Articles Posted in Failure to Supervise

Stoltmann Law Offices, a boutique securities, investment, and consumer fraud law firm in Chicago, has represented victims of fraud and Ponzi schemes since 2005, recovering tens of millions of dollars for out clients and restoring their financial security and freedom.  On September 9, 2022, it was reported that an Ameriprise financial advisor, Dusty Lynn Sternadel, was barred from the securities industry by FINRA for failing to cooperate with FINRA’s requests for information in connection with an investigation launched by the regulator.  The investigation stemmed from a regulatory filing made by Ameriprise wherein it stated it had terminated Sternadel for cause “for violation of company policies for misappropriation of client funds.”

The FINRA investigation into Sternadel did not get very far because she refused to cooperate with the regulator.  When financial advisors fail to cooperate with a FINRA investigation, FINRA Rule 8210 provides FINRA with the authority to essentially end the advisor’s career. The penalty for not cooperating with the regulatory investigation is harsh and brokers like Sternadel know this, yet she chose to take the lifetime ban instead of cooperate.  The FINRA AWC states that FINRA sent Sternadel a request to testify and produce documents, and that on August 30, 2022, during a phone call, Sternadel stated she would not cooperate or appear and understood the penalty for her refusal.

The Ameriprise disclosure regarding her termination is very vague, yet combined with the FINREA action, is disconcerting. According to the Ameriprise filing, Sternadel was terminated for cause for misappropriating (converting) client funds. Neither the Ameriprise termination notice nor the FINRA AWC state how much money was allegedly misappropriated or from how many Ameriprise customers. There are no customer complaints disclosed yet on Sternadel’s FINRA  Broker/Check Report.

Stoltmann Law Offices is investigating cases where brokers have traded excessively and churned their clients’ accounts. FINRA, the U.S. securities industry regulator,  reached a settlement with R.W. Baird for allegedly overcharging commissions on thousands of stock trades in 2019 and 2020. The firm will pay more than $416,000 in fines and restitution.

FINRA alleged “a substantial failure to supervise the commissions the firm was collecting, citing a minimum-commission policy of $100 per trade that resulted in inappropriately large fees for clients who made smaller transactions,” Barron’s reported. FINRA cited one case involving a Baird client who “purchased two shares of Apple stock for $772 and paid the $100 commission, amounting to 13% of the principal transaction.”

FINRA cited three rules that Baird allegedly violated in its trading activity, including FINRA Rule 2121, which sets terms for fair prices and commissions. That rule offers guidance that firms should cap commissions at 5%, but notes that percentage “is a guide, not a rule. FINRA urges brokers to think of the 5% threshold as a ceiling, not a floor, noting that other factors might render a commission at that level too high.”

Stoltmann Law Offices is investigating cases where brokers have overtraded to generate commissions in risky investments. FINRA, the federal securities industry regulator, has fined Next Financial Group, a broker-dealer owned by Atria Wealth Solutions, $750,000 to settle charges that it failed to supervise ‘unsuitable’ trading of mutual funds and municipal bonds by one unnamed broker, according to citywireusa.com.

FINRA found that the broker “engaged in short-term trading of Class A mutual fund shares in 19 client accounts, resulting in ‘unnecessary’ front-end sales charges of $925,000 from 2012 until February 2019.” All told, the broker racked up some $5 million in sales charges in the seven-year period. Additionally, FINRA found that “from June of 2013 to November of 2016, the broker engaged in short-term trading of Puerto Rican municipal bonds in 16 customer accounts, concentrating five of the accounts in these bonds.”

‘These bonds carried risks not associated with other municipal bonds because of concerns about the Puerto Rican economy and subsequent restructuring of Puerto Rican debt. The risk of such concentration was compounded by frequent trading in the PR Bonds because of the repeated payment of upfront costs that would decrease any investment returns,” FINRA said in its complaint. The investors in the Next case lost more than $4 million from their Puerto Rican bond investments.

Stoltmann Law Offices are investigating cases where brokers have sold clients single-stock, Exchange-Traded Funds (ETFs). Massachusetts Secretary of the Commonwealth William Galvin office has announced a probe of single stock ETF offerings, according to Investment News. Galvin’s office, Investment News reports, is “seeking to protect ‘Main Street investors’ from harm by initiating a sweep of complex single stock exchange traded fund offerings recently made public.”

“These are risky products, investing in only one stock, with no diversity cushion whatsoever,” Galvin said in a statement. “For nearly all Main Street investors, there is no difference between investing your money in single-stock ETFs and gambling with that money at a casino,” he added. “Under no circumstances should an investor use these products as a long-term investment.”

ETFs are typically broad-based baskets of stocks, bonds and other securities in one package. They are known for their tradability and relatively low costs. But some of these products can pose high risks to investors, who can lose money.

Chicago-based Stoltmann Law Offices is investigating allegations made by the United States Securities and Exchange Commission (SEC) regarding former LPL Financial Advisor Eric Hollifield and stealing over $1 million from a client.  This is not the first time an LPL financial advisor has been caught red-handed stealing from LPL firm clients. Given the independent contractor model employed by LPL Financial over its financial advisors, these sorts of scams are all too easy to pull off and continue to happen.

According to the SEC’s complaint, Hollifield, who worked out of Dacula, Georgia, executed several fraudulent ruses designed to hide his true intent. First, he solicited investors to put money into a company called Century Warehouse, Inc., which was allegedly involved in the warehousing and shipping industry. From October 2019 through October 2020, Hollifield is alleged to have raised $5.35 million from advisory clients for Century Warehouse. Hollifield’s alleged fraud were his representations to investors that Century intended to use investors funds to buy PPE and other COVID-related supplies for the benefit of veterans.  According to the SEC, at least $1 million of the money raised from investors went back to Hollifield’s bank account where he spent the money on personal expenses.  The SEC also alleges that Hollifield used $1.7 million in misappropriated investor money to purchase a home sitting on 37 acres in Winder, Georgia.  The SEC alleges further that Hollifield lied to a client about setting up a “high yield” account at Goldman Sachs and instead stole the money.

There are two primary compliance and supervisory models that have existed in the brokerage industry for decades.  The first is the one most people think of when they hear the term “brokerage firm”.  They envision a huge office with fifty cubicles and telephones ringing. This office model is still common in the large “wire house” brokerages like Merrill Lynch and Morgan Stanley. In that structure, a branch manager is stationed at his post on-sight, reviews all incoming and outgoing correspondence, reviews a daily trade blotter, and reviews a daily transaction ledger that shows all checks sent and received for accounts in his branch. This branch manager wanders the office, peaks over shoulders, and should ensure his brokers are living up to the standards of a licensed securities broker.

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from dealing with broker-advisors who have violated securities laws. When brokerage houses or investment advisers make big “block” stock trades, there are numerous rules they must follow to ensure that other investors don’t get burned. They are not allowed to “front run,” an illegal brokerage practice of a stockbroker placing an order for their own account ahead of the client’s, knowing when the client’s order is placed it will move the market and create a profit for the broker.

Disruptive Technology Solutions LLC, a software services company, and affiliated funds, have filed a demand for arbitration against Morgan Stanley with FINRA, the federal securities industry regulator, according to The Wall Street Journal.

“Disruptive alleges that Morgan Stanley and a senior executive there leaked information ahead of the fund’s sale of more than $300 million of Palantir in February 2021, resulting in tens of millions of dollars in damages,” the Journal reports. Disruptive is seeking compensatory and punitive damages. Palantir is a software firm that provides a wide range of platforms from artificial intelligence to supply chain products.

Stoltmann Law Offices is a Chicago-based investor-protection and securities law firm offering representation to clients nationwide on a contingency fee basis in arbitrations and litigation. We have extensive experience representing investors against LPL Financial for numerous investor-related violations including most ominously, “selling away” by their registered representatives. Historically, LPL has had issues maintaining adequate supervision of their financial advisors/registered representatives, as evidenced by the multitude of regulatory actions against the firm for supervisory failures, over many years.

As the saying goes, the more things change, the more they stay the same. Another LPL financial advisor was busted for “selling away” – which is securities industry lingo describing when a financial advisor sells an investment to investors that is “not approved” by the brokerage firm. This scheme involved Upper Saddle River, New Jersey-based LPL financial advisor Michael Mandel who sold interests in a tequila business to approximately 17 investors, many of whom were LPL clients. According to published reports, Mandel only received about $5,000 in compensation for selling the investment, but also received a promise of equity participation in the Tequila company. It should come as no surprise, the tequila business was a scam and the investors lost everything.

According to regulatory filings, Mandel was fired by LPL Financial in January 2022 in connection with his participation in the tequila company. LPL suggests Mandel was terminated for “failing to disclose” the activity to the firm, which is technically correct, but far from where the story ends for LPL. In truth, the entire concept of “selling away” means there is a failure by the advisor to accurately disclose outside activities. Of course, if Mandel went to his boss at LPL and told them he wanted to sell his clients investments in some tequila company, LPL would have told him in no uncertain terms that he was forbidden from the affiliation. What happens instead is, financial advisors move forward with selling these sorts of investments without the firm’s knowledge. It happens all of the time, and companies like LPL know it.

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from dealing with broker-advisors who’ve robbed their accounts. There’s no shortage of incidents where brokers have taken advantage of older Americans to “churn” or over-trade their accounts to generate commissions. In many cases, their clients may be unaware of the abuses or unknowingly granted power of attorney to facilitate broker theft of customer funds. Other times, brokers go rogue and flat out steal from their clients.  That is the unfortunate reality for Totowa, New Jersey-based PFS Investments financial advisor Jeffrey Dampf.

FINRA, the federal securities regulator, has barred ex-Primerica/PFS broker Jeffrey Dampf, who had joined the firm in 2009, according to Thinkadvisor.com. “On Oct. 30, 2020, Ocean County Prosecutor Bradley D. Billhimer announced that Dampf, then 69, of Brick Township, New Jersey, was charged with attempted theft and conspiracy to commit theft. Meanwhile, Robert Tindall, then 46, and Leanna Guido, then 47, both of Toms River, New Jersey, were charged with theft for their roles in the same scheme.” An investigation by the Ocean County Prosecutor’s Office “revealed that Dampf, in his capacity as the power of attorney and accountant for two senior siblings, was misappropriating funds entrusted to him while caring for the two older clients,” according to Billhimer.

Dampf “allegedly attempted to electronically transfer $500,000 to an investment account from the victims’ bank account for his own benefit. The transfer was ‘flagged,’ however, and the money was not transferred from the victims’ account,” according to Billhimer. “Tindall and Guido received funds they were not entitled to in an amount exceeding $1.5 million” from the victims, Billhimer said. “The funds were allegedly misappropriated through check or electronic transfer executed by Dampf and drafted to appear as though they were legitimate reimbursements for money spent on the care and for the benefit of the clients.”

Chicago-based Stoltmann Law Offices is investigating claims by investors in connection with financial advisors who switch clients into more expensive investments that trigger unnecessary fees. Overtrading in a brokerage account or “churning” has long been an industry abuse. But some brokers take churning to new limits.

FINRA, the US securities industry regulator, has suspended a former Edward Jones broker for six months and fined him $7,500 for allegedly making more than 800 transactions in four of his clients’ accounts without their authorization or consent, according to thinkadvisor.com.

From December 2017 to November 2018, Albert L. DeGaetano “executed 470 securities transactions in the accounts of a fundraising organization for a charitable hospital without its authorization or consent,” according to the FINRA letter. The 823 securities transactions in all, which included 389 purchases of exchange-traded fund (ETF) bonds, had a total principal value of about $7.2 million and generated approximately $113,000 in total trading costs, according to FINRA.

Chicago-based Stoltmann Law Offices is investigating financial advisors who switch clients into more expensive investments that trigger unnecessary fees. Financial advisors and brokers who work on commission often make “exchanges” that switch clients from one investment into a very similar different investment. They often use the rationale that “you’ll make more money” in these new investments, but the truth is that they’ll make more in commissions and fees.

NY Life Securities has agreed to “pay a total of $263,347 to settle allegations that, as a result of supervisory failures, it failed to prevent several of its clients from being charged excessive, unnecessary fees after one of its brokers engaged in unsuitable mutual fund and cross-product switches,” according to FINRA, the federal securities regulator, as reported by ThinkAdvisor.com.

“On hundreds of occasions” between January 2015 and March 2019, a broker at the firm, identified only as “Broker A,” recommended that 10 clients buy and sell Class A mutual funds after holding the shares for short periods of time, according to FINRA

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