Articles Posted in FINRA

Hungry, creepy creatures are crawling abundantly on the web eager to swallow your money and your stocks and bonds and ETFs from your brokerage account.  But while many of the crooks employ the latest technology to do their dirty work, you can use a centuries old salve to thwart (some) of them: An ounce of prevention is worth a pound of cure.

A good way to start is with the off button on a computer or your broker’s web site.  You could still leave the door open to cyber thieves if you simply close or minimize your browser or type in a new Web address when you’re done using your online brokerage account, warns the broker self-regulatory body, the Financial Industry Regulatory Authority (FINRA).  So be sure to hit the “log off” button on your broker’s web site when you are finished or turn off the computer or mobile device completely.

Generally turning off your computer when it is not in use or at least disconnecting it from the Internet can also keep intruders from your account.  Regularly check your brokerage account for unauthorized transactions—especially withdrawals or wire transfers to an account that is not yours —and ask the firm to investigate if you find any, the brokerage regulator suggested.

On August 5, 2019, FINRA fined Morgan Stanley registered representative Ken Kavanagh $25,000 and suspended him from practicing in the securities industry for eighteen after discovering that he concealed his outside business activity. According to FINRA’s order, beginning in 2003, Kavanagh provided personal management services to professional athletes. In October 2007, he registered his business as CEO-Sports in New Jersey, then formed another LLC in Pennsylvania, MGMT LLC. His services included coordinating travel and dinner arrangements, housing, bill payment, opening and managing bank accounts, and referrals to other professionals for tax return preparations and wills. Kavanagh had approximately 42 clients and generated at least $5 million in fees from 2012 through 2018 for providing these services.

FINRA Rule 3270 (formerly NASD Rule 3030) prohibits FINRA financial advisors from engaging in outside businesses unless they are properly disclosed to and approved by the advisor’s  brokerage firm. Mr. Kavanagh did not disclose his interest in MGMT or CEO-Sports to Morgan Stanley. He also attested in annual questionnaires required by Morgan Stanley that he was not involved with any outside business activities. He named a close relative as the sole owner or member of MGMT and CEO-Sports and also as the authorized representative on the each company’s bank accounts.  As a result of these FINRA Rule violations, FINRA fined Kavanagh $25,000 and suspended him for eighteen months.

As Stoltmann Law Offices previously alerted investors, Kavanagh has not been registered in the securities industry since resigning from Morgan Stanley in April 2018 after a client complained of his undisclosed outside business activities. On August 15, 2018, a customer also complained that Kavanagh placed unauthorized trades and forged documents.

If you lost money with Puerto Rico financial advisor Pedro Gonzalez-Seijo, Stoltmann Law Offices may be able to help you recover these losses. Gonzalez-Seijo, a registered representative of Transamerica Financial Advisors, Inc. from September 1991 through May 2016, solicited clients to purchase variable annuities, but instead deposited their money into his personal bank account. The Securities and Exchange Commission barred Gonzalez-Seijo from the securities industry on July 5, 2019. Through its investigation, the SEC found that he stole $480,813.15 from five clients between 2013 and 2016. He pled guilty to one count of bank fraud in the criminal action that was pending against him in the United States District Court for the District of Puerto Rico on January 31, 2019.

Rather than terminate Gonzalez-Seijo, Transamerica gave him a slap on the wrist when they discovered “unauthorized check withdrawals” in client accounts and permitted him to resign. He did not register with any other broker dealer after resigning from Transamerica in May 2016 and, given the bar imposed by the SEC last week, he will no longer be allowed to work in the securities industry in any capacity. According to his FINRA BrokerCheck Report, Gonzalez-Seijo also sold life insurance and annuities through PGS Insurance, Inc. There are two client complaints disclosed on his BrokerCheck report for this scheme, one has been closed and one is pending.

Stoltmann Law Offices is highly experienced in representing investors who lost money in similar theft and selling away, or “Ponzi” schemes. You can find information on just a few of those cases in which Stoltmann Law Offices successfully recovered their clients’ stolen assets, and in some cases attorney’s fees, costs, interest and punitive damages on our website. “Selling away” is when a broker sells an investment to clients that is either unregistered, or not approved by the brokerage firm. Common forms of these alleged investments are promissory notes, bonds, and limited partnerships. Often times the advisor uses a shell company to misappropriate client funds. In some cases the advisor will even represent that he is investing the money in publicly traded stocks and mutual funds and will go as far as creating phony account statements to hide the theft. If the broker is not properly supervised by his firm, he can engage in this scheme for a long enough time period to abscond with the money, leaving their clients with nothing by the time they discover that the investment was fake.

Stoltmann Law Offices is pursuing investment losses for investors in IGF Investment Grade Funds I, LP (“IGF Fund”). IGF Fund is a real estate private placement that invests in single-tenant, net leased commercial properties, with 75% of the portfolio being “investment grade rated tenants with the remainder being of quality private credit tenants or those trending to investment grade.” IGF Fund advertises that it pays 6% annual returns to investors, paid monthly, with two-thirds of the income being tax-deferred. On its website, IGF Fund solicits property owners and brokers for “single tenant triple net or double net leased assets…retail, office, restaurants, and C-stores, and leases backed by investment grade tenant credit of AAA or BBB-“. While IGF solicits properties from $1 million to $16 million, it raised less than $12 million as of August 2018. IGF Partners Realty LLC is the general partner of the IGF Fund and is headquartered in Santa Barbara, California. The IGF Fund is a Delaware limited partnership and a Regulation D private placement.

Generally, Regulation D private placements should only be sold to accredited investors, with some exceptions. Some of the criteria considered is the investor’s annual income, net worth, and sophistication and investment experience. In order to qualify as an “accredited investor”, an investor must have a $200,000 annual income, or $300,000 joint income for the past two years, or a net worth of $1 million (excluding their home). When considering the suitability of a real estate investment for a client, a broker must take into consideration the client’s current asset allocation. For most client’s, their home is already one of the largest pieces of their net worth, so investing in more real estate (and particularly illiquid real estate investments, like IGF Fund) simply does not make sense.

IGF Fund is desperate to raise cash. The initial offering of $60 million was made on March 29, 2016. As of August 21, 2018, the fund raised only $11,720,000. This means that over 80% was left to be sold two years after the initial offering. Because of this, IGF Fund notified investors in early 2019 that it was extending its offering period from December 31, 2018 to April 30, 2019. IGF Fund and brokers selling this investment have been wining and dining current and potential investors to convince them to invest more cash. The lack of capital raised limits IGF Fund’s ability to purchase properties, thus minimizing any potential return for investors. Moreover, extending the offering period also extends the time period before the Fund can be liquidated. The IGF Fund is still paying distributions to investors, however without sufficient funding to purchase assets it will run dry, leaving investors with nothing.

Stoltmann Law Offices, P.C. is evaluating investor claims in connection with recently disbarred financial advisor Philip Nalesnik from Pottsville, Pennsylvania.  According to a document signed by Mr. Nalesnik on April 15, 2019, he voluntarily consented to a permanent bar from FINRA. This is a professional death sentence for anyone who wants to provide financial services or financial advice to clients. The Acceptance, Waiver, and Consent (AWC) states that Mr. Nalesnik refused to provide on-the-record testimony to FINRA in connection with its investigation into his outside business activities.  Prior to signing the AWC, according to his FINRA BrokerCheck Report, Mr. Nalesnik was terminated for cause by LPL Financial on July 8, 2018 as a result of LPL’s internal investigation into his outside businesses, including not cooperating with LPL’s investigation.

Mr. Nalesnik’s FINRA BrokerCheck Report reveals a few other troubling red flags.  He has been named in five customer complaints, with one of them resulting in an adverse arbitration award in November 2010.  He filed for Chapter 7 bankruptcy protection in January 2012 and more recently, was hit with two tax liens.  Financial troubles like these can be red flags or indications that a financial advisor could slip into various forms of misconduct, including selling away, where an advisor has investor-clients invest money in an outside entity without the formal authorization of his firm.

Mr. Nalesnik did prominently disclose several outside businesses on his CRD Report.  These include Ridgeview Wealth Management which was disclosed as a company through which Mr. Nelsnik sold non-variable insurance products.  He also disclosed Integrated Insurance Management, LLC which looks to be an insurance agency. Mr. Nalesnik also reports an affiliation with Private Advisor Group, LLC, which is a registered investment advisory firm headquartered in Morristown, New Jersey. Doing business with any of these entities would be required to be supervised by LPL Financial.

It is time for GPB Fund investors to seriously consider their legal options. Over the last year, the GPB Capital Funds have been beset by serious issues raising red flags for investors:

  • On April 30, 2018, GPB missed a mandatory filing date with the SEC
  • In August 2018, GPB announced that is was “overhauling” and restating its 2015 and 2016 financials

The securities fraud attorneys at Stoltmann Law Offices, P.C. continue to investigate investor claims against brokerage firms that sold their clients investments in various GPB Capital Holdings offerings.  On March 22, 2019, attorney Joe Wojciechowski announced the filing of a Statement of Claim with FINRA Dispute Resolution for an investor who was sold units in GPB Automotive Fund, L.P. The claim was filed against NewBridge Securities and also includes allegations in connection with various non-traded REITs issued by American Realty Capital (ARC). The claim is for a retail investor whose financial advisor recommended she invest nearly 100% of her accounts in alternative investments offered by GPB Capital and ARC.  The claim alleges misrepresentations and omissions of material facts in violation of the Securities Act of Washington, consumer fraud in violation of the Washington Consumer Protection Act, negligence for violating numerous regulatory rules including FINRA Rules 2111 (suitability) and 3110  (supervision), and breach of fiduciary duty. Our client seeks rescission of her GPB Automotive Fund investment and compensatory damages for her realized losses in the ARC REITs, plus attorneys fees, costs, interest, and punitive damages.

Investors who were solicited by financial advisors and brokers to invest in GPB Capital funds should consider their legal options to seek rescission of those investments.  Under the state securities laws (frequently referred to as the Blue Sky Laws), the primary remedy for investors is called rescission, which means the investor sues to force the brokerage firm to buy the investment back.  The rescission remedy seeks to put the investor back in the same place she was prior to purchasing the investment. This is important for investors who own alternative investments like GPB Capital Funds.  These are not liquid or tradable investments, meaning an investor cannot call their advisor and sell it and realize a gain or a loss. Essentially, the investor is stuck. Given the troubling news about GPB Capital over the last several months, something Stoltmann Law Offices has written about extensively, investors are correct to be wary and should consider an exit strategy. Unfortunately, because there is no way out of the GPB Funds, the only option for investors may be to pursue arbitration claims against the brokerage firm responsible for soliciting the investments in the first place.

In the last several years, as interest rates remained very low, it has been difficult for investors to find fixed income investments, like corporate and municipal bonds, that offered higher yields without exposing them to speculative risk. Likewise, due to the long term low interest rate environment, the principal value of the bonds begin to drop as interests rates have risen. The solution to these problems for brokerage firms has been to sell “alternative investments” that offer relatively high yields, but because they are non-traded and do not report any real market value, they have the appearance of a stable value for investors. The bonus for brokerage firms is that these alternative investments offer the advisors commissions they could never achieve by selling standard fixed income securities like corporate bonds or municipal bonds. Advisors sell the sizzle of a high yield and fixed prices and either gloss over or completely misrepresent the speculative risk being taken by investors who entrust their money to private entities like GPB Capital.

AdobeStock_198259345-300x200Our firm is investigating allegations made against Stephen C. Carver, who was a registered representative for Cetera Advisors in Peoria, Illinois. According to his FINRA BrokerCheck Report, an investor sued Cetera and Mr. Carver in FINRA Arbitration for upwards of $3 million. The complaint makes allegations of elder abuse, conversion, breach of fiduciary duty, and violations of both Illinois and Federal statutory and consumer protection statutes. The claim was filed in October 2018 and involves direct-participation programs, limited partnerships or also known as Private Placements.

Mr. Carver has several disclosures on his BrokerCheck Report in addition to this recent complaint. He was terminated by LPL Financial in 2009 for failing to disclose his involvement in an outside business, which is major red flag to brokerage compliance departments. He also discloses several tax liens on his record. He was then terminated by Cetera for failing to disclose a gift he received from a client, who he stated was his uncle.

Mr. Carver was also named in a Regulatory Complaint filed by FINRA for failing to disclose tax liens on his Form U-4.  FINRA’s By-Laws, specifically Article V, Section 2(c) require all financial advisors update their U-4 with information required to be disclosed within thirty days of learning of the event requiring the disclosure.  Tax liens are specifically disclosable events that financial advisors like Mr. Carver are obligated to report within thirty days or they are violating FINRA By-Laws along with FINRA Rule 1122 and FINRA Rule 2010.

The smoke emanating from the GPB Funds continues to build. As detailed in our post from November, the 1.8 billion-dollar GPB Capital Funds have been raising eyebrows for a few months now. Back in September, Massachusetts Secretary of State William Galvin announced an investigation into 63 brokerage firms that sold investments in GPB to its clients. According to a recent Investment News report, both FINRA and the SEC have now also inquired into brokerage firm sales practices connected to the GPB Capital Funds.

According to published reports, GPB paid brokerage firms a 12% commission to sell its speculative, high-risk private placements to retail investors.  This sort of commission is the driving force behind brokerage firms selling private placements. By comparison, a brokerage firm will generate a commission of about 1% on a stock trade and perhaps as high as 5% on a Class A mutual fund.  With the increasing popularity of cheap alternatives like Index Funds which only generate commissions of less than 0.5% in most instances, it is clear why brokerage firms peddle speculative investments like those issued by GPB Capital. A financial advisor would have to sell a lot of stocks and bonds to generate the same amount of commissions.

For example, if a financial advisor sells an investor a $100,000 unit of one of the GPB Capital private placements, the advisor and his firm would be paid $10,000-$12,000 for making this sale. If on the other hand, the advisor instead sold the investor a basket of Dow 30 stocks for $100,000, the take would be only $1,000-$2,000.  This advisor would have to sell over a million dollars of stocks to this client to make the same commissions.  Plus, selling a basket of stocks and bonds requires ongoing professional service and advice from the financial advisor.  Issues related to rebalancing and market volatility require ongoing financial advice.  Financial Advisors love selling private placements like those offered by GPB Capital because they feel like they can sell it and forget it. These private placements do not price to a market daily, creating the illusion that they are stable and that an investor’s principal is safe. It is really a no brainer for your trusted financial advisor.

The Financial Industry Regulatory Authority (FINRA) records indicate that Kenneth Savino, a former LPL broker, was suspended from the industry for 15 days and fined $5,000. He allegedly purchased shares of a security for $100,000 without providing prior notice to his member firm and inaccurately indicated on an annual compliance questionnaire that he had not participated in any private securities transactions. He was discharged from LPL in October 2015 for allegedly entering into a loan transaction with another company, receiving shares of the company in return, with no pre-approval by the firm. He also allegedly made private securities transactions that he did not have pre-approved by the firm and introduced a client to a potential outside investment opportunity that was not approved by the firm. These are all against securities laws and internal firm rules. Selling away refers to when a financial advisor solicits investments in promissory notes or companies that are not pre-approved by his member firm. He does this in order to not have to share the commissions he earns from the sale with his member firm. The firm can be held liable for losses in this case.

According to FINRA records, Mr. Savino was previously registered with Manequity Inc. from May 1983 until December 1988, Lincoln Financial Securities Corp in Windsor Locks, Connecticut from December 1988 until July 2010 and LPL Financial in West Hartford, Connecticut from July 2010 until November 2015. He is currently registered with FSC Securities in East Hartford, Connecticut, and has been since December 2015.

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