LPL terminated financial advisor Dain F. Stokes on August 28, 2019 for selling unregistered promissory notes to clients that purported to invest in a project in Africa allegedly sponsored by Taylor Swift. According to InvestmentNews, Stokes converted at least $576,000 from two clients, whom he solicited to invest in this phony charity project, which he sold as being created by Swift to help needy people in Africa. Stokes claimed to have a close relationship with Swift, telling clients that she personally hired him to manage the finances of the Africa project and to promote a new song release by her in June 2019. He also told clients that Bill Gates was involved in the project.

The State of New Hampshire Department of State Bureau of Securities Regulation filed a petition and order against Stokes after an investor (“Investor #1”) invested $201,000 in the Africa Project between August 1, 2018 and January 25, 2019. Stokes used promissory notes to facilitate these investments. According to the promissory notes, Investor #1 would receive the return of his entire principal plus 20% interest by making this investment. Payment on the first promissory note was initially due by November 8, 2018, however the due date was continually pushed back by Stokes. At one point, he even told his client that President Donald Trump allegedly froze his assets. Stokes was ordered to pay $201,000 plus interest in restitution to Investor #1 and a $20,000 fine for violating New Hampshire Blue Sky Laws, which prohibit the fraudulent sale of securities (RSA 421-B:5-501) and the sale of unregistered securities (RSA 421-B:3-301(a)). To date, a second investor who invested $375,000 has come forward.  The New Hampshire Department of State Bureau of Securities Regulation has since frozen Stokes’ assets and issued an injunction prohibiting him from speaking with those who invested in this scam.

New Hampshire authorities interviewed Stokes, who refused to provide any details about the African charity, claiming that all information, including the name, was privileged. He also refused to reveal whether the checks, which were made payable to him personally, were invested in his personal accounts.

Stoltmann Law Offices, P.C. continues to investigate investor claims and reports involving former Invest and LPL Financial  registered representative James T. Booth, of Norwalk, Connecticut, who was indicted on charges of securities fraud, wire fraud, and investment advisory fraud on September 30, 2019.  According to the unsealed indictment, Booth is alleged to have executed a Ponzi scheme which effectively converted almost $5 million from forty clients. The unsealed indictment was filed in the United States District Court for the Southern District of New York, Case No. 19-CRIM-699, and can be viewed here. Although Booth operated his own company called Booth Financial Associates, he was at all time relevant to this scheme a licensed and registered representative with FINRA member brokerage firms Invest Financial Corporation and LPL Financial.

As we previously discussed on this blog, James Booth was  terminated from LPL Financial on June 26, 2019 for allegedly converting $1 million from his clients. On July 1, 2019, Booth consented to a lifetime ban from the securities industry after FINRA investigated information provided to it by LPL established that Booth converted – or stole – $1 million from clients by depositing the funds into personal accounts for his own use. According to the FINRA Acceptance Waiver and Consent (AWC), Booth committed these alleged acts from approximately April 2014 to May 2019. Looking back, it appears that both LPL and FINRA underestimated the scope of this scam because the SDNY now alleges that Booth stole $4.9 million.

According to FINRA, numerous clients have filed complaints against Invest and LPL Financial to recover funds stolen by Booth. Some of these complaints have already been settled with full recoveries. FINRA Rules and securities industry regulations require brokerage firms like Invest Financial and LPL Financial to supervise their financial advisors. The foundation for this obligation to supervise to found in the Securities Exchange Act of 1934 which states:

Stoltmann Law Offices is investigating claims on behalf of defrauded victims of California Registered Investment Advisor Strong Investment Management. According to a complaint filed by the SEC on February 21, 2018, Strong and its President and sole owner Joseph B. Bronson defrauded its advisory clients by engaging in what is called a “cherry picking” scheme.   The complaint alleges that for at least four years Bronson abused his clients’ trust by earmarking profitable trades to himself while booking the losers in his clients’ accounts.  The complaint also alleged that Bronson and Strong misrepresented the trading strategy they were engaging in, stating that all trades were allocated pursuant to a pre-trade allocation statement. In reality, alleged the SEC, Bronson reaped substantial personal profits to his clients’ detriment.

On September 25, 2019, the SEC obtained a final judgment against Bronson and Orange County-based Strong Investment which were ordered to pay over $1 million in restitution to defrauded investors. Bronson also faces a lifetime bar from the securities industry. Cherry-picking schemes like that engaged in by Bronson are fairly common unfortunately.  On September 20, 2018, a Louisiana based investment advisory firm, World Tree Financial, was charged by the SEC with orchestrating a $54 million cherry picking scheme. In January 2017, the SEC uncovered another cherry-picking scheme engaged in by Massachusetts based investment advisory firm Strategic Capital Management with a $1.3 million cherry picking scheme.  The list of investment advisors that have engaged in this scheme goes on and on.

Cherry Picking schemes are pretty easy to execute which is why they’re fairly common.  A lot of investment advisors use omnibus accounts to trade their clients’ investments in bulk and then allocate the gains and losses directly to client accounts pursuant to an allocation practice. These practices have to be disclosed on the advisory firm’s Form ADV, but no one is looking over their shoulder to make sure these allocations are done correctly. No one audits these accounts to make sure the investment advisor, who is provided full discretion to execute these transactions, is not cherrypicking or skimming off the top.  The only entity that should be aware of this sort of scam is the brokerage firm through which these cherry-picking schemes are executed.

Financial Services firms sometimes breed their own cyber crooks and for reasons you might not suspect.  And while it is overseas based hackers that get the lion’s share of the publicity, it is internal company crooks who are responsible for much of the thievery.

Scott Capps is an interesting example as he allegedly stole $2.1 million. Recently, Capps told his tale to Philadelphia Inquirer reporter Joseph DiStefano before a month before the 48-year-old husband and father of one was scheduled to start a four-year federal prison sentence.  In the article, Capps said his path to the crime started out of a series of frustrations—that the source of the money he took was from dormant funds of various Vanguard clients.   After a period of time, those funds must be handed over to state governments as unclaimed property.

Capps acknowledged “”I stole $2.1 million, because I was [upset], because of what happened to my career.” As he explained: “Vanguard, as well as its many competitors, was not finding all the dormant accounts in its systems and didn’t seem to be trying really hard to improve. Checking the laws and questioning company lawyers, Capps became convinced that “we are all doing this wrong.”  The article went on to say he wanted to do it right by sending out a mass mailing or making mass calls to the account holders to tell them to respond and then their accounts wouldn’t be inactive, but Vanguard told him they didn’t want to do it.

Stoltmann Law Offices has been investigating Northridge Holdings and Glenn Mueller on behalf of several clients over the last several months. On September 5, 2019, the Securities and Exchange Commission (SEC) filed a complaint against Glenn Mueller, Northridge Holdings, and several other Mueller-controlled companies, in the United States District Court for the Northern District of Illinois.  The complaint alleges that since at least 2014, Mueller, through his tangled web of entities, has orchestrated a veritable Ponzi scheme, raising in access of $40 million from investors based on the representation that he was purchasing properties with those funds. The truth is, Mueller has not purchased a piece of property since 2012. Instead of using investor money to purchase properties, Mueller used new investor funds to make interest and principal payments to previous investors, in class Ponzi-payment fashion. These funds were also used to pay “finders” commissions for referring new investors to Northridge. The SEC also alleges that Mueller used investor funds for personal and family use, including to make loans to family members and trade stocks and options in personal brokerage accounts.

The SEC’s allegations blow the lid off of Northridge and Mueller’s schemes. Although Mueller and his finders represented the “notes” sold by by Northridge were “secured” by property, they are not. In fact, although Mueller claims the full liquidation value of his real estate is over $100 million, he owes investors and mortgages on those properties more than that. Despite all of his representations to the contrary, Mueller and his companies are “upside-down”.  The Daily Herald also details the religion-based sale pitches used by Mueller which is an all too common hook used by schemers.

The next steps for investors is to await the appointment of a receiver. According to the docket report for this case, there is a hearing on Wednesday, September 11 during which the SEC will request the court appoint a receiver and freeze all of Mueller’s and his subsidiaries’ assets. Assuming this request is granted, which given the allegations seems likely, the receiver will begin the process of marshaling assets, selling off properties, and collecting funds to repay creditors and investors.  How long this process takes and how much money investors can expect to get out of this is anyone’s guess. The fact of the matter is, and according to the SEC, Mueller owes more money than his properties are estimated to be worth. Further, any liquidation of real estate creates a buyer’s market, so whatever purported value these properties have, they will likely be sold at a discount eventually.

Has the Harvest Volatility Management Collateral Yield Enhancement Strategy (“Harvest CYES”) been a deceptively bitter harvest for you? You are not alone in your complaint.  Well known brokerage firms like Merrill Lynch, Morgan Stanley, J.P. Morgan, Schwab and Fidelity have sold the product from the 11-year-old little known vendor of options-focused portfolios.  But as time goes by dozens of investors have complained they weren’t told by their brokers that the product is excessively risky.  Many of these investors were seeking low-risk places to put their money.

Harvest CYES is an complex “Iron Condor” investment structure that was peddled by multiple asset management firms in recent years.  Investopedia describes iron condor as a strategy  “constructed by selling one call spread and one put spread (same expiration day) on the same underlying instrument.”  Most often, the underlying asset is one of the broad-based market indexes, such as the S & P 500 Index (SPX); the NASDAQ-100 Index (NDX); or the Russell 2000 Index (RUT), the financial dictionary adds.

Investopedia goes on to show the head-scratching complexity of the Harvest Volatility Management and Collateral Yield Enhancement Strategy and its ilk by saying it involves selling an at-the-money put with a strike price closer to the current cost of the underlying asset.  “Sell one at-the-money call having a strike price just above the current price of the underlying asset. Buy one out-of-the-money call with a strike price further above the current price of the underlying asset. The out-of-the-money call option will protect against a substantial upside move,” Investopedia explains.

Think financial crooks are much smarter than you are?  Usually not.  They can be lazy, looking for the simpler ways to make a buck like many of us.  And like home burglars they are seeking the easiest way to loot. The open basement window is a quicker way to get in and come out not empty handed than the dead-bolted front door.

For a Wells Fargo representative, wide-open basement windows were Navajo Indians who were both elderly and didn’t speak English. CNN reported the Navajos sued Wells in 2017, claiming workers from the financial giant stalked basketball games and other community events from 2009 to 2016 to prey on its members by selling them unnecessary accounts.  To settle the claims of fraud, Wells paid the Nation $6.5 million.

In announcing the settlement in a press release, the Nation said Wells had conducted a long campaign of predatory and unlawful practices.  The Nation originally filed a suit against Wells in December 2017.  After a judge in that case dismissed it on the grounds Wells Fargo had settled with U.S. federal authorities in 2016, the Nation filed a separate lawsuit in Navajo Nation District Court during November 2018 reasserting its tribal and common law claims.

FINRA permanently barred former Securities America financial advisor, Bobby Wayne Coburn (“Coburn”) on August 27, 2019 after he failed to appear at the disciplinary hearing. This came after Securities America terminated Mr. Coburn on March 20, 2019 for soliciting multiple clients to invest in an unapproved private securities transaction. He also tried to settle a complaint made by a customer without notifying the firm. According Mr. Coburn’s FINRA BrokerCheck report, the securities were in the form of promissory notes and real estate securities.

On notice of Coburn’s violations, FINRA promptly initiated an investigation into Coburn in July 2019. According to the Acceptance, Waiver, and Consent (“AWC”) FINRA entered against Coburn, Securities America learned in January 2019 that Coburn sold unregistered securities to clients in 2010 and 2011. Securities America also discovered the Coburn settled a customer complaint relating to this scheme in 2016 without providing the required notice to his firm and FINRA.  When FINRA requested documents and information from Coburn, he informed FINRA that he was no longer working in the securities industry and refused to produce the documents and information, in violation of FINRA Rule 8210. FINRA also found that Coburn violated Rule 2010, which is a “catch all” rule requiring that brokers and firms conduct business with “high standards of commercial honor” and maintain “just and equitable principles of trade”. FINRA permanently barred Coburn from the securities industries for violating these rules.

Coburn’s career in the financial services industry began in 1986 at Ameritas Investment Corp. During his thirty-three year career, he bounced from firm to firm, and landed at Securities America in January 2009. He worked from the Fort Meade, Florida branch office. Two customers have filed complaints against Coburn, including one complaint related to the real estate investment scheme. According to his BrokerCheck report, Coburn sold the client an investment in a Costa Rica real estate development, which did not make the required payments pursuant to the promissory note. The complaint for $32,000 was settled for $7,000. The entire settlement was paid by Coburn. Another client of Coburn and Securities America formally complained about an unsuitable variable annuity that Coburn sold, and the $5,000 complaint was settled for nearly $55,000, with Coburn contributing $5,000.

This week the sun has set on the near quarter of a century career of Bank of America Merrill Lynch top private wealth manager Patrick Dwyer.  The top earning Dwyer, who wore both the broker and adviser hats for the firm has departed in the wake of company concern about a $25,000 political contribution he made in a suspected attempt to pressure the Financial Investor Regulatory Authority (FINRA) to wipe out customer complaints on his record.

That record includes a claim where customers were trying to seek more than $7.2 million in damages. All but one of the complaints were closed or denied without being resolved as detailed by the Miami Herald. The campaign contribution went to Florida Chief Financial Officer Jimmy Patronis who is one of the Florida officials who oversees the state banking regulator.  That paper said an arbitration panel agreed to remove the complaints, but FINRA itself balked.

Dwyer had seven customer complaints filed against him between 2001 and 2009. Two were denied, one was settled and the rest were closed without any action.  Six of the complaints alleged he had made unsuitable investment recommendations.  In the one dispute that was settled, the client received $111,000 in 2001 after complaining Dwyer didn’t delay the purchase of an investment as the investor instructed. As is customary, the firm disclosed the matter was settled to avoid the expense of litigation and that the complaint arose from a misunderstanding between Dwyer and the investor. Before leaving, Dwyer had run a 12-person unit that had close to $4 billion in assets under management and took in $10 million in revenue for the firm annually.

This week the Financial Industry Regulatory Authority (FINRA), which oversees brokers fined Milwaukee based brokerage firm Robert W. Baird & Co. $150,000 and censured the firm for failing to disclose a conflict of interest arising from the interview where there was substantial likelihood that a reasonable investor would have considered the conflict important to his or her investment decision. In a consent decree, Baird neither admitted nor denied the charges.

Here’s the story: Six years ago, the CEO of a company being followed by a research analyst at Robert W. Baird, a broker, asked the professional if he or she would like to come in for a job interview with the company’s chief and its chief financial officer. The interview came off favorably.

The meeting escalated into a conflict of interest that drew the attention of FINRA when the CEO told senior Baird management about the interview; that the chances were good it could lead to the analyst jumping ship for the company he or she  was writing on and asked Baird if the firm had any objections.  When the analyst told management at his brokerage about the interview, he was told he could still write about the company he was interviewing at and following, but try to avoid learning about any material, non-public  information.

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