Articles Posted in FINRA Arbitration

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:

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers who’ve fleeced clients. This is a sad occurrence, but sometimes brokers take advantage of clients and steal their money. We’ve investigated countless cases when this has happened.

The instances are all too familiar to us: Usually it’s elderly, retired women who are preyed upon. A recent case involving a 73-year-old client is a case in point. A former LPL broker, Matthew O. Clason, of Chesire, Connecticut, is accused of stealing more than $300,000 from the client, “with whom he formed a personal relationship.” Clason, who had been a registered broker since 2004, sold securities from his client in 45 transactions over the last 20 months, the SEC said in its suit filed against the broker.

“He transferred about $330,000 [from proceeds of the sales of client assets] to a joint checking account they had opened at a large national bank, funding most of it through securities sold from a non-retirement account that charged the client 1.54% of her assets under management,” the SEC reported. The agency is requesting “that the court enter an order freezing Clason’s assets and requiring an accounting. The SEC also seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil penalties.” Clason, who was registered with LPL and Integrated Wealth Concepts, could not be reached for comment, according to AdvisorHub.com. He was fired by LPL on August 13 for failing to comply with firm policies with respect to handling client funds, the SEC said.

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.

Chicago-based Stoltmann Law Offices continues to investigate investor claims related to UBS YES products.  In recent years, with savings yields at rock bottom, investors have been eager to attempt to safely earn a higher return on their money. Wall Street has responded with so-called “yield enhancement strategies” (YES) designed to pump up returns. But these strategies eek out this extra yield by employing extremely risky options trading strategies.

What brokers haven’t told investors in countless pitches, however, is that yield enhancement products are complicated and carry numerous hidden risks. The UBS YES program, involving an “iron condor” options trading plan, has attracted a great deal of attention recently. Investors are suing UBS, the Swiss wealth management firm, claiming they lost money when UBS brokers enrolled them in the strategy. Arbitration claims against the company have also been filed with FINRA, the securities industry regulator.

Investors who invested in the UBS YES program claim they suffered losses, even though the firm claimed the strategy was “conservative” and “low risk,” according to Wealthmanagement.com. What investors apparently were not told is how complex and convoluted the YES strategy was:

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses due to recommendations by financial advisors and brokers to invest in Exchange-Traded Products (ETPs). With market gyrations giving average investors motion sickness this year, it’s understandable for many to find ways of hedging volatility. When the market is up one day and down another, it’s pretty unnerving.

That’s why Wall Street invented Exchange Traded Products linked to volatility indexes, which track the nervy fears of the market at large. When anxiety is high, these indexes are high. One of the most popular such indexes is the so-called VIX, which is managed by the Chicago Board Options Exchange. Brokers and advisors often recommend ETPs based on the VIX for clients who want to hedge against market volatility.

ETPs are securities traded on stock exchanges that can track anything from baskets of bonds to precious metals. For many investors, they can be efficient ways of owning commodities or hedging prices on nearly any kind of security. But each have their own risk profile. Some are clearly unsuitable for unprepared investors.

Stoltmann Law Offices, P.C. is investigating allegations made by the Financial Industry Regulatory Authority (FINRA) that Jose Yniguez sold clients approximately $99,000 worth of investments in an outside company. Fortunately for defrauded investors, TransAmerica Advisors, the company with whom Mr. Yniguez was licensed and registered, could ultimately be liable for any losses in connection with these illicit investment recommendation. Victims of investment fraud can file claims through the FINRA Arbitration process to recover investment losses.

The allegations against Yniguez were unveiled just this week through FINRA regulatory filing called an Acceptance, Waiver, and Consent (AWC).  In this document, which is signed by Yniguez, FINRA Department of Enforcement alleges that on November 19, 2018, TransAmerica reported in a Uniform Termination Notice for Securities Industry (Form U-5) that Yniguez was terminated for “engaging in undisclosed activities with and referring firm and non-firm customers to investment with an outside entity without TransAmerica’s approval.” That Form U-5 spurred FINRA Department of Enforcement’s interest and it launched an investigation into Mr. Yniguez pursuant to FINRA Rule 8210.  FINRA concluded that Yniguez violated FINRA Rules 3270 and 2010 by failing to disclose his involvement with an outside company to TransAmerica. He also solicited eight firm customer to invest in the entity, which is a violation of FINRA Rule 3280.

Just because this activity was undisclosed, does not mean TransAmerica is off the hook. FINRA Rule 3110 requires TransAmerica to adequately supervise its financial advisors. Further, to the extent “red-flags” existed that Mr. Yniguez was engaging in this unauthorized activity, that creates an obligation to “peel the onion” and act. TransAmerica, for example, cannot just ignore emails sent by Yniguez discussing this outside company. It must act and protect both its clients and its own business interests. By failing to reasonable supervise Yniguez, TransAmerica can be liable for negligence to the investors in this scheme. Likewise, due to the fact that outside investments were securities; were sold by a securities broker; to clients of a securities brokerage firm; regardless of whether Yniguez disclosed it to the firm, TransAmerica can be liable for damages due to apparent agency or Respondeat Superior.

Chicago-based securities law firm Stoltmann Law Offices continues to investigate nationwide claims involving American Realty Capital (“ARC”) New York City REIT.  New York City REIT, Inc. is a non-traded real estate investment trust that owns a portfolio of high-quality commercial real estate located within the five boroughs of New York City, particularly Manhattan.  In order to induce clients to invest in the ARC New York City REIT, brokers pitched the REIT as maximizing total shareholder returns through appreciation and current income, maintaining a low loan to value rate, targeting liquidity events, acquiring high-quality New York City real estate and as having a diversified group of tenants. Stoltmann Law Offices is investigating claims against stockbrokers and investment advisors who recommended this complex high commission based product to investors.

Brokers sold the ARC New York City REIT to customers as having primary objectives of preservation and protection of capital and capital appreciation.  Unfortunately, the ARC New York City REIT ceased paying distributions on March 1, 2018.  Furthermore, the ARC New York City REIT paid substantial fees to advisors.  No public market existed for the ARC New York City REIT and the investment is illiquid pending its IPO.  As of December 31, 2017, ARC New York City REIT owned only six properties and therefore had limited diversification.  The value of the shares of ARC New York City REIT have declined substantially leaving investors stuck with the illiquid investment and a principal loss.

The New York City REIT is a “non-traded” REIT, which means it falls into a subset of the broader REIT investment class. REITs generally speaking are trusts designed to provide tax incentives to the owners of the underlying property. In order to maintain their status as a REIT, the REIT managers have to ensure that at least 90% of all taxable income generated by the REIT trickles down to the investors via dividends. REITs are concentrated investments in income producing property and are basically by definition non-diversified. The real issues investors have traditionally had with REITs are the liquidity and conflicts problems in the non-traded variety, of which the ARC New York REIT was a member.

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