Articles Posted in Fiduciary Duty

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 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.

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from dealing with financial advisors who’ve had conflicts of interest when representing investors. Is your broker-dealer working in your best interest? Sometimes it’s difficult to tell, particularly when they don’t reveal hidden conflicts. Broker-Dealers who fail to properly inform their clients may be guilty of violating U.S. Securities and Exchange Commission (SEC) regulation “Best Interest (BI).”

In a study conducted by Finra, the federal securities regulator, the agency found that “firms are failing to update their existing policies and procedures to reflect Reg BI’s requirements by “making recommendations that were not in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards and costs associated with the recommendation,” the self regulator said. FINRA also found that brokers and their registered reps “recommended transactions that were excessive in light of a retail customer’s investment profile and placed the broker-dealer’s or associated person’s interest ahead of those of retail customers.”

What should brokers be doing to protect clients? Firms should be “identifying and mitigating conflicts of interest by identifying, disclosing, and eliminating or mitigating conflicts of interest across business lines, compensation arrangements, relationships or agreements with affiliates, and activities of their associated persons,” FINRA said. This means brokers need to “implement policies and procedures to identify and address conflicts of interest, such as through the use of conflicts committees or other mechanisms or creating conflicts matrices tailored to the specifics of the firm’s business that address.” Firms also should be “identifying conflicts across business lines and how to eliminate, mitigate or disclose those conflicts.”

Stoltmann Law Offices is representing investors whose brokers or financial advisors sold them GWG Holdings, Inc. L Bonds. Brokerage firms, including but not limited to Aegis Capital, recommended this speculative private placement to clients, collecting up to 5% of the Bond’s market price as their commission. The L Bonds are high-yield life insurance bonds used to finance the purchase of life insurance on the secondary market. Any type of investment in the secondary life insurance market is an extremely risky investment, and these bonds certainly were not suitable for many, if any, clients. Given recent events, default on the L Bonds seems to be imminent, and may leave investors with a total loss of their investments. These investment losses may be recoverable from the financial advisors who sold the L Bonds as a result of their due diligence failures, and for making unsuitable recommendations.

According to their filings with the Securities and Exchange Commission (“SEC”), GWG has halted the sale of the L Bonds and failed to issue $10.35 million of interest payments and $3.25 million of principal payments to L Bond investors by the January 15, 2022 due date. If these payments are not made by the end of the 30-day grace period on February 14, 2022, GWG will be in default. Pursuant to GWG’s Amended and Restated Indenture, when in default, noteholders or trustees holding at least 25% of the aggregate outstanding principal amount of the L Bonds may elect to accelerate liquidation of the Bonds.

By halting the sale of the L Bonds, GWG has also cut-off a main source of its liquidity. If the “interest” payments that GWG was making on the L Bonds was actually paid from incoming principal from new investors, rather than revenue, then GWG will not be able to make interest payments any time soon. GWG is underwater based on its balance sheets.  While it has close to $1 billion in tangible assets, GWG has over $1.5 billion in outstanding L Bonds, plus $327.7 million in senior credit facilities. Based on these numbers, if liquidation of the L Bonds is accelerated, GWG will not have enough in assets to cover the liquidation.

Chicago-based Stoltmann Law Offices represents investors have suffered losses from the negligence and breach of fiduciary duty of registered investment advisors (RIAs).  All too often brokers and RIAs trade in customers’ accounts to generate fees and commissions. This practice reduces their total returns while enriching broker-advisor firms. When regulators crack down on these practices, they usually find it’s a “failure to supervise” by the brokerage firm with whom the advisor is registered.

FINRA, the federal securities regulator, fined Next Financial Group, a $2.6 billion RIA and 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 19.” 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.”

Certain classes of mutual funds and related investments carry higher commissions and fees than others. Broker-advisors are required to tell clients that trading in and out of these investments will generate higher income for the firm and its representatives. They are also required under FINRA rules to fully disclose the downside of the investments, which should be suitable for the client’s age and risk tolerance.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers who have failed to recognize their clients’ need for lower-risk portfolios. It’s no secret that the COVID pandemic has made the stock and bond markets more volatile. When the outbreak first hit markets, it triggered a massive sell-off in everything from blue chip stocks to municipal bonds.

Yet many broker-advisers failed to protect their clients, keeping them in high-risk portfolios that lost money. Even though they constantly make claims to the contrary, almost no advisor can time markets to fully protect investors. Few saw the pandemic coming, or the devastating impact it would have on the world economy.

After the stock market peaked on February 19, 2020, it dropped 34% in a month, hitting a bottom on March 23. But by June, the market had bounced back, surging 39%. Then, on Oct. 28, the Dow dropped more than 900 points as COVID cases again surged worldwide in a second, record-setting wave. Who could have predicted such stomach-churning volatility? Investors who were risk averse and needed to protect principal – and were overexposed to stocks – got burned the most.

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.

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