Category: Securities Regulation

SEC files insider trading charges involving Post-it note eating.

OK, here’s a tip.  If you feel compelled to eat Post-it notes or napkins because you don’t want someone to know what you’re doing, your conduct is probably bad.  Apparently, the “middleman” in this insider trading scheme didn’t see anything wrong with consuming office supplies.  He sure didn’t see it as an indication of illegal activity.

The SEC charged two people, a law firm employee and a registered representative, with insider trading.  The law firm employee would allegedly disclose to the middleman the names of companies that he learned about from the firm’s files.  The middleman would then, allegedly, write the ticker symbol on a Post-it or a napkin, show it to the stockbroker, then chew up and/or swallow the piece of paper.  Ick.

The broker is then alleged to have concocted a paper trail showing the reasons for a recommendation to buy the tipped stock.  He also is alleged to have made this recommendation to a number of unsuspecting clients who just thought he was a good stock picker.  Wrong.

Oddly, the Post-it note eating middleman has not been charged.  Maybe eating Post-it notes was punishment enough.  I hope he used the small ones.

So the SEC figured out the little scheme, it claims.  FINRA got credit in the press release.  No word on whether they recovered any of the Post-it notes.

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Microcap fraudster stopped by SEC

Are people really this stupid?  Really.  Are they this stupid?  This removes my faith in humanity.

A guy holds a large position in a thinly traded penny stock.  He uses nominees offshore to do it.  He then sends an email blast to 700,000 sheep, I mean “people”, touting the stock.  He apparently found a bunch of sheep, I mean “people”, who believe everything they receive in their inbox.

So a bunch of these sheep, having received this unsolicited email, think “Here’s a great idea.  Let’s buy this piece of crap thinly-traded stock because this email says great things about it.  And while I’m at it, I’ll buy some of those all natural male “enhancement” pills, too.”

So the POS stock increases in price and volume, giving the promoter/emailer/sheep fleecer a handy profit of over $1,000,000.  But the SEC caught wind of this plot and shut it down.  You can read what they did here.  Nice work by the SEC to protect the sheep from themselves.  But really, who believes these emails?  Remember the voicemail scam from a bunch of years ago?  A woman left a voicemail saying that her boyfriend gave her a hot stock tip that she’s not supposed to share.  The key was that the voicemail was supposedly for someone else.  That’s what made the tip sound legitimate.  You can read about one SEC enforcement action on phony voicemail tips here.

Folks, investing is not as easy as buying a stock you hear about in an unsolicited email or a misdirected voicemail.  But if you’re interested in a bridge….

That’s the view of one lawyer in Jupiter, Palm Beach County, Florida.  I’m Marc Dobin.

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Welcome to the party, Ken Abbas (real name Kumail Abbas) from C.K. Cooper & Co., Inc.

Dear Ken Abbas – As promised, I am mentioning your name in my blog. Unlike you, I like to tell people the truth. You see, you told me that we spoke in October of last year. We never spoke and you know it. Of course, in October of last year, you were working for a different company.

I asked you if you had looked me up on the internet and you said you hadn’t. I looked you up on brokercheck.finra.org and found that you have worked for a variety of unknown and barely known brokerage firms. Prior to that, it seems the only qualification you had for being a broker was working at Enterprise Rent-a-car, Taco Bell and Target after graduating from high school in 2004. Yes, Ken (which is not your real name, that is Kumail), I checked you out. And I’m not sure I would want to rent a car or buy a Big Beef Burrito from you, let alone take a securities recommendation.

You see, dear readers, the cold callers have gotten my name. I don’t know how. But they call me and think that I’m an idiot. I always ask “Do I know you?” and they always tell me about some stock recommendation that they made to me in the past, which is a blatant lie. So, with a relationship based on a lie, why would I do business with them. I can only imagine what they do to older people who are easily confused and not armed with the same information as me, including a healthy dose of skepticism.

Please, cold callers, do your homework. Check me out and then think twice about calling me. Better yet, don’t call me at all.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Being a broker means that you can say “I am Sorry” – Dow Jones Video

I was quoted in a recent article on Dow Jones Wealth Adviser about whether or not a broker should apologize. My answer, just like one might expect from a lawyer, “It depends.”

If you’re sorry you’re late returning a call, say it. If you’re sorry the account statement has an incorrect address, say it.

On the other hand, if you’re sorry that your research department’s report was wrong, keep it to yourself. If you’re sorry that a recommendation you made declined in value, “sorry” is best left unsaid.

Here’s a video by the reporter (a short ad might run before the video):

That’s a multimedia view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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FINRA sanctions brokerage firm for taking too much customer information.

There is now apparently a difference between taking customer information and taking too much customer information. Since I joined the securities business in 1983, brokers have moved from one firm to another with varying levels of difficulty and information. In the stone age (when we only had copiers), brokers would copy their holding pages (paper forms for those of you unfamiliar with the term) which had a whole host of customer information including social security numbers, birthdays, mother’s maiden name and other minute details of the customer’s life.

Brokerage firms litigated the heck out of the copied information and argued about what was proper and what was improper. Sometimes the firms used Regulation S-P as their weapon. This Regulation governs privacy of customer information. In broker recruiting, Regulation S-P appeared to be honored in its breach.

Along came the Protocol for Broker Recruiting. This changed things. Suddenly, the founders and the adopters of the Protocol agreed that certain limited categories of information were fair game to be moved from one firm to the other. The SEC and FINRA are aware of the Protocol. To describe their enforcement efforts in this area as “rare” would be an understatement.

About 4 years ago, Next Financial was found to have violated Regulation S-P by the SEC. As they say, bad facts make bad law and the facts in that case were pretty outrageous as they were described in the Initial Decision. This case was decided in June 2008 but was underway starting a year earlier. NEXT employees, according to the decision, took a broad range of information from the “losing” firm and also used the other firm’s employees’ usernames and password to access computer systems. Oops.

Fast forward to 2012. FINRA has joined the Regulation S-P game. In a recent decision, FINRA fined a member firm $65,000 for taking customer information and using it to start the account opening process on its own books before the customers had agreed and before the brokers had left their prior firm. FINRA alleges that the firm obtained “nonpublic confidential information included the customers’ social security numbers, account numbers, driver’s license numbers, dates of birth and financial information.” Apparently, names, addresses and phone numbers are fair game, as this is what is allowed by the Protocol, but those numbers, Social Security and Driver’s License, are off-limits.

The ironic part of this is that the questioned activity took place in December 2008, according to FINRA. Apparently this broker-dealer didn’t get the memo.

So what is the takeaway from this? Stick to protocol data. Aside from the fact that it should keep a broker out of hot water, it is also a good time to update all the vitals. Working from 10 year-old suitability information? Update it. Customer remarried and has a new job? Change your data. Maybe you’re a lucky one and your customer won the lottery. Change the financials. Moving is a good chance to do two things: Update customer data and weed out your book. It is not the time to see exactly how much data one can download from the current firm’s system.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Broker loses appeal of FINRA fine and suspension for U-4 non-disclosure

Unfortunately, many brokers treat the form U-4 as a necessary evil. Many view it as a form that stands between them and registration. Of course, the regulators view the form as an opportunity to examine a broker’s background.

And the U-4 is a fluid document. It must be updated with each reportable event. A customer complaint is the standard triggering event, whether it is a complaint letter or an arbitration. In other cases, a broker may be responsible for disclosing a bankruptcy, tax lien or even a credit card judgment. I am sometimes approached by what I call “the grandfather with a half-ounce in college.” You figure it out.

Brokers may not be 100% familiar with the reporting requirements, but they should keep in mind that any felony arrest is reportable. Any misdemeanor which demonstrates a lack of trustworthiness is reportable. Virtually anything out-of-the-ordinary dealing with the broker’s financial life, such as a lien or judgment, is reportable. These disclosures don’t necessarily mean that the broker won’t get registered or will lose their license, but it must be reported.

The problem is that brokers don’t know the rules of reporting that well. And sometimes they get bad advice. The 2nd Circuit Court of Appeals recently upheld a FINRA sanction against a broker for failing to disclose tax liens. The bigger problem is that the Court supported the regulator’s argument that the non-disclosure was “willful” which will cause a statutory disqualification, making it more difficult for the broker to be registered.

The lesson here is that disclosure, no matter how annoying or embarrassing, must be made. Failure to do so could result in repercussions that far outweigh any penalties, if any, that were received at the time of the infraction.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Auction Rate Securities Expungements Discussed in Registered Representative

It’s interesting how the securities business goes in cycles. Over 20 years ago, my former employer Prudential Securities (now Wells Fargo Advisors) had problems with limited partnerships. At the time, the Prudential Securities name became synonymous with limited partnership sales, even though other firms sold LPs in greater volumes.

Other products have come and gone. More recently, Auction Rate Securities (ARS) are in the news. While the credit market lock-up is old news, the effects of these products is just being felt by registered representatives. As this article in Registered Representative magazine describes, stockbrokers are facing a lifetime tattooed with customer complaints which were none of their doing. Wachovia/Wells Fargo, along with other brokerage firms, settled with securities regulators and agreed to buy back ARS from their retail customers. However, because of a strict reading of U-4 reporting requirements, financial advisors at many firms have seen otherwise unblemished records tarnished through no fault of their own. The real question I have is why didn’t the firms negotiate the non-reportability of these settlements.

But there are steps to fix this. They require time and money. An expungement arbitration can be started to get relief from the reported settlements. While there is no guarantee that an arbitrator or arbitrators will grant the expungement request, the language placed by most firms forced to settle ARS complaints will go a long way towards convincing an arbitrator that an expungement is proper.

The next step is court confirmation, if the expungement award is entered. Generally, this is handled in the same manner as confirming an arbitration award. If and when the court confirms the award, then the order is sent to the CRD processing center and the negative information is removed. The happy day is when the broker looks at his or her CRD and does not see the complaints that previously tainted the report.

That’s the view of one Lawyer from Jupiter, Florida. I’m Marc Dobin.

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Florida’s rule disqualifies stockbrokers with old offenses.

In May of last year, the State of Florida amended its registration rules regarding the criminal histories of stockbroker applicants. The amendment assigns year values for specified crimes. Those year values then disqualify an applicant according to its terms.

For instance, if an applicant has committed a specified felony, the disqualification period is for 15 years from the date of the plea or finding. If other crimes are committed at different times, then additional 5 year periods can be tacked on. It appears that the entire disqualification period can only be reduced by a maximum of 3 years.

So what this means is that the felony drug possession as a senior in college could delay a new broker’s application for 15 years and could possibly be used to deny registration anyway. Further, it appears that a new U-4 filing will give the State of Florida a new shot at currently registered representatives. So brokers changing firms with otherwise ancient and forgotten criminal histories could end up with big problems.

The interesting thing is that a broker who is already registered and has a specified crime in his/her past would not lose his/her license. It is only on the submission of a new U-4 that this new part of the registration rule would apply. This could make for some very uncomfortable situations.

So the most important thing for currently registered brokers to keep in mind is that, if there is a felony in their past, they need to keep this rule in mind if they are thinking about changing firms. And if there is a question about any potential disqualification, they need to get help in interpreting the rule very carefully.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Securities America wants it both ways with Federal injunction strategy.

I am outraged. It’s no secret that I’m not a big fan of Securities America, the hapless offspring of American Express Financial Services (now Ameriprise). In fact, I’m kind of embarrassed that I own Ameriprise stock, if for the only reason that it owns Securities America. There may be other reasons, but I haven’t looked at the company that closely lately.

Those of you who know me will recall that, with my then-partner, my law firm obtained an arbitration award against Securities America for $5.4 million several years ago. In that case, the firm tried to assert, with a straight face, that a broker using a stolen identity was properly registered. The arbitrators disagreed.

This time around we have Medical Capital Holdings and Provident Royalties. Both of these companies turned out to be frauds and Securities America was a huge seller of these two products. The one at issue in the Federal case is MedCap.

Securities America is desperate. Even though the company is owned by a huge financial services company, it is claiming that there is not enough money in the pot to fund a class action settlement and pay potential arbitration claims. So the company asked a judge to stop the arbitrations and now is asking the same judge to stop state regulators. (See Suzanne Barlyn’s article here.) Huh?

I was outraged when the judge halted the arbitrations. To me it was the height of hypocrisy to tell clients that they must participate in a class action. Yet Securities America would not allow a class action arbitration I am certain. Further, if a client brought an individual action against the company in court, it’s first reaction would likely be a motion to compel arbitration of the claims. Then they would ask a class-action judge to stop the arbitration? How is that fair or logical.

Pick your venue, boys. Class action or arbitration. But you don’t get the choice of stopping an arbitration (or regulator) in favor of the class action. If you don’t have the money, then file for bankruptcy and let everyone pick over the carcass. I’m betting there’s a good financial reason not to do it.

I have clients on both sides of the arbitration aisle. What I’m looking for is consistency in the application of laws regarding arbitration. I don’t see it here. Once again, Securities America seems to be making up the rules in its favor as it tries to deal with a problem. Good luck with that.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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