Articles Posted in Failure to Supervise

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with broker-advisors who’ve stolen their money. Sometimes brokers are not the least bit subtle about what they do with clients’ assets. They may shift cash into separate accounts and spend it themselves.  Such was the case with Apostolos Pitsironis, a former Janney Montgomery Scott advisor. He is accused of stealing more than $400,000 from his clients from 2018-2019.

In the brokerage business, stealing clients’ funds is often known as “converting” their assets. Brokers may spend the money on gambling, cars or other consumption items. Pitsironis was “discharged in June 2019 after an internal investigation uncovered that the FA transferred funds via unauthorized ACHs from a client’s account to a third-party bank account owned and controlled by Pitsironis,” according to ThinkAdvisor.com. “He later used this money to pay his family’s personal expenses, all the while deceiving both his victims and the financial services firm for whom he worked,” prosecutors stated.  Pitsironis also allegedly spent his clients’ money on casino gambling debts, credit card bills and the lease of a luxury car.

“Janney is committed to serving our clients with the utmost integrity and trust,” the brokerage firm said in a statement obtained by ThinkAdvisor. “Upon discovering the improper actions taken by this advisor with one client account, he was promptly terminated, and the client was fully reimbursed. Janney has fully cooperated with law enforcement and will continue to do so.”

Stoltmann Law Offices previously posted about Scott Wayne Reed, former broker at Wells Fargo Advisors, selling away to his customers, including customers of Wells Fargo. On December 15, 2020, the Arizona Corporation Commission filed a “Notice of Opportunity for Hearing Regarding Proposed Order to Cease and Desist, Order for Restitution, Order for Administrative Penalties, Order for Revocation and Order for Other Affirmative Action” against Reed, his wife, Sarah Reed, Pebblekick, Inc. and Don K. Shiroishi, the Chief Executive Officer and President of Pebblekick.

According to the ACC’s notice, Mr. Reed sold at least $3.5 million of investments in short-term, high-interest notes issued by Pebblekick. Mr. Reed sold these notes as offering an annualized rate of return of sixty-percent (60%). In turn, Pebblekick paid at least $191,340 to Reed. He sold these notes to clients as “100% safe” investments and represented that he also invested in Pebblekick. He went as far as personally guaranteeing $100,000 of the $200,000 investment made by one investor.Reed also sold other outside investment to customers, which he alleged were connected to Pebblekick, including but not limited to Precision Surgical, Mako Studio, and Ascensive Creator.

Reed was a registered representative of Wells Fargo Advisors at the time that he sold this investment, but did not disclose that he was selling notes in Pebblekick or that he received nearly $200,000 in commissions and fees for selling Pebblekick. According to the ACC, “when Reed’s firm reported him for potentially selling away and the Securities Division requested Reed to provide information and documents concerning the allegation, Reed impeded the Division’s investigation by providing responses that were false, incomplete, and misleading.”

Chicago-Based Stoltmann Law Offices, P.C. is currently investigating reports that Michael Edward Magill raised $700,000 in purported private notes that turned out to be part of a criminal scheme. If you were sold investments by Mr. Magill and lost money as a result, you may have a claim to pursue to recover your investment losses through FINRA Arbitration.

According to a FINRA Acceptance, Waiver, and Consent (AWC) signed by Mr. Magill on December 7, 2020, Mr. Magill was hied by a private company to raise money for it. the FINRA allegations state that Mr. Magill solicited at least three investors to invest a total of $700,000 in this company, representing the investments as short term secured notes.  He urged investors to invest quickly because time was of the essence.  Mr. Magill was paid a salary by this company for his services and also received a commission for the investments he sold.  He also distributed marketing materials for the investments.  The investments were not registered with any regulatory agency and were sold in violation of applicable state and federal securities laws.  The principals of the company for whom Magill raised these funds pled guilty to conspiracy to commit wire fraud.

At all times relevant, Mr. Magill was a dually registered and licensed financial advisor with Foreside Fund Services and as a Registered Investment Adviser with WBI Investments, Inc. out of Boca Raton, Florida.  By virtue of FINRA Rules and the fiduciary duty owed by WBI Investments, both Foreside and WBI could be liable to investors who were caught-up in this scheme.  Stoltmann Law Offices has for many years pursued brokerage firms and investment advisers for these claims and has successfully recover money on victims’ behalf.  These companies have legal obligations to supervise the conduct of their registered representatives. Typically referred to in the securities industry as “selling away”, Magill allegedly did not advise the companies he was registered with of his illicit activities.  Nevertheless, there likely existed a stack of red flags that would have put Foreside Funds and WBI Investments on notice that Magill was participating in what was in reality a fraudulent scheme.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers who have sold highly unsuitable investments to their clients. Brokers have a legal obligation to sell investments that are suitable for their clients’ age, risk tolerance, financial sophistication, and mental capacity. Sometimes, though, they ignore all of these safeguards to take advantage of older customers to generate what they think are easy commissions.

The worst cases that we’ve represented usually involve wealthy elderly clients whose portfolios are pilfered and re-invested in risky vehicles that lose large amounts of money, often leaving them impoverished. These practices are commonly known in the industry as “selling away,” or diverting assets away from investments brokerages normally deem inappropriate for older clients.

Eduardo Tarajano, Sr., 80, is suing his broker Jorge Sonville for investing more than $4 million in a Key Biscayne, Florida, liquor store, which was later sold for $585,000. Sonville, working for Merrill Lynch, had allegedly drained Tarajano’s family trust to buy a stake in the store. Tarajano’s federal suit alleges that Sonville worked with Tarajano’s son and the broker’s cousin to “pilfer the accounts Merrill Lynch was managing.” The cousin reportedly received a commission for the liquor store transaction.

Stoltmann Law Offices, a Chicago-based securities and investor rights law firm continues to investigate claims by investors who were sold investments in the fraudulent note scheme Future Income Payments. Investors have rights and if you were solicited to invest in Future Income Payments by your financial advisor, you may have a claim to pursue for negligence or fraud. According to an article that appeared on ThinkAdvisor, former SagePoint financial advisor Troy Baily solicited several clients to invest in securities offered by Future Income Payments (“FIP”).  FIP turned out to be a multi-million dollar pension scam with investors losing everything.  According to the article, Baily submitted to what is called an “Acceptance, Waiver, and Consent” with the Financial Industry Regulatory Authority as a result of these ill-fated solicitations.

An AWC  is essentially the formal settlement of a regulatory investigation conducted by FINRA of a licensed financial advisor. In this instance, Baily accepted FINRA’s conclusion that he solicited four SagePoint clients to invest a total of $210,000 in securities offered by Future Income Payments.  In so doing, he violated FINRA Rule 3280 and FINRA Rule 2010. As punishment for his violations, Baily accepted a six-month suspension and a fine in the amount of $5,000.  Although an AWC is technically not an admission of fault or guilt, the facts alleged by FINRA are clear and do not require interpretation – Baily sold FIP investments to his SagePoint clients.

The best bet for victims, especially those who were Baily’s clients, is to pursue his broker-dealer, SagePoint through FINRA Arbitration. As we have said in the past, brokerage firms are ultimately responsible and liable for the misconduct of their agents. Here, there are two separate routes investors can take to recover against SagePoint. The first is through the legal theory of apparent agency, or Respondeat Superior. This is an age-old legal concept that the principal is responsible for the conduct of its agent, so long as the conduct is performed in the course and scope of that agency relationship. Here, Baily sold securities, provided investment and financial advice, to clients to invest money in FIP. That is clearly within the scope of his agency relationship with SagePoint.

Chicago-based Stoltmann Law Offices is representing investors who were solicited by their financial advisors to invest in junk-bonds offered by now bankrupt Hornbeck Offshore. The bonds sold to our clients were rated D by Standard and Poor’s at the time of the solicitation, which is as low as bond ratings go.  This was not even speculation, it was financial homicide. The financial advisor at issue in our clients’ cases, Thomas M. Bonik was registered with NTB Financial Corporation (f/k/a Neidiger, Tucker, Bruner), which is headquartered in Colorado and has offices all over the country.  Mr. Bonik’s office was primarily in St. Augustine, Florida.

Hornbeck Offshore had been struggling financially for years.  The company is primarily engaged in offshore oil drilling and transportation. The persistently low prices for oil and gas for the past few years resulted in Hornbeck struggling financially due to a heavy debt load. Part of that debt was in the form of bonds purchased by investors.  Covid was the last straw for this struggling company and in June it filed a pre-packaged Chapter 11 plan in the Bankruptcy Court for the Southern District of Texas.  These pre-packaged plans are negotiated in advance with the “Secured” creditors, and typically burn bond holders like our clients. No surprise, our clients have lost every dime they invested in these Hornbeck bonds.

Financial advisors recommend clients invest in corporate or municipal bonds that are technically “junk” rated because these bonds have much higher yields than higher rated bonds. In the persistent low-rate environment in the US and to some degree the worldwide economy has been in since after the financial crisis, investors and advisors alike reach for higher yields, often investing in esoteric alternatives to grab that extra yield.  In this instance, the recommendation was to invest in corporate bonds that were rated “D” by S&P, which defines this rating as:

Stoltmann Law Offices, P.C. is a Chicago-based securities, investor protection, and consumer rights law firm that offers victims representation on a contingency fee basis nationwide. We’ve represented investors who’ve suffered losses in connection with the recommendation to invest in variable annuity products.

One strategy that unscrupulous brokers employ is to switch clients out of variable annuities into other insurance products or mutual funds. This move, of course, generates even more commissions, but may not be in the best interest of their customers. With variable annuities, investors who cash out of them within a short period of time also may incur high “surrender” fees, which are onerous. Variable annuities – the more complex and costly version of low-cost fixed annuities – are often oversold by brokers and advisors. Due to high “surrender” fees, they may lock in investors for a certain period of time. Then they may be paying even more commissions and fees in new investments.

Such practices hurt investors and have caught the attention of FINRA, the securities industry regulator. FINRA recently fined Wells Fargo Advisors Financial Network and Clearing Services more than $2 million for switching 100 clients from annuities to other products.  The regulator found that from January 2011 through August 2016, Wells Fargofailed to supervise the suitability of recommendations that customers sell a variable annuity and use the proceeds to purchase investment company products, such as mutual funds or unit investment trusts.”

Chicago-based Stoltmann Law Offices is investigating claims made by the Securities and Exchange Commission that financial advisor Scott Fries of Piqua, Ohio engaged in a Ponzi-like scheme , defrauding investors of nearly $200,000.  According to the complaint filed by the SEC last week, Fries raised approximately $178,000 from investors and used that money to pay personal expenses like his mortgage, payday loans, and credit cards. The SEC further alleges that Fries attempted to fraudulently conceal his activities by creating fake account statements which he delivered to his clients that purported to show their money invested in legitimate investments. The SEC alleges Fries’ misconduct violated several federal securities laws including Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, Section 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a), and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-6(1) and 80b-6(2).

Before the SEC took action, the Financial Industry Regulatory Authority (FINRA) barred Fries from the securities industry in November 2019 for violating FINRA Rule 8210. In response to being terminated for cause by his broker/dealer firm TransAmerica, FINRA launched an investigation into the allegations which led to Fries’ termination. If a broker/advisor fails to respond to these requests for information under FINRA Rule 8210, they can be barred for life from the securities industry. In many instances, brokers refuse to answer Rule 8210 requests because doing so would put them in the untenable position of having to answer question under oath.  It is likely, given the SEC’s allegations, that Fries chose not to answer FINRA Rule 8210 requests because it was not in his best interest for their to be a record of whatever this scheme actually was.

Investors who were caught up in this scheme run by Fries have legal options to attempt to recover their losses.  First and foremost, at all times relevant, Fries was a registered, licensed, representative of TransAmerica. This means victims – even those that were not contractual customers of TransAmerica – can file an arbitration action against TransAmerica to seek recovery of their losses. As a FINRA registered broker/dealer firm, TransAmerica is legally obligated to supervise the conduct of its financial advisors. This supervision requirement is rooted in the Securities Act and all applicable state laws, including myriad FINRA Rules and regulations, including FINRA Rule 3110.  Case law also supports the proposition that even non-customers of the firm can sue for the firm’s role in facilitating or failing to supervise their advisors. See McGraw v. Wachovia Securities, 756 F. Supp. 2d 1053 (N.D. Iowa 2010). When “red flags”of misconduct present themselves, firms like TransAmerica have a duty to act and to take steps to protect investors.

Chicago-based Stoltmann Law Offices continues to represent investors who’ve suffered losses in connection with financial advisors who have oversold energy stocks and other energy-related investments. With the COVID-19 pandemic depressing demand for everything from gasoline to jet fuel, it’s been a mostly rotten year for energy stocks. In fact, when news first hit the markets in early March, stocks in many oil & gas companies and funds that invested in them crashed. At one time, the Energy Select SPDR (XLE), an exchange-traded fund that invests in energy companies, was down as much as 58%.

The net effect of tens of millions of Americans sheltering in place, avoiding travel and not commuting slashed demand for fuels. Only a handful of people were getting on jets, buses, ships, trains, or driving to work. That resulted in energy companies eliminating dividends and losing money.  While the economy has recovered somewhat as more states have re-opened in recent months, energy demand is nowhere near where it was at the beginning of 2020. The U.S. economy is now in a recession, which may continue into 2021.

What is important to realize about oil/gas prices is, the decline in energy demand actually began a few years ago – primary energy consumption dropped by half in 2019 alone — hasn’t stopped brokers from selling investments in oil & gas companies. They have sold stocks, limited partnerships, and mutual funds that concentrate in fossil fuels, which are volatile commodities and have a long history or volatility.

Chicago-based Stoltmann Law Offices continues to see a surge of complaints from investors who bought unlisted or non-traded Real Estate Investment Trusts (REITs). For most investors, the prospect of getting a higher yield on any investment has been alluring. With rates near zero, it’s been hard to earn a return that beats inflation. Enter REITs and funds that invest in them. These are special vehicles that bundle real estate properties into one investment: You can invest in everything from apartment buildings to storage units.

Many REITs are listed and traded on stock exchanges, but some are not, which are called “private” or “unlisted” REITs. In their heyday, REITs routinely paid double-digit yields. Unlisted or “non-traded” REITs have been a consistent sore spot for investors in recent years. Many are loaded with fees and commissions, which dramatically lower investors’ net returns. They even may be money losers, even though they are sold with the promise that 90% of the income generated by properties they hold must be paid to investors. Middleman expenses, which can be as high as 15%, eat up returns in most cases.

Disclosure of the actual financial condition of these vehicles has also been troublesome. It’s hard for investors to know the true value of the properties within these vehicles, which have been aggressively sold by broker-dealers, who make high commissions selling them. When the COVID-19 crisis wracked the economy earlier this year – at first hitting commercial real estate developers and owners particularly hard – REITs that specialized in retail and office properties got clobbered. Retail and Hotel REITs were down 48% and 53%, respectively (as of April 15), according to Deloitte. Investors in these funds, of course, may be still experiencing large losses.

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