Monthly Archives: November 2013

FINRA Fines Broker-Dealer Firm Merrimac Corporate Securities, Inc. for Failure to Supervise Registered Representatives

FINRA recently fined Merrimac Corporate Securities, Inc. $100,000 after determining that the firm failed to supervise two of its registered representatives in violation of NASD Rules 3010 and 2110 and FINRA Rule 2010.

The registered representatives, Richard Pizzuti and Daniel Voccia, convinced 30 individuals to invest more than $4 million in a company that they controlled between 2006 and 2009.  It appears that these investments were unsuitable for many of these customers.

Merrimac contended that it will be unable to pay the fine. FINRA has recommended that Merrimac pay off the fine in $10,000 installments over the course of 10 months.  FINRA recommended that Merrimac cut certain of its business expenses in order to be able to make the installment payments.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership and shareholder rights disputes.  Contact us at 312-443-1600 to learn about the services we offer.

National Futures Association Fines Forex Dealer Firm FXDirectDealer LLC

The National Futures Association (NFA) recently issued a $1.1 million fine and a $1.8 million restitution order against FXDirectDealer LLC (FXDD). The New York City-based firm is registered with NFA as a futures commission merchant (FCM)  and a forex dealer.  It has been an NFA member since December 2009.

FXDD deals in rolling spot forex contracts.  Spot forex contracts differ from currency futures markets in various respects.  One of the most significant differences is that there is no centralized exchanges for spot forex contracts.

The firm’s compliance officer, listed principal and designated FOREX associated person, James E. Green, has also been subjected to disciplinary action.

The NFA decision, issued by its hearing committee, came after two complaints (June 29 and October 23, 2012) were initiated by its business conduct committee. The actions followed two annual NFA audits; one commenced on March 1, 2011 and the second one in June 2012.

From the 2011 audit, the complaint cited a number of “deficiencies associated within the firm’s recordkeeping, its anti-money laundering (AML) program and other areas of the firm’s operations.”

Charges filed against FXDD included “failing to supervise the trade integrity of the firm’s electronic trading systems; failing to maintain complete and accurate records; and failing to review the use of promotional material.”

NFA also investigated FXDD’s order execution practices and learned the firm “treated price slippage differently.” This led to charges against it for allegedly utilizing asymmetrical price slippage settings that favored the firm over customers.

The complaint also accused the firm of “making improper price adjustments in customers’ accounts; converting customer funds; willfully submitting misleading information to NFA and others; and failing to treat all customers equally when giving price adjustments.”

And in final charges, the NFA alleged that FXDD neither created nor implemented “adequate screening procedures to determine whether persons and entities with whom FXDD intended to do forex business were required to be registered with the Commodity Futures Trading Commission (CFTC) and Members or Associates of NFA.”

The NFA’s 2012 annual audit focused on FXXD’s AML program. It discovered annual AML training had not been conducted by the firm, which led to the October 23 complaint. Charges against FXXD included the following: “failing to implement an adequate AML program and failing to adequately supervise the firm’s AML program.”

FXDD submitted a settlement offer related to its price slippage practices, paying $1,828,261 in restitution to customers who underwent “unfavorable” price slippage on “limit-fill-or-kill” trades from December 10, 2009 through June 29, 2011.

In addition, from the $1.1 million fine, $914,131 has been attributed to FXDD’s unfavorable price slippage practices.

On a final note, in a related Commodity Futures Trading Commission action, FXDD will pay a $914,131 penalty to the agency.

FXDD has neither admitted nor denied these allegations.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership and shareholder rights disputes.  Contact us at 312-443-1600 to learn about the services we offer.

Consent Order Entered Against Bankrupt Commodities Firm MF Global, Inc.

This week, the U.S. District Court for the Southern District of New York entered a consent order in the Commodity Futures Trading Commission’s (CFTC) lawsuit against bankrupt commodity firm MF Global, Inc. and its former CEO Jon Corzine and officer Edith O’Brien. This lawsuit was filed in June 2013.  The consent order requires MF Global, Inc. to pay a $200 million fine to the CFTC and $1.212 billion in restitution to customer who sustained losses when the firm failed in 2011.

The CFTC’s complaint alleges that MF Global, Corzine and O’Brien unlawfully used customer funds and did not put proper safe holds in place to ensure that the firm’s practices did not result in losses for its customers.

The CFTC  will continue to pursue its claims against defendants Corzine and O’Brien.

In 2011, MF Global used approximately $1 billion of customer funds to address the failing firm’s need for immediate cash. Corzine was allegedly aware that the firm was violating its own policies by dipping into customer funds and knew the truth about the firm’s low cash balance, but still continued to direct the firm to unlawfully use customer funds.  Before taking over at MF Global, Corzine was the CEO of Goldman Sachs and governor of New Jersey.

O’Brien allegedly oversaw transfers of hundreds of millions of dollars from customer accounts to the firm, while being aware that the practice was illegal. It “could be game over” if funds were not returned to customers on time, O’Brien allegedly said.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership and shareholder rights disputes.  Contact us at 312-443-1600 to learn more about the services we offer.

Brokerage Firm Wall Street Strategies, Inc. Faces FINRA Complaint

On October 29, 2013, the Financial Industry Regulatory Authority (FINRA) brought a complaint against Wall Street Strategies, Incorporated (WSSI), Gary Savage, Sr. and Louis Karl Kittlaus.  WSSI is a FINRA registered securities broker-dealer firm.

Savage has been FINRA-registered through WSSI since 1993. He entered the securities industry in 1983 and has been registered with numerous member firms in various roles. He is currently WSSI’s President, CEO, and CCO.

Kittlaus has been registered in the securities industry since 1965 and is a WSSI representative.

According to FINRA’s complaint, between January 2012 and November 2012, Savage sold through WSSI $2 million-plus of Renewable Secured Debentures via GWG Holdings, Inc. (GWG); he made approximately $95,000 in commissions from the sales.

The debentures are considered high risk, illiquid alternative investments and FINRA has alleged that “during the relevant time period, Savage made unsuitable recommendations to nine different customers in the course of 19 separate sales totaling more than $2 million of Debentures…Savage’s recommendations to his customers to invest in the Debentures were unsuitable based on the customers’ overall investment profiles.”

Savage also made “false, exaggerated, unwarranted and misleading statements in communications with the public.” When making sales, he utilized a GWG Debentures brochure that FINRA has alleged is false and misleading as it stated the debentures were secured by life insurance policies when instead they are pledged as collateral for an independent line of credit, according to the prospectus.

In addition, Savage, who oversaw 12 registered representatives across six locations, failed to establish and maintain a supervisory system that ensured his brokers are compliant with all applicable industry rules and regulations.

In particular, Savage’s supervisory lapses encompassed not establishing a system to review and hold his representatives’ written and electronic correspondence conducted with the public. This failed to achieve NASD and FINRA compliance as the system did not include a “reasonable review of the GWG sales literature, and failed to identify and follow-up on red flags related to Firm representatives’ unsuitable commendations and sales of the Debentures.”

As for Kittlaus, he also distributed the GWG brochure to prospective customers during the aforementioned period and according to FINRA, he additionally used “a false, exaggerated, and misleading letter promoting the Debentures.”

Customers of Savage, Kittlaus and/or WSSI are encouraged to contact the law firm of Blau & Malmfeldt at 312-443-1600 for a no-obligation consultation. Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.

FINRA Fines PNC Investments, LLC Following Registered Representative’s Misappropriation of Customer Funds

FINRA has issued a $100,000 fine against PNC Investments, LLC, (“PNCI”) after determining that the firm violated FINRA rules through its failure to enforce supervision systems reasonably calculated to prevent its brokers from misappropriating customer funds.

The regulatory action against PNCI comes after Burim Turkaj, a PNCI financial advisor based in Vero Beach, Florida, misappropriated funds from four customers.

Turkaj opened accounts for two of his customers and used a PNC address as the mailing address for the accounts.  Two other clients switched the address on their accounts to Turkaj’s PNC branch, at Turkaj’s instruction. All four of the clients were elderly.

Turkaj deposited $128,000 in checks payable to his elderly customers into the outside bank accounts that he had established under false pretenses.  Turkaj misappropriated an additional $362,000.

FINRA permanently barred Turkaj in April 2013 for failing to respond to a request for information.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership and shareholder rights disputes.  Contact us at 312-443-1600 to learn about the services we offer.

More Bad News for TIER REIT, Inc.

On November 5, 2013, TIER REIT, Inc. (formerly known as Behringer Harvard REIT I, Inc.) filed its report for the third quarter with the Securities and Exchange Commission.   Behringer Harvard REIT I changed its name to TIER REIT in June 2013.

TIER REIT’s recently filed 10-Q  states that shareholder equity has slid from $781 million at the end of 2012 to $773 million at the end of September 2013.  With 299,191,861 shares of stock outstanding, the book value of TIER REIT’s shares stands at $2.58 per share.

Despite this slide in book value, TIER REIT revised its estimated share value upwards from $4.01 to $4.20.  Investors should keep in mind that the estimated share value in no way reflects the market value of the shares.  There is no public market for TIER REIT shares.  The shares have recently traded on a secondary market for $1.91.

Many brokerage firms that sold Behringer Harvard REIT I/TIER REIT have urged investors to be patient and have promised that they will eventually recover a substantial portion of their investment when TIER REIT restructures itself and becomes a traded REIT.  Given the continued downward slide of the book value of TIER REIT shares, it does not appear likely that investors will ever recover a significant portion of their principal.

According to the operator of one prominent non-traded REIT secondary market – where investors can sell their shares in this company at a discount to book value — speculators have avoided TIER REIT because “it is a failed company.”

In 2012, a class-action lawsuit was filed on behalf of TIER REIT shareholders against the company’s directors and former management company.  The lawsuit relates to alleged misrepresentations concerning the value of the stock through the company’s dividend reinvestment program.  Essentially, the complaint alleges that the defendants sold stock to the shareholders through the dividend reinvestment program for $10 per share despite their knowledge that the stock was worth considerably less than this because of the company’s poor performance.

While some investors may receive something from the class-action lawsuit, investors’ best chance at achieving a meaningful recovery requires filing an arbitration action against the broker-dealer firms that sold the investment.  Many brokerage firms misrepresented the risks of this investment and concealed the massive up-front commissions and fees that both the brokerage firms and TIER REIT’s sponsor received.

TIER REIT investors are encouraged to contact the law firm of Blau & Malmfeldt at 312-443-1600 for a free initial consultation.  Blau & Malmfeldt is a law firm that represents investors across the country in securities, commodity futures, partnership, and shareholder rights disputes.

Prison Sentence for Former Next Financial Group, Inc. Broker Thomas Redmond, Jr.

Thomas Redmond, Jr., an Indianapolis-based securities broker formerly registered with the Financial Industry Regulatory Authority (FINRA), was sentenced to four years in prison earlier this year for securities fraud.  Redmond was registered with Next Financial Group, Inc., from 2007 to 2009. Prior to that, he was registered with Capital Financial Services, Inc., in Carmel, Indiana.

According to the Indiana Secretary of State, Redmond began taking his clients’ funds for personal use as early as 2004, defrauding approximately 10 clients of a total of $580,000.  Indiana’s Secretary of State recently announced that $46,000 would be returned to five investors who worked with Redmond and lost their life savings in his Ponzi scheme.

In addition to running a Ponzi scheme, it appears that Redmond defrauded other investors through his brokerage business with Next Financial.  In 2011, FINRA initiated a regulatory action alleging against Redmond claiming that he defrauded customers through the sale of high risk investments that had been approved by Next Financial.

Specifically, FINRA alleged that between 2007 and 2008, Redmond made “unsuitable investment recommendations” to a 60-year-old widow. Redmond apparently knew the widow had little investment experience, and told her to invest almost half of her funds in high risk investments without informing her of the risks. It also appears that Redmond forged the signatures of two clients on subscription agreements for Provident Royalties, LLC., without their knowledge or consent.

Brokerage firms are required to enforce supervisory systems reasonably calculated to ensure that their brokers are acting in compliance with all applicable rules and regulations.  It appears that Next Financial failed in this respect.  It is possible that Redmond’s customers may be able to recover their losses by pursuing claims against Next Financial for their supervisory failures through arbitration at FINRA Dispute Resolution.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.  Investors who worked with Redmond are encouraged to contact our law firm at 312-443-1600 to discuss their legal rights.

CFTC Files Lawsuit Against Commodity Pool Operator AlphaMetrix, LLC

On November 4, 2013, the U.S. Commodity Futures Trading Commission (CFTC) filed a fraud lawsuit against Chicago-based AlphaMetrix, LLC.  AlphaMetrix is registered with the CFTC and with the National Futures Association as a commodity pool operator, commodity trading advisor, swap firm, and forex firm.

The complaint, filed in the U.S. District Court for the Northern District of Illinois, alleges that AlphaMetrix misappropriated funds from commodity pools the firm operated and misled some of its pool participants. A federal district judge issued a restraining order on AlphaMetrix’s assets soon after the complaint was filed.

AlphaMetrix appears to have told some of its clients that it would reinvest their funds for them, but instead transferred approximately $2.8 million of those funds to its parent company, AlphaMetrix Group, LLC.  The parent company had no legitimate entitlement to the $2.8 million it received between January 1 and October 31, 2013.

The firm issued statements to its clients that reflected increases in their net asset values as if the funds had been invested properly.  If the CFTC’s allegations prove to be true, the transfers of funds to the parent company and the misreporting of customer NAVs would constitute violations of the Commodity Exchange Act.

Earlier in October, the president and CEO of AlphaMetrix Group hinted at the problem in a letter in which he admitted that the firm was facing “significant cash flow issues” and was delaying fee rebates owed to some of its clients.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership and shareholder rights disputes.  Contact us at 312-443-1600 to learn about the services we offer.

Former LPL, Berthel Fisher, and Morgan Stanley Broker James Scott McKee Pleads Guilty to Securities Fraud

On October 25, 2013, former securities broker James Scott McKee  pled guilty to nine counts of aggravated theft and securities fraud in connection with a string of customer funds thefts between 2008 and 2010.

The Financial Industry Regulatory Authority (FINRA) previously banned McKee from working in the securities industry effective October 11, 2012.  According to McKee’s FINRA records, he improperly induced customers to invest in outside real estate ventures, and embezzled money from customer accounts to pay off past investors and personal expenses.  In one case, McKee recommended that a church invest $100,000 in a risky startup real estate venture.  McKee forged company documents, including suitability and disclosure reports to further his scheme.

In June 2013, 19 investors who have suffered losses as a result of McKee’s apparent wrongdoing filed a lawsuit against Steve Master and the companies Master owns seeking $2.5 million in damages.  The lawsuit claims that Master and his companies benefited from McKee’s scheme and are therefore liable for their losses.

McKee was a registered representative of the following broker-dealer firms:  LPL Financial Corporation, Eugene, OR (11/2002 – 09/2008); Berthel, Fisher & Company Financial Services, Inc., Springfield, OR (09/2008 – 11/2010); and, Morgan Stanley Smith Barney, Eugene, OR (12/2010 – 10/2011).

Brokerage firms are required to enforce supervisory systems reasonably calculated to ensure that their brokers are acting in compliance with all applicable rules and regulations.  It appears that McKee’s former broker-dealer firms may have failed in this respect.  It is possible that McKee’s customers may be able to recover their losses by pursuing claims against these firms for their supervisory failures through arbitration at FINRA Dispute Resolution.

FINRA records show a total of 19 customer complaints have been filed against McKee’s former brokerage firms in connection with his wrongdoing.  FINRA records show that some of these arbitration claims have resulted in substantial settlements.

Former customers of McKee are encouraged to contact the law firm of Blau & Malmfeldt at 312-443-1600 to discuss recovery options.  Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.

Morgan Stanley Customers Bear All of Managed Futures Funds’ Risks but Enjoy None of Rewards

Recent articles in Bloomberg News and the Washington Post have exposed Morgan Stanley’s unfair practices in connection with both its management of managed futures funds and its sale of these investments to retail brokerage customers.

Morgan Stanley Smith Barney Spectrum Technical L.P. is an example of one Morgan Stanley managed futures fund that appears to have existed purely for the benefit Morgan Stanley at the expense of investors.

According to the Bloomberg article, Spectrum Technical raised $797 Million between 2002 and 2012 and experienced trading gains of $490 Million during this period.   Based upon this data, one would think that Spectrum Technical would have been a great investment.

Amazingly, Spectrum Technical  experienced an overall loss during this period.  This is because it paid $497 Million in fees, expenses, and commissions to Morgan Stanley and various outside commodity trading advisers, approximately $7 Million more than its trading gains.

Morgan Stanley’s brokerage/financial advisory division made massive commissions selling this product.  The general partner of the fund which reaped massive management fees — Ceres Management LLC — is a wholly-owned subsidiary of Morgan Stanley.

This investment never made any sense for Spectrum technical’s limited partners.  No rational investor receiving a fair disclosure of the skewed risk versus reward balance would have put capital at risk for the opportunity to pay any windfall in trading profits to Morgan Stanley and to commodity trading advisers in fees, commissions, and expenses.   Investors essentially gave Morgan Stanley money to gamble, Morgan Stanley won big at the casino, but Morgan Stanley gave none of the winnings back to the investors.

It appears that Morgan Stanley misled many of its brokerage customers.  Morgan Stanley apparently presented rosy charts showing how well certain managed futures funds had performed during the past two decades.  However, the effects of fees and commissions are not fairly addressed in the fund’s prospectuses.

These problems are not limited to Morgan Stanley.  According to the Bloomberg articles, 63 managed futures funds were required to report information to the SEC over the last ten years due to their size.  In aggregate, 89% of the trading profits from these 63 funds were eaten up by fees, commissions, and expenses during this period. Interestingly, BarclayHedge, a company which tracks the performance of managed futures funds, only looks at trading performance and does not keep track of the performance of funds net of fees.

Spectrum Technical is a Delaware limited partnership.  Under Delaware law, a general partner owes fiduciary duties to the limited partnership.  As a fiduciary of Spectrum Technical, Ceres Management — the Morgan Stanley subsidiary that is the general partner of Spectrum Technical — was required to put the interests of Spectrum Technical above its own interests.   By managing Spectrum Technical in such a manner that the partnership bore all of the risks, but stood no real chance of success, it appears that Ceres breached fiduciary duties.

The names of nine Morgan Stanley managed futures funds appear below:

Morgan Stanley Smith Barney Spectrum Strategic L.P.

Morgan Stanley Smith Barney Spectrum Technical L.P.

Morgan Stanley Smith Barney Spectrum Currency and Commodity L.P.

Morgan Stanley Smith Barney Spectrum Global Balanced L.P.

Morgan Stanley Smith Barney Spectrum Strategic L.P.

Morgan Stanley Smith Barney Spectrum Select L.P.

Polaris Futures Fund L.P.

Meritage Futures Fund L.P.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.  Investors in Spectrum Technical, and in other managed futures funds, are encouraged to contact our law firm at 312-443-1600 to discuss their legal rights.