SEC suit raises disclosure questions for breakaway reps – Investment News

Investment News discusses a recent SEC action against an investment adviser who left a wirehouse and formed his own RIA. Many brokers are viewing RIA business as a magic bullet to solve their increasing unhappiness with the wirehouse life.

I have seen this before. But years ago, it was “wrap fees.” Brokers were tired of being accused of churning (executing trades solely to generate commissions) so they thought that a wrap fee, where a fee is charged as a percentage of assets. But then the SEC found that brokers were setting up wrap fee accounts and not performing any special services or executing trades. So this was not in the clients’ best interest either. A few major firms paid fines to FINRA and/or the SEC for failing to detect this “park and wrap” strategy.

So, how does an investment professional avoid these various potholes? Remember that the regulators do not want you lying to clients. Don’t tell them falsehoods to entice the clients to move to your new firm. If you’re going to have a wrap fee arrangement, make sure services are delivered in return. Simply placing a client in a wrap fee and moving on is not in the client’s interest.

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

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FINRA washes out broker’s mouth with soap and a suspension.

OK, so remember when your mother was allowed to wash out your mouth with soap for using “dirty” words? (Now I think it counts as child abuse.) I do. There is at least one person who does not.

In a recent FINRA disciplinary decision, a certain “forbidden” word was written in the opinion multiple times. I can’t recall ever seeing that word appear in a prior opinion, but it most certainly could have. The opinion is here. The interesting thing is that the word was used in quotes of statements made by the Respondent (the person whose license was in jeopardy.)

I am certainly no prude. Anyone who knows me knows that I can sling profanity with the best of them. But I make it a practice of not directing it at regulators (at least not in their presence). But this individual, who was represented by counsel and must have been embarrassed by his client’s conduct, simply let the FINRA employees have it, with both barrels and unvarnished. I don’t know WTF he was thinking.

But I can only imagine his reaction to the fact that the National Adjudicatory Council increased his fine from $12,500 to $50,000 and increased his suspension from 35 days to one year. I’ll bet he said more than WTF.

So what did we learn from this? Don’t curse at regulators, unless you’re related to one. Behave yourself in disciplinary hearings. And don’t threaten people that you will get them fired. Either get them fired or don’t. They don’t react well to mere threats. In all my time practicing, I can’t say that I’ve ever threatened a regulatory employee that I would make them lose their job. I’m thinking that they would resent that behavior. But that’s just me.

So, read the decision and let’s all say WTF together and thank our stars that we’re smarter than this one person who seems to have an anger management issue.

That’s the friggin’ view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc “effing” Dobin. Have a great “effing” day.

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SunTrust Investment Services Disciplined for Unit Investment Trust Activities.

SunTrust Investment Services brokers, as I understand it, sit in banks. They wait for bank clients to come in and try to sell them securities. Generally, these clients are not experienced investors who are seeking out a stockbroker, active trading or margin accounts. They are customers who remember when CDs paid 5% per year and thought that was low.

In these low interest rate markets, it is not unusual for the average CD buyer to become a “yield hog” and look for something that is paying more than the 1 – 3% the bank is offering. These clients, for the most part, only look at current yield and don’t consider that the underlying value will fluctuate. Bank brokers have disclosures that they are required to make, but the customers frequently just don’t pay attention to them.

FINRA just ordered SunTrust Investment Services to pay $1.44 million in fines and disgorgement for unsuitable, mostly short-term, transactions in Unit Investment Trusts, Closed-End Funds and Mutual Funds. (when you click on the link, you will need to go to the last pages of the FINRA newsletter.) FINRA found that two brokers in the Maryland area were short-term trading these “packaged products” which was unsuitable.

The “packaged products” are not short-term vehicles. FINRA has pointed this out before. Branch Managers are supposed to pick this up. They are supposed to look for “red flags” indicating possible violations. In this case, the manager ignored the red flags and was suspended as a principal for six months and fined $10,000. One of the two brokers has been barred from the industry. The other broker still has charges pending.

The irony of this whole story is that these transactions last took place in 2006 and FINRA’s disciplinary system just ruled. So four years later, when one broker is gone, the manager suspended and the other broker still fighting, SunTrust pays a big penalty (for me, anyway) and moves on. That’s the cost of doing business. Will it change the way SunTrust does business, one would hope it would. But the systems were in place already and the warnings were ignored. Maybe next time?

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

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A good use for an iPhone with a broken screen – space adventurer!

This is pretty far off-topic, but I have to admit that this is a good use of an iPhone. A father and his young son sent an iPhone with a broken screen into space tethered to a weather balloon. This is very cool.

Homemade Spacecraft from Luke Geissbuhler on Vimeo.

I’m still not an iPhone fan, but at least we can say “Space Travel? There’s an app for that.”

That’s the extraterrestrial view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin. Take me to your leader.

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Marc S. Dobin, author of Lawyers Are From Jupiter, featured in Law Technology News.

Those of you who know me, know that it is hard for me to keep my mouth shut. Sometimes this is a detriment.

I recently wrote to the editor of Law Technology News, Monica Bay, concerning my opinion about Thomson Reuters’ acquisition of some software I am using. We got to “talking”, via email, and next thing I know, she asked me to write a story about the firm’s use of technology. So I did.

And now I’m published. I love the title “Once and Again Solo” which is pretty much the way I’ve felt over the last two years. I had a firm, then I was solo, then I was with a firm, then solo again.

If you read the article, I hope you enjoy it. I enjoyed writing it. It pointed out to me exactly how complex it can be just to run a two-lawyer practice. And that my wife definitely can be described as “long-suffering.”

That’s the view of one Lawyer from Jupiter, Palm Beach County, Florida.

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Small Broker/Dealer faces closure as FINRA tightens the noose.

Investment News reports that a small California broker-dealer, Pyramid Securities, has been told by FINRA to close its doors for net capital violations. This is a result of a securities arbitration award against the firm in the amount of $339,000. From reading the article, it appears that the firm does not have the money, or insurance, to pay the award.

And that brings up the scary part of doing business in today’s environment. The entry cost is fairly low for anyone to set up a broker-dealer and then do significant damage. I have represented customers in arbitration claims where I have heard, more than once, “if you win, you’ll put us out of business.” Given what I’ve seen, that would not necessarily be a bad thing.

But Pyramid does have some money. It hired a lawyer to get an injunction to stop FINRA from shutting the firm down. The Federal judge has said no, for now. Which means that Pyramid will go the way of Jesup & Lamont, another firm with net capital issues.

I don’t pretend to know how to calculate net capital. I think computers do it, for now. But the question an investor should ask of him or herself is “what happens if something goes wrong? Who stands behind the guy who is selling me this idea? What if I need legal recourse?” In a number of instances, the broker-dealer is only worth as much as the credit line on the owner’s credit card.

Some of you may say “What about SIPC?” SIPC may cover some unauthorized trading losses, if the firm goes out of business. But SIPC is not an insurer or guarantor against market losses. Neither is a brokerage firm. But there are bad apples out there. There are brokers whose sole interest is lining their own pockets. When that occurs, arbitration is generally the recourse. And if you win against one of these small firms, you may be able to use the award to wallpaper your bathroom, but that’s about it.

So ask questions? What insurance do you have? How much in cash reserves do you have? Who stands behind your company? And get it in writing.

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

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Google adds telephone calls to Gmail and Gmail Voice

I love technology. It usually makes my life easy. I love saving money. I love technology that helps me save money. And I must add that I am a big Google fan. I have a Gmail account. I have a Google Voice number. My business email is hosted by Google.

I noticed something new in my Gmail account today. It told me, in the Chat section, that I could make telephone calls with my Gmail chat client. I tried it. I called my friend, Joel Beck in Atlanta to try it out. He remarked that I sounded like I was on a good quality speakerphone. In effect, I was. I was using the microphone on my laptop and the speakers on my desk.

Joel sounded great. Then we did Google video chat. Unfortunately, there’s only so much a webcam can do for the subject (sorry Joel). Google has said that it will keep the service free through the end of the year and then see what happens.

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

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Citigroup executives get a slap on the wrist – Brokers get a punch in the face.

There are times when I just wonder where the justice is. I represent, and have represented, former Citigroup (Now Morgan Stanley Smith Barney)brokers in arbitration claims filed by the firm seeking recovery of promissory note money. Citigroup isn’t alleging that my clients did anything wrong other than refusing to pay back the money Citi claims that it is owed.

On the other hand, my clients’ careers have been devastated, for the most part. The past several years have not been great ones to be a broker, particularly a low to mid-level producer at a firm looking to make itself look pretty for a suitor. That was the case with Prudential Securities brokers in 2002-2003 and it was the case more recently when Smith Barney and Morgan Stanley were doing the dance. Morgan Stanley and Smith Barney made it very clear that honest, hardworking (though not financially successful) brokers were not going to be able to hang around the firm any longer.

It did not matter if the broker came to work every day. It did not matter that the broker had no customer complaints or regulatory problems. It did not matter that the broker needed what little money the firm was willing to pay, even at a 20 or 25% payout. The broker just wanted to work and have the opportunity to build up his or her book of business. Instead, of course, the firms made it impossible to make a living and forced the brokers through the door. Then, Citigroup files an arbitration to recoup the money that the brokers were living on because their business collapsed.

Meanwhile, at the top of the food chain, two senior executives were caught by the SEC telling untruths about Citigroup’s exposure to sub-prime mortgages. They did it “unintentionally” we are told. Who cares. They did it, they messed up and their total fines were $180,000. You can read about it here.

According to Citigroup’s proxy statement, Gary Crittenden, who paid a $100,000 fine, received compensation totaling over $12,000,0000 in 2008. How is he supposed to learn from this experience?

In the 2009 Proxy Statement, it was disclosed that he received a $350,000 housing allowance, including a car and a driver, for the slightly more than six months he worked at Citigroup in 2009. My clients are lucky to to have a car that starts in the morning. This means that he had to give up less than 30% of his car allowance in 2009. I hope he was able to survive on what was left over from 2008.

That’s the angry view of one Lawyer From Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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The fat lady is singing – Jesup & Lamont, Inc. files for bankruptcy.

According to this website, Jesup & Lamont, Inc. filed for Chapter 11 bankruptcy protection today. Perhaps this phoenix will rise from the ashes, but I doubt it will do so under current management. A sixth grade lemonade stand might have been run better.

It’s a shame, too. Jesup was a storied name, but so were Oldsmobile, Pontiac and Mercury. But they all suffered from the same problem – bad management and more desirable competitors. And let’s not forget that there are FINRA employees who have broken out the champagne and are doing cartwheels in the hallways. (Although they would never admit it.)

I fell badly for some of the employees, too. (But not their management team.) At least some of their registered representatives have landed with another firm, Anderson Strudwick of Richmond, Virginia. I wish them the best. Maybe they’ll flourish without the burden of working for their former employer.

The interesting question now is, what will happen to all the brokers who were named in arbitrations while Jesup employees. Being a broker formerly employed by a now-defunct brokerage firm is akin to being the last member of Saddam Hussein’s private army, and you didn’t find out that Saddam surrendered. You keep fighting the fight, but you have only your own resources to back you up. We shall see.

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

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