRA that the firm failed to reasonably supervise resulting in a failure to prevent improper, excessive, and unsuitable short-term trading for multiple customer accounts.

John William Grant, formerly with Torrey Pines Securities, Inc., in Red Bluff, California, was barred from association with any FINRA member in connection with a finding by FINRA he executed unauthorized transactions in accounts belonging to trustees of a family trust in excess of $1 million.

Larry Alan Prelesnik, formerly with LPL Financial LLC, in Palm Desert, California, was fined $7,500 and suspended from association with any FINRA member for 20 business days in connection with a finding that Prelesnik sent oversimplified and incomplete solicitations to clients in connection with a 100 percent bond positioning strategy.

Krittibas Ray, formerly with White Pacific Securities, Inc., in San Francisco, California, was barred from association with any FINRA member in connection with a finding by FINRA that after soliciting investors to purchase promissory notes as a vehicle to fund the startup of a hedge fund he used some of the $675,000 in proceeds for personal expenses and proceeds from later sales to pay interest and principal amounts due on the notes earlier purchasers held.

December 2011

Internet Securities and Chief Compliance Officer Michael Wayne Beardsley of Oakland, California, were censured, fined $12,500, and required to retain an outside consultant to review and prepare a report concerning the adequacy of the firm's supervisory, and compliance policies and procedures and supervisory controls in connection with a finding by FINRA that as a result of Beardsley's failure to supervise, the firm's representative was able to conduct numerous unsuitable transactions.

Walter Louis Howerton formerly with Wachovia Securities, LLC, in Modesto, California, was fined $12,500 and suspended from association with any FINRA member for six months in connection with a finding that he made unsuitable recommendations related to a customer's account. The losses on the account forced the customer to closer her position at a substantial loss. FINRA further found that Howerton did not have reasonable grounds to believe that the recommendations were suitable for the customer based on her financial situation and needs.

Fred Ralph Schwartz formerly with Wells Fargo Advisors, LLC, in Los Angeles, California, was fined $5,000 and suspended from association with any FINRA member for three months and was ordered to pay $42,599 restitution to customers in connection with a finding by FINRA that he engaged in excessive, unsuitable trading in the customers' accounts.

Jeffrey Alan Smith with Accelerated Capital Group in Irvine, California, was suspended from association with any FINRA member in any principal capacity for 20 business days in connection with a finding by FINRA that Smith failed to effectively supervise the activities of the firm's associated persons.

SEC Adopts Regulations to Preclude the Sale of Private Placements to Small Investors

Mon, 09 Jan 2012 21:21:22 -0800

As repeatedly reported here in the California Securities Fraud Lawyer Blog, we have seen an exponential growth in investor complaints involving the sale of private placements. For those of you unacquainted with the term "private placement," click here.

In a nutshell, private placements are illiquid non-publicly traded investments that are exempt from registration requirements under the Securities Exchange Act. For this reason, only wealthy and sophisticated investors, referred to as "accredited investors," are allowed to invest in them. In order to qualify as an accredited investor, an individual must have a net worth of $1 million or more. However, this does not mean that it is fair game for stockbrokers and investment advisors to sell private placements to anyone with a paper net worth of $1 million. See related blog posting: Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule.

In an effort to protect smaller investors whose only significant asset is their home, the Securities and Exchange Commission ("SEC") recently took steps to limit Regulation D of the Securities Exchange Act of 1933 to exclude an investor's primary residence from the $1 million net worth calculation. Although the rule became effective February 27, 2012, the net worth prohibition actually took effect back in July 2010 when President Obama signed off on the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009. See blog post: Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

The Bottom Line

We recommend extreme caution to anyone contemplating an investment in a private placement that is limited to accredited investors. Don't be fooled by your financial professional's sales pitch. No matter how you slice it, private placements are illiquid and risky investments. As stated in the fine print: These investments are only appropriate if you are willing to lose your entire investment. Still not convinced? I've got a backlog of cases where clients wrongfully assumed that they could get out of their investment anytime they wanted. They are still waiting.

Related Blog Postings:

Investor Sues Ameritas Over Recommendation to Use Real Estate Loans to Invest in Private Placements

FBI Reports 105% Increase in High Yield Investment Fraud Investigations

IMH Secured Loan Fund | IMH Financial Corporation Lawsuit Information

Highland Floating Rate Fund Undergoes Metamorphosis in Name Only

Mon, 09 Jan 2012 17:42:08 -0800

On January 9, 2012, Highland Funds will officially transfer management of their fund portfolios to a new entity called Pyxsis Capital. If history is any guide, Highland Floating Rate Fund investors should not expect a boost in performance following the name change. According to a 2005 study by Michael Cooper with the Krannert Graduate School Management at Purdue University, funds that changed their names actually performed worse after the name change.

Highland's change of identity is understandable, particularly in light of the legal backlash faced by brokers and advisors who sold the Highland Floating Rate Fund to unwary investors. See our August 2011 blog posting in the California Securities Fraud Lawyer Blog: Highland Floating Rate Funds' Poor Performance Leads to Investor Lawsuits.

Despite the name change, the Pyxsis Floating Rate Fund's management and investment strategy will continue to remain primarily focused in high-yield "junk bonds." High-yield bonds are characterized by high returns as a reward for the risk inherent in investing in below investment grade securities (rated below BBB by credit reporting agencies). The family of Pyxis floating rate funds plan to invest 75% of the fund's assets in bonds of which more than 80% are below investment grade.

Related Blog Posts:

Highland Floating Rate Funds' Poor Performance Leads to Investor Lawsuits

J.P. Morgan Chase Fined $1.7 Million by Securities Regulators for Unsuitable Sales of Floating-Rate Funds

Wells Fargo Investments Fined $2 Million for Unsuitable Reverse Convertible Note Sales

Thu, 15 Dec 2011 11:52:55 -0800

Today, the Financial Industry Regulatory Authority (FINRA) announced that Wells Fargo Investments, LLC was fined $2 million for making unsuitable investments in connection with the sale of reverse convertible notes and for failing to provide required sales charge discounts on Unit Investments Trust (UIT) transactions. FINRA also took the unusual step of requiring Wells Fargo to pay restitution to customers who did not receive UIT discounts and to those who were placed in unsuitable reverse convertibles. More often than not, FINRA will levy a fine on the brokerage firm and leave investors to fend for themselves and try to recoup their losses through FINRA's securities arbitration process.

What are Reverse Convertible Securities?

Reverse convertibles are short-term investments that are tied to an underlying stock or bond. When the security matures, the investor will receive either 100% of the original investment or a predetermined number of shares. When investing in reverse convertibles, investors risk losing a significant portion of their investment if the value of the underlying stock or bond falls below a certain level at maturity. For example, in a reverse convertible bond fund, an investor may be forced to redeem their bonds at a decreased value.

Wells Fargo's Failure to Review Suitability of Reverse Convertible Transactions

FINRA found that Wells Fargo, through one broker, had recommended hundreds of unsuitable reverse convertible transactions. Of the 21 accounts that were found to have unsuitable reverse convertibles, fifteen of those belonged to elderly customers who were over 80 years old. These customers were exposed to risk inconsistent with their investment objectives that resulted in an overconcentration of reverse convertibles in their accounts.

Wells Fargo's Failure to Provide Eligible Customers with UIT Discounts

UITs offer discounts on purchases that exceed certain "breakpoints" or involve proceeds from another UIT during the initial offering period. FINRA found that Wells Fargo failed to provide eligible customers with "breakpoint" and "rollover and exchange" discounts due to the firm's lack of systems for review to ensure that UIT customers received the proper discount.

Ameritas Investment Corporation Suing Its Own Brokers Over Customer Losses in Sale of Private Placement

Fri, 18 Nov 2011 12:10:01 -0800

As noted in a previous blog posting, ALF is pursuing an arbitration claim against Ameritas Investment Corporation on behalf of an investor who borrowed funds to invest in the IMH Secured Loan Fund (now known as IMH Financial Corporation). In an unusual move, Ameritas responded by filing a cross-claim against the broker who sold the investment seeking "contractual and/or common law contribution and/or indemnity" on the basis that any harm or damage suffered was the result of acts or omissions of the broker. It is believed that the broker in question was, at the time, acting in the capacity of an agent or employee of David White & Associates based in San Ramon, California.

As a result of these developments, ALF is stepping up their investigation into this matter and is reaching out to other IMH investors who purchased through brokers employed or affiliated with Ameritas Investment Corporation and/or David White & Associates. ALF is also interested in speaking with current or former brokers employed or affiliated with Ameritas and/or David White & Associates.

Related Blog Posts:

Here come the lawyers! (Nov. 7, 2011)

IMH Financial Corporation's CEO Shane Albers unloads stock at a premium of $8.02 per share (Aug. 15, 2011)

IMH's Financial Troubles Reported in Wall Street Journal (Jan. 19, 2011)

All IMH Posts

J.P. Morgan Chase Fined $1.7 Million by Securities Regulators for Unsuitable Sales Practices Involving Floating-Rate Funds & UITs

Tue, 15 Nov 2011 18:07:46 -0800

On November 15, 2011 the Financial Industry Regulatory Authority (FINRA) entered into a settlement with J.P. Morgan Chase who consented to a fine of $1.7 million and agreed to reimburse customers in the amount of $1.9 million in connection with the failure to supervise unsuitable recommendations to invest in unit investment trusts (UITs) and floating-rate funds given to unsophisticated investors who had a conservative risk tolerance and little or no investment experience. FINRA further found that firm's brokers made the recommendations absent any reasonable grounds to suggest they were suitable for the affected investors.

"Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase's customers," said Brad Bennet, FINRA Executive Vice President and Chief of Enforcement.

FINRA found that 260 unsuitable recommendations were made with regard UITs resulting in $1.4 million in losses to customers. Unreimbursed losses to customers based on unsuitable recommendations from brokers to purchase the floating-rate funds totaled $500,000.

A UIT is an investment vehicle comprised of a bundle of securities, which can include risky investments such as high-yield below investment-grade, or "junk" bonds. Floating-rate funds are mutual funds comprised of senior loans made to entities with low credit ratings that increases the credit risk associated with those funds. Generally, both types of instruments are not suitable for inexperienced investors with a low risk tolerance seeking preservation of capital.

Also included in FINRA's finding was that WaMu Investments Inc., which merged with Chase in July of 2009, also made unsuitable recommendations to customers related to the purchase of UITs and floating-rate funds.

J.P. Morgan Chase stipulated to FINRA's findings without admitting or denying the charge. The settlement agreement requires Chase to contact eligible customers and complete the process of making restitution payments by April 13, 2012. Accepting such payments, however, does not foreclose affected customers from pursuing arbitration or mediation to recover losses. FINRA encourages customers to consult with a securities lawyer to discuss their rights.

Regulators Concerned About Brokers Claiming to be "Senior Specialists"

Fri, 11 Nov 2011 09:58:56 -0800

Many investors do not realize that the terms Financial Analyst, Financial Advisor, Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are simply generic terms or job titles commonly used by stockbrokers and investment advisors. Equally as troubling are the use of titles or designations, such as "Senior Specialist," that are designed to gain the trust and confidence of elderly investors and retirees. The use of such designations is often little more than a marketing tool to attract business from the rapidly growing pool of investors who are 65 years or older.

Recently, our law firm filed a securities arbitration claim against a financial advisor who touted his qualification as a "Certified Senior Advisor" (CSA) and assured a group of elderly women who attended a free lunch seminar that his firm "worked exclusively with senior investors to protect their financial assets and standard of living." Based on these assurances, they believed that their financial advisor had their best interests in mind when he recommended that they invest the bulk of their assets in a risky high-yield investment.

Our clients are now seeking damages through arbitration before the Financial Industry Regulatory Authority (FINRA). The organization that granted the broker his CSA designation, cannot provide any direct assistance to these investors. Although the Society of Certified Senior Advisors (SCSA) has a mechanism for disciplining CSA designees who fail to adhere to their Code of Professional Responsibility, the SCSA's primary method of discipline is to simply revoke the financial advisor's CSA designation.

FINRA Oversight of Senior Designations

In November 2011, FINRA published a Regulatory Notice urging brokers to pay closer attention to the use of senior designations that imply an expertise or specialty in advising senior investors. According to a survey conducted by FINRA, 68% of firms allow the use of senior designations by their representatives. Of those firms that permit the use of senior designations, 66% require the approval and verification of the credentials, 23% require approval but do not verify credentials, and 11% do not require approval of the certification and do not verify the credentials.

There are a variety of senior designations in use by brokers including: Certified Senior Advisor (CSA), Certified Senior Consultant (CSC), Chartered Senior Financial Planner (CSFP), Chartered Advisor for Senior Living (CASL), Certified Retirement Planning Counselor (CRPC), Accredited Retirement Plan Consultant (ARPC) and Certified Retirement Services Professional (CRSP). FINRA is most concerned with those titles that have little, if any, meaningful qualification standards. California law also precludes broker-dealers and investment advsiors from using senior-specific credentials in the offer or sale of securities where such credentials are non-existent or where the organization does not have reasonable standards for ensuring competency of certified individuals. According to FINRA: "[i]nvestors are unlikely to differentiate between designations that represent an enhanced level of proficiency in dealing with financial matters relevant to senior investors versus a designation that is simply a marketing tool." A brokerage firm that allows the use of any title that conveys expertise in advising for retirement or senior investors where such a specialty does not exist could be in violation of industry rules and also the anti-fraud provisions of the federal securities laws and FINRA rules.

There's No Such Thing as a Free Lunch

A common tactic used by bogus "senior specialists" is the hard to resist free-meal seminar. Elderly investors should be particularly wary of salesmen who are pushing variable or indexed annuities. It is particularly important to make sure that the sales person is properly licensed. Before investing, all investors, especially seniors, should check out a broker's disciplinary history using FINRA's BrokerCheck service.

IMH Secured Loan Fund: Here Come the Lawyers!

Mon, 07 Nov 2011 08:35:07 -0800

A number of our California securities law firm clients who suffered investment losses in the IMH Secured Loan Fund (now known as IMH Financial Corporation) have reported receiving a mass-mailed solicitation letter from a law firm located in Florida. California investors should think twice before hiring an out of state law firm to handle their case. For more information, see related blog posting: Why having a California licensed securities arbitration lawyer is so important

More IMH Blog Posts:

IMH Financial Corporation's CEO Shane Albers unloads stock at a premium of $8.02 per share

Investor Sues Ameritas Over Recommendation to Use Real Estate Loans to Invest in Private Placements

Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

Senior Citizens Have a New Financial Watchdog

Wed, 19 Oct 2011 16:28:42 -0800

Today, the Consumer Financial Protection Bureau named Hubert H. Humphrey III to direct the newly created Office of Older Americans, which was established to focus on elder financial abuse - especially in connection with reverse mortgages and retiree bankruptcies. Based on the cases that have come through our securities law firm, other areas that need immediate attention include: high yield investments and variable annuities.

In a statement by Raj Date, a senior Treasury advisor, he stated that seniors are targeted by fraudulent practices and, according to the CFPB, are losing almost $3 billion a year from such abuses. Such poor investment advice is an important issue for seniors who often have more assets than younger investors and are in a position where they have to make complex financial decisions. A representative of the AARP explained that older Americans are being talked into investing in annuities using money from a reverse mortgage - a practice that she says is a very bad investment decision.

One concerning practice is the growing prevalence of financial advisers with a so-called "senior certification." Humphrey intends to work to make sure that financial advisors do not mislead older investors by telling them that they specialize in seniors.

Another questionable investment strategy is the use of reverse mortgages, which are comprised of hard to understand terms and high fees. Humphrey intends to address the issue of reverse mortgages along with other scams and fraudulent sweepstakes directed at senior investors.

According to Humphrey's blog post regarding his new position, the Office of Older Americans will give seniors the tools they need to detect financial scams and make informed financial choices.

California Securities Fraud Lawyer News Flash: AXA Investment Executive Settles Securities Fraud Charges

Thu, 22 Sep 2011 11:39:16 -0800

Barr M. Rosenberg, co-founder and chairman of Orinda, California, investment firm AXA Rosenberg agreed to pay $2.5 million to settle securities fraud charges that involved hiding a computer error that caused $217 million in losses to his clients. As part of the settlement, Rosenberg will also be banned from the securities industry His company, AXA Rosenberg, which is owned by french company AXA SA, has also agreed to pay $242 million to settle civil charges.

California Stockbroker Discipline Report for May - August 2011

Thu, 01 Sep 2011 15:15:50 -0800

Midas Securities, LLC, in Anaheim, CA, was fined $80,000 in connection with a finding by FINRA that they failed to reasonably supervise registered representatives in the sale of unregistered securities.

Brecek & Young Advisors, Inc., in Folsom, CA, was censured and fined $125,000 in connection with a failure maintain adequate supervisory procedures and a failure to supervise its representatives in complying with applicable securities laws with respect to variable annuities.

Ronald Lee Gershon, with Oppenheimer & Co. Inc in Los Angeles, CA, was suspended from association with any FINRA member for 10 days and fined $5,684.75 in connection with the recommendation and sale of unsuitable securities to a customer of Oppenheimer, including auction rate securities and preferred securities that were below investment grade.

Ernesto Zuniga Gomez, formerly with Merrill Lynch, Pierce, Fenner & Smith in San Diego, CA, was barred from association with any FINRA member in connection with the use of verbal authorization forms that falsely stated customer approval for the transfer of funds from their accounts to other customers' accounts.

Jerrold Robin Sexton, formerly with Capital Growth Resources in El Cajon, CA, was barred from association with any FINRA member in connection with findings that Sexton received checks from a customer to be invested in a company he represented as safe. The customer did not know that the company was Sexton's company and that Sexton would use the funds for personal and business expenses.

Mark Andrew Sibert, formerly with Uvest Financial Services Group, Inc. in San Diego, CA, was barred from association with any FINRA member in connection with findings that he engaged in private securities transactions without approval from Uvest and solicited his firm's customers to invest in his company, which was supposed to raise money to invest in real estate and gold-mining.

Ace Diversified Capital, Inc. and chief compliance officer Lynnwood Jen in San Gabriel, CA, were jointly fined $25,000 in connection with a failure maintain adequate supervisory procedures for complying with applicable securities laws with respect to private placements. The findings state that the firm sold interest in Medical Capital Holdings, Inc. without a permit to engage in the sale of private placements.

Carla Wendy Cooper, formerly with Crowell, Weedon & Co. in Los Angeles, CA, was barred from association with any FINRA member in connection with forging a LOA for a customer to authorize the transfer of funds into the account of Cooper's relatives' account.

Priscilla Sabado, formerly with AXA Advisors in Irvine, CA, was barred from association with any FINRA member in connection with findings that she sold investments in Texas oil and gas projects without consent of her member firm.

Highland Floating Rate Funds' Poor Performance Leads to Investor Lawsuits

Tue, 30 Aug 2011 18:05:58 -0800

Our securities law firm is currently pursuing a securities arbitration case on behalf of California investors who suffered losses in the Highland Floating Rate Advantage Fund [Symbols: XSFRX (Class A); XLACX (Class C); XLAZX (Class Z).] These funds are also referred to as "leveraged" loans because the borrowers typically have a significant level of debt relative to equity. The Highland Floating Rate Advantage Fund's share price declined 8% in 2007 and more than 50% in 2008.

Unlike their peers, the Highland Floating Rate funds have continued to disappoint investors. Compared to the performance of other loan participation funds, the Highland Floating Rate Funds are in a class by themselves due to their five-year history of negative returns. In June 2011, the Highland Floating Rate Advantage Fund and the Highland Floating Rate Fund [Symbol: XLFAX] were merged into the Highland Floating Rate Opportunities Fund. Below are the 5-year return results for the Highland Floating Rate Opportunities Funds:

Highland Floating Rate Opportunities Fund 5 Year Return*

Class C Shares [HFRCX] -20.41%
Class B Shares [HFRBX] -19.80%
Class A Shares [HFRAX] -18.39%
Class Z Shares [HFRZX] -16.96%

*Source: lipperleaders.com

Highland's sales literature claims that its floating rate funds seek "capital preservation and the management of credit risk while utilizing leverage to increase yield potential." Investors were attracted to the Highland Floating Rate Funds because they supposedly offered a higher return without adding any significant risk. One of the main reasons the Highland Floating Rate funds performed so poorly is that they invested heavily in loans that were rated as below investment grade or "junk."

Securities Regulators Urge Investors to Use Caution when Investing in Floating Rate Funds

The Financial Industry Regulatory Authority (FINRA) recently issued an "investor alert" to warn investors who may be attracted to the high return promised by floating rate funds. In promoting these investments, FINRA expressed concern about brokers who downplay the potential risks while emphasizing the higher returns.

According to FINRA, floating rate funds have become increasingly popular since 2008 - having grown from $15 billion to $60 billion as of April 2011. These bank-loan funds are highly coveted during periods where investors are concerned with spiked interest rates. Although the funds are low in interest-rate risk, they carry a much higher credit risk. They often extend their portfolios to lower quality borrowers who typically have a higher rate of default than investment-grade bonds. Floating rate funds and other risky high-yield investments should play a very minor role in any investment portfolio--if at all.

IMH Financial Corporation's CEO Shane Albers unloads stock at a premium of $8.02 per share

Mon, 15 Aug 2011 11:24:43 -0800

IMH Secured Loan Fund / IMH Financial Corporation Update

IMH just disclosed in the company's latest filing with the Securities Exchange Commision (SEC), that former CEO Shane Albers transferred 313,484 shares of stock to NW Capital as part of his separation agreement with IMH at a price of $8.02 per share. According to the SEC filing, NW Capital paid Albers $1.2 million over and above the estimated fair value for the IMH stock. By my calculation, this means the "fair value" given to Albers' IMH stock was approximately $4.25 per share. IMH investors who purchased ownership units for $10,000/each, paid the equivalent of $45.38 per share--thus, according to these latest figures, IMH has declined by more than 90%.

There are several lawsuits pending against IMH and the original principals of the company, including a class action lawsuit. In addition, numerous investors have filed lawsuits and securities arbitration claims against their stockbrokers or financial advisors who recommended IMH. In fact, our securities law firm is currently representing a group of investors who filed an arbitration claim against Scottsdale, Arizona, financial advisor Randolf Albers who recommended and sold IMH to his clients through Albers Financial Group and Sunset Financial Services, Inc. Randy Albers is the father of IMH's former CEO Shane Albers.

Click here for more blog postings about IMH Financial Corporation (formerly known as the IMH Secured Loan Fund, LLC)

Citigroup Fined $500,000 for Failure to Supervise and Detect Theft of Customer Funds at Palo Alto, California, Office

Wed, 10 Aug 2011 17:19:00 -0800

Citigroup Global Markets, Inc has been fined $500,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise and detect securities fraud committed by former Smith Barney sales assistant Tamara Moon who worked in the firm's Palo Alto, California, branch office. (Smith Barney is a division of Citigroup Global Markets, Inc. and is now doing business as part of Morgan Stanley Smith Barney, LLC.) As reported in a previous blog posting, Tamara Moon was barred from the industry back in 2009 for bilking as much as $750,000 from elderly and vulnerable customers, including her own father, by taking advantage of Smith Barney's lax supervision. According to FINRA, the firm failed to detect or investigate numerous "red flags" that should have alerted them to Moon's fraud. Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement noted that "Citigroup had reason to know what she was doing and could have stopped her."

Although the firm agreed to reimburse customers and pay a $500,000 fine, the firm consented to the entry of FINRA's findings without having to admit or deny the charges. The practice of paying a substantial fine without having to admit any findings of wrongdoing is a standard procedure in FINRA settlements.

Stockbroker Breach of Fiduciary Duty is the Number One Investor Complaint

Thu, 14 Jul 2011 13:03:55 -0800

Once again, breach of fiduciary duty ranks as the most frequently alleged customer claim according to our mid-year review of securities arbitration cased filed with the Financial Industry Regulatory Authority ("FINRA"). Other commonly alleged claims include negligence and misrepresentation.

So far this year, customers have prevailed and been awarded damages in 48% of the cases that went to hearing. This is the highest win ratio reported by FINRA over last five years. The lowest ratio of winning cases occurred in 2007 when only 37% of arbitration cases received any sort of damage award at all. For more information about arbitration awards, see our analysis of San Francisco arbitration awards for the year 2009.

What is a Stockbroker's Fiduciary Responsibility?

The dictionary definition of the word fiduciary simply states: "involving confidence or trust." A fiduciary relationship can arise whenever someone places their trust and confidence in another. Investment advisors have always been considered fiduciaries under federal law. Stockbrokers, on the other hand, are generally not subject to a fiduciary duty under the federal securities laws; however, courts have found that stockbrokers have a fiduciary duty under certain circumstances. Although the laws of each state differ on this issue, stockbrokers are considered fiduciaries in California and many other states. The leading California case on a stockbroker's fiduciary duty is Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal. App. 2d 690, 69 Cal. Rptr. 222 (1968), which held that the stockbroker-customer relationship is fiduciary in nature and "imposes on the broker, the duty of acting in the highest good faith." Furthermore, if the stockbroker has discretionary control over the customer's account, the courts will impose a more heightened fiduciary duty.

A breach of fiduciary duty can arise whenever a broker places his or her own interests ahead of their customer's. Claims for breach of fiduciary duty usually overlap with other causes of action such as negligence, misrepresentation, unsuitability, overconcentration, and churning.

Adopting a Uniform Fiduciary Duty Standard for Brokers and Advisors

The different fiduciary standards that apply to stockbrokers and investment advisors has been under attack lately. According to a study by the Securities and Exchange Comission ("SEC"), many investors do not understand the distinction between a stockbroker and an investment advisor. Under a mandate from the Dodd-Frank Act, the SEC recommended the adoption of a uniform fiduciary duty applicable to both stockbrokers and registered investment advisors ("RIAs"). The uniform standard proposed by the SEC, states:

The standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

Although the SEC stated that it would formally propose a new standard by July 2011, adoption has been delayed leaving many to doubt whether a "uniform" fiduciary duty for all financial professionals will become a reality any time soon.