Protecting Investors - Securities law attorneys investigating financial fraud and Wall Street misconduct involving Lehman Brothers, non-traded REITs, bonds, ETFs

Wells Fargo Advisors Steer Retired Naples Couple to High Risk Products and Steep Losses

Wells Fargo Advisors committed financial wrongdoing that resulted in significant losses to the retirement nest egg of a Naples couple, according to a claim filed with the Financial Industry Regulatory Authority by Vernon Healy, a national investor advocacy law firm. 

The claim asserts that advisors for Wells Fargo took the bulk of the retired couple’s conservative investments and replaced them with much riskier investments -- some of them Wachovia Securities products -- that were unsuitable for the couple’s age and risk averseness. The much riskier investments were not in line with the couple’s main goal: to protect their retirement nest egg.

Following long professional careers, the couple looked forward to what they believed would be a comfortable retirement. Most of their investments were in low risk mutual funds. However, as the economy began to decline in late 2007, the couple sought what they thought would be professional investment advice from the then Wachovia Securities, now Wells Fargo Advisors.

The couple made it clear that protecting their irreplaceable nest egg was their top priority. Despite the demand for a conservative approach, Wells Fargo advisors immediately sold the couple’s secure investments that were reaping reasonable returns, causing immediate losses to their portfolio due to the market’s fall.

The advisors then placed much of the couple’s nest egg in risky products, many of them from the financial sector, including Wachovia products, which led to significant losses for the couple in a matter of a few months.  For example, Wells Fargo Advisors recommended and sold the retired couple General Motors notes just two months after GM had reported operating losses of $39 billion. Wells Fargo Advisors further jeopardized the couple’s retirement future by recommending an interest only mortgage for their home rather than paying cash for it. The interest-only mortgage further encumbered the couple’s principal investment because the loan required them to keep a collateral account open with a minimum balance of more than $720,000 and relinquish control of it to Wells Fargo Advisors.

Over the course of just 10 months, Wells Fargo Advisors effectively tripled the amount of exposure the retired couple had to the volatility of the market and caused irreparable losses to their retirement nest egg, according to the claim that seeks at least $400,000 in damages.

Vernon Healy is a Naples, Florida-based law firm that represents investors nationwide who are victims of securities fraud, stock fraud and stock losses due to broker fraud and brokerage fraud. Vernon Healy attorneys have decades of experience in securities arbitration and litigation matters. The firm assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. Vernon Healy focuses its practice on complex financial litigation and arbitration as well as business and commercial litigation.

Forex brokerage firm fine shows regulators failing investors

Foreign-exchange brokerage FXCM Inc., which deals with retail investors, paid a fine to regulators due to complaints that it was cheating customers with respect to getting the best trade prices available. (See Wall Street Journal) The details of this settlement provide more evidence of how regulators are simply failing investors.  

In the settlement, FXCM was not required to admit any wrongdoing and the benefit to investors will be about $17 per customer, i.e. less than the cost of popcorn and a movie at your local movie theatre. Although regulators are working on more safeguards for retail currency investors, as well as futures and stock investors, additional regulation will not solve the problem without aggressive policing and enforcement of existing or new regulations by the regulators.

The perils of investing with retail FX brokers are already significant, with only one in four investors make money. The additional hurdle of dealing with an unethical or incompetent brokerage firm ads to these risks. 

-- Chris Vernon, founding partner of the Vernon Healy law firm

Vernon Healy Securities Attorneys: Investors can't rely on government regulators to police Wall Street

As touched on by Gretchen Morgenson yesterday in her story “AIG to Sue Bank of America over Mortgage Bonds,” investors are not able to rely on government regulators to police Wall Street and other major financial institutions. 

As a result, they must go out and hire private lawyers to not only prosecute, but also investigate these deceptive business practices and frauds being perpetrated by the financial industry.   

The problem of weak regulatory and enforcement action is even more of a problem when it involves the pseudo-private regulator known as FINRA. 

Unlike the SEC and state regulators, which are subject to freedom of information and open government laws, the fruit of FINRA’s investigations are largely withheld from investors and their private attorneys. This is significant because when the SEC or a state regulator punishes a brokerage firm far more lightly than it should, at least private investigators can access much of the evidence of wrongdoing through the regulator.  

In stark contrast, FINRA does not consider itself a government agency with respect to making information publicly available from investigations that result in paltry fines (For example, see my blog post “FINRA fine of UBS for Lehman notes deception is woefully weak.” 

In other words, FINRA effectively refuses to share the evidence of its investigation with the investors it claims to support.   This is especially disconcerting given the new move in Washington to transfer much more financial industry oversight to FINRA. 

Contact Chris Vernon, founding partner of the Vernon Healy law firm, at 239-649-5390. Vernon Healy represents investors and businesses in arbitration and litigation involving all manner or fraud and financial and investment disputes. 

 

Vernon Healy and Dovin Malkin & Ficken: GenSpring under investigation for hedge fund investments sold as conservative bond substitutes

Naples, Fla. – The investor rights law firms of Vernon Healy and Dovin Malkin & Ficken have come together to launch a nationwide investigation of GenSpring Family Offices, formerly Asset Management Advisors (AMA), a wealth management firm that caters to high net worth individuals and families. Read more...

Limits needed on mandatory arbitration agreements: Give investors the power to choose again

Arbitration clauses in contracts between broker-dealers and investors have been the norm for more than 20 years. In 1987, a split and divided decision by the United States Supreme Court in Shearson/American Express v. McMahon determined that mandatory arbitration agreements between investors and financial institutions are enforceable. Since then, passionate debates have developed over the fairness of the arbitration process. But new legislation gives the SEC the opportunity to dramatically limit the use of mandatory pre-dispute arbitration clauses in customer agreements. A decision from the SEC is expected soon.

An action to ban or limit mandatory arbitration agreements could be one of the most important investor protection actions since the enactment of the Securities and Exchange Act in 1934. Banning or limiting mandatory arbitration agreements would finally level the playing field on behalf of investors who have been forced to pursue their claims in arbitration as opposed to an open court of law.

Financial institutions across the country are required to be members of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization.  FINRA has jurisdiction and authority to supervise and discipline firms that violate its SEC approved rules. However, unlike the SEC, FINRA is a private company. FINRA’s board of governors is comprised largely of members of the securities industry, and their annual meetings are closed to the public. Equally troubling is the fact that FINRA, the organization in charge of overseeing arbitration disputes between securities firms and investors, is financed by the securities industry.

In 2008, FINRA collected more than $610 million in broker-dealer member fees alone. For 2009, its unaudited revenue rose to more than $755 million. This relationship between FINRA and broker-dealers creates an enormous conflict of interest because securities broker-dealers impose mandatory FINRA arbitration agreements on their customers. When customers file a claim, the broker-dealers — who directly finance FINRA — force the dispute into a FINRA operated arbitration rather than court. Supreme Court Justice Blackmun warned of this conflict of interest in his dissent for the McMahon case more than twenty years ago with the following comment: “Compelling an investor to arbitrate securities claims puts him in a forum controlled by the securities industry.”

Until now, courts have regarded pre-dispute mandatory arbitration agreements as binding contracts over which the SEC has no authority. However that changed on July 21, 2010 when President Barack Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act. This comprehensive legislation overhauls many regulations in the financial sector and empowers the SEC to impose significant restrictions on mandatory arbitration agreements. The Act deals with mandatory arbitration provisions in two ways.

First, this Act successfully amends Section 15 of the Securities Exchange Act of 1934, giving the SEC the power to restrict or prohibit mandatory arbitration agreements. The SEC has yet to write a new rule, however, it is safe to say that the SEC will affect substantial change unless it buckles to Wall Street pressure as it has in the recent past.  

Second, the Act mandates the creation of the Consumer Financial Protection Bureau (CFPB).The Bureau will enforce consumer protection laws and stay current on emerging trends of abuse across the financial sector. Among other things, the Bureau is required to conduct a study on the use of mandatory arbitration agreements and report to Congress. The Act gives the Bureau authority to impose limitations on arbitration agreements based on its findings. This means that if the SEC does not have the will to change the rule on mandatory arbitration agreements, the CFPB will have the power to do so.

In anticipation of the likely SEC rule changes, certain financial institutions are starting to show some flexibility regarding investor agreements. For example, a spokesman for Wells Fargo Advisors told the San Francisco Chronicle that “if the client, during the account-opening process, indicates they will prefer to have that [arbitration] clause excluded, we will exclude it if they ask.” However, neither FINRA nor the brokerage firms inform investors that few financial institutions give this option. Investors should be made aware of this, and they should exercise the option to remove arbitration provisions from the contract.

Removal of the arbitration clause does not limit the customer’s choice of forum. FINRA Rule 12200 states that brokerage firms must arbitrate a dispute if the customer requests it. This means that investors would have the right to choose between arbitration and court litigation; a choice that needs to be placed back in the hands of investors, not broker-dealers.  

Christopher Vernon is a Naples-based attorney with the law firm Vernon Healy.  He advocates for the rights of investors throughout the United States and abroad—both in and out of the courtroom and arbitration hearing room. Vernon Healy represents investors in all manner of securities fraud including fraud and brokerage misconduct related to principal protected notes, structured products, Lehman notes, reverse convertibles, REITs, non-traded REITs, hedge funds, bonds, fixed-income products and others.

This article was co-written by Victor Bayata, also with Vernon Healy.

SEC Finally Approves FINRA Rule on All Public Arbitrator Panel

One week ago, the Securities and Exchange Commission (SEC) approved a FINRA rule that will now allow investors the opportunity to select a panel composed entirely of public arbitrators, also known as the “All Public Panel Rule.”

The proposed FINRA Rule was published for comment in the Federal Registry in November of last year, and finally approved on January 31st. The SEC received 125 comments from attorneys from all over the country; including Vernon Healy’s founding partner Susan Healy. Ms. Healy addressed the SEC on the issue and pointed out:  “For years, the cards have been stacked against the consumer before the case even begins, due to the FINRA requirement that one of the three arbitrators deciding the case must be a member (or former member) of the very industry about which the consumer is complaining.”

The new FINRA Rule allows customers the flexibility to weigh in on several factors and determine with their attorneys whether to choose an all public panel, or, in the alternative, to have two public arbitrators and one industry arbitrator. “If securities industry arbitration is to have any chance of producing fair results, worthy of public confidence in the system, all investors must have the same opportunity to have their cases decided by a panel that is not tainted by such an obvious, and easily remedied, source of bias,” Attorney Healy points out.

Vernon Healy, along with other investors’ rights attorneys and customer advocate organizations, has consistently argued in favor of giving the consumer the ability to select arbitrators from a pool that has no conflict of interest with the Securities Industry. “This is a step in the right direction” said Ms. Healy. “As an attorney who has litigated securities claims filed both in the courts and in arbitration, I strongly support the Rule change as a first step in correcting the fundamentally flawed securities industry arbitration process.”

Vernon Healy is a Naples, Florida-based law firm that represents investors nationwide who are victims of securities fraud, stock fraud and stock losses due to broker fraud and brokerage fraud. Vernon Healy attorneys are experienced in securities arbitration and litigation.The firm assists clients attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as business and commercial litigation.

Financial reform: SEC needs to make sure fiduciary duty applies to all stockbrokers and financial advisors, not just registered investment advisors

For decades, financial institutions have purposefully blurred the distinction between stockbrokers and investment advisors to the point that most investors believe those designations mean the same thing.

More than two thirds of the investors in the United States have the mistaken belief that stockbrokers hold themselves to the same fiduciary standards – including a commitment to always put the interests of the client first – as registered investment advisors.   These mistaken beliefs have troubling consequences for investors, and the Dodd–Frank Wall Street Reform and Consumer Protection Act should lead the SEC to promptly solve this significant problem. As discussed below, the SEC needs to clearly establish that fiduciary standards apply to all investment professionals. Read more...

SEC charges against Schwab track claims prosecuted for investors by Vernon Healy and former SEC lawyer Thomas Shine

Charles Schwab’s $119 million settlement on Tuesday of fraud charges with the Securities and Exchange Commission in connection with the Schwab YieldPlus Fund provides additional ammunition for jilted fund investors and may begin to close an ugly chapter for Schwab. 

Investors rights attorneys Christopher Vernon, of Vernon Healy, and former SEC lawyer Thomas Shine, in conducting their sweeping investigation of fraud and misconduct involving the Schwab YieldPlus Fund on behalf of investors nationwide, uncovered and long ago publicly exposed much of the most egregious conduct that formed the basis of SEC charges.

Without admitting or denying wrongdoing, Schwab agreed to pay $119 million to settle SEC charges that Schwab:
-- fraudulently misrepresented the safety of the YieldPlus bond mutual fund to investors;
-- failed to prevent abuse of inside information;
-- and violated securities laws by changing the YieldPlus Fund’s investment concentration policy without a required vote of shareholders. 

The settlement announced Tuesday comes in addition to $235 million that Schwab agreed to pay to settle a federal class action lawsuit as well as separate payments and settlements connected to legal claims brought by individual investors in arbitration.

Many of the SEC charges filed Tuesday track closely the allegations filed in investor claims made public by Vernon and Shine in 2008 and 2009. Some of these investigative findings were made public on the Vernon Healy blog, ProtectingInvestors.com.

The Shine Vernon legal team long ago publicly exposed key investigative findings including that:

-- Schwab’s senior management changed the Schwab YieldPlus Fund’s investment policy in September 2006 to allow for a higher concentration in riskier mortgage-backed securities and asset-backed securities, without obtaining shareholder approval or clearly disclosing this major shift to investors;   
 
-- Schwab embarked on a self-dealing “damage control” marketing campaign to avert redemptions of Schwab YieldPlus by Charles Schwab retail clients, while behind the scenes Schwab executives were quietly selling 2.9 million Schwab YieldPlus Fund shares from other Schwab proprietary mutual funds during the period January 31, 2008 to April 1, 2008. Marketing materials, newsletters, talking points, and other investor communications by Schwab managers urged unwitting Schwab retail clients to hold their shares.
 
-- Schwab ignored the warnings of securities and banking regulators about the risky
nature of mortgage-backed securities and collateralized mortgage obligations, including warnings to refrain from deceptive advertising of such securities and comparisons to certificates of deposits;
 
-- In SEC filings and direct communications with shareholders and prospective investors, Schwab misrepresented the Schwab YieldPlus Fund as an ultra short-term bond fund.  In reality, the fund was heavily weighted with floating and variable rate bonds with long-term maturities, which gave the fund a weighted average maturity equivalent to a much longer term bond fund. During the second half of 2007 and in 2008, when the fund was declining in value, these misrepresentations created the false illusion that if investors held on to their positions for the next six months to a year, the bonds held in the fund’s portfolio would mature at face or par value and the fund and its shareholders would recoup their unrealized losses.
 
-- Unlike its peers in the Morningstar ultra short bond fund category, the Schwab YieldPlus Fund failed to maintain adequate cash on hand to meet investor redemptions.  Schwab YieldPlus Fund had little cash, while its peers in the ultra short-term bond fund category averaged 27 percent of their positions in cash.  As more and more investors sought to sell their shares, Schwab’s lack of cash forced it to sell illiquid securities held in the portfolio at distressed prices.

The funds’ high concentrations in risky and mostly illiquid securities exposed investors to the risk of substantial losses of principal.

Gina Edwards & Associates LLC private investigative agency contributed to Vernon and Shine’s investigation, uncovering that Schwab changed the YieldPlus Fund concentration policy without shareholder approval in violation of the Investment Act of 1940, among the key charges leveled by the SEC Tuesday and first disclosed publicly by Shine and Vernon.

Shine and Vernon were also the first attorneys to file an investor claim naming Schwab YieldPlus Fund manager Kimon Daifotis as a respondent. One day after Vernon and Shine filed the claim against Daifotis in June 2008, Schwab announced that it had replaced Daifotis as the fund manager of YieldPlus.

Chris Vernon is a founding partner of the Naples, Fla. based law firm Vernon Healy, which represents investors throughout the United States. Shine, a former enforcement attorney with the Securities and Exchange Commission in Washington, D.C., is in private practice in the Melbourne, Fla. area.     

 

Business Owners Beware of Tax Shelter Pitches

Companies considering insurance plans that offer significant tax benefits should be on their guard.  Negligent and unscrupulous tax shelter promoters could leave them – as they left a pair of Tampa small business owners — facing back taxes, fines and fees from the IRS as well as expensive and unnecessary insurance.

When properly designed and administered, Section 419 plans —so named because the law regarding them is found in Section 419 of the Internal Revenue Code — allow businesses to contribute tax deductible funds to a trust in order to provide certain tax-free benefits for business owners and their key employees. Benefits allowable under a properly created and implemented Section 419 plan may include health insurance premiums, uninsured medical care, long term care and death benefits.

Retirement income is never allowed as a benefit under a 419 Plan. But insurance agents holding themselves out as “retirement planning specialists” peddling “alternative investments” often lure small business owners into buying very high-commission life insurance policies with false promises, including promises of tax-free investment income.

According to an ongoing lawsuit filed by Vernon Healy on behalf of small business owners, one such Section 419 plan funneled retirement savings through a life insurance policy. These business owners were told at the time they agreed to buy the policy – from those who stood to benefit substantially from the sale — that they could reduce or even skip their annual contribution without affecting benefits. It turned out that they were, in fact, required to make a substantial minimum contribution each year or lose their entire investment.

Because of the volatility of the business they are in, the owners would never have agreed to a plan that did not allow flexibility in its contributions. But that was only the initial hardship and headache that came as a result of the advice given them.

In addition, the premiums paid for cash value life insurance policies as part of the plan were not tax deductible under the Internal Revenue Code since they were used to fund retirement income. That is true for Section 419 plans even if the funds are run through a so-named “welfare benefit plan,” as was the case for these business owners. So in addition to being responsible for a large annual contribution, the owners were also on the hook for the back taxes due for those contributions as well as fines and penalties from the IRS.

The tax collecting agency has recently become more aggressive in its pursuit of fraudulent tax shelters, even when the owners of those shelters have been misled.

Vernon Healy’s clients were not warned of the possibility of such a devastating scenario. In presentations made in their own offices, the business owners were led to believe that: contributions to the plan were fully tax deductible, contribution amounts were flexible, the plan provided safety of the initial investment, the benefits were tax free, the plan provided retirement income and the plan could be terminated at any time.

To the contrary, even after the IRS declared the plan to be an illegal tax shelter, the 419 plan administrator refused to shut it down unless the business owners paid a hefty “termination fee.”  

Vernon Healy is a Naples, Florida based law firm that assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as business and commercial litigation.

For more information, contact:

Susan Healy, attorney at law

Christopher T. Vernon, attorney at law

http://www.vernonhealy.com
http://www.protectinginvestors.com

High Interest Junk Bonds Next Scam for Investors

It is a scene that has repeated itself many times on Wall Street to the dismay of all but the profiteers. Financial advisors are once again leading unsuspecting clients to potential financial ruin while reassuring them that their money is safe. This time the product is junk bonds, and already the red flags are waving.

Just as with many products sold to main street investors just before they implode, junk bonds and similar products have recently performed very well for savvy speculators who invested in them when they were much undervalued. The results those investors enjoyed provide fuel for the sale and issuance of the next wave of bonds that are not under-priced and not likely to achieve the same good results. And much if not all of the risk remains.

Retirees and other Americans who have seen their incomes decline in the last year or two while their expenses remain the same are often the targets of financial advisors hawking junk bonds. Retirees have watched their incomes drop through falling interest rates and eroding principal on their investments. Working Americans have seen pay decreases.

To these investors, who now fear the risks of the stock market, high interest bonds, private REITS and structured notes appear to answer their need for income without significant risk. But despite the optimistic sales pitches for — and the enthusiasm with which these products are being issued and sold by those who benefit from their sale — they carry significant and often under-disclosed or undisclosed credit and liquidity risks.

Making the sales of these risky products easier for unscrupulous financial advisors is the dual misperceptions that bonds are safer than stocks and that past results are indicators of future results. Junk bonds and similar products are also being sold based on the misperception that banks are not lending, and the loans these bonds represent are the types of loans that banks would make in “normal” times. This sales pitch is flawed in many ways.

As noted recently in the blog Butthenwhat.com :
The talk about a lack of credit to small and medium sized businesses retarding recovery has been largely based on opinion or at best anecdotal evidence. Fortunately, the Atlanta Fed has taken a stab at testing the hypothesis and they come up with some results that call into question the conventional wisdom.

Although there were significant statistical limitations to the Atlanta Feds survey, it concluded that “most going concerns have been able to obtain all or most of the credit they need. What they don’t have are customers.”

Not only is the sales pitch that the credit markets remain frozen a flawed one, so too is the suggestion that these are loans that well-run banks would make in “normal” times. This is highlighted in the recent Wall Street Journal article “Yield Junkies Return to Bond Market.

According to the Journal, companies considered dead a year ago are issuing debt; private, equity-backed businesses are paying dividends using new bond issues called dividend recapitalization deals and others are repaying their existing debt so they can push back maturing debt. But unlike borrowing from banks, the loans from Main Street to these companies via junk bonds “lack the restrictive covenants of loans, which often require minimum liquidity levels, restrictions on spending and other operational metrics,” according to the Journal. 

Investors should consider the motivations of the issuers and salespeople who are offering them junk bonds and step back and reflect on what they are doing to get a better return on their investments. They should consider that they are loaning money to a company that may very well be using it to cash out professional investors who came in and bought a troubled company on the cheap. These companies may be using investors’ money to pay off professional lenders, the very lenders who are no longer comfortable loaning these companies money.

Vernon Healy is a Naples, Florida based law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage fraud. Vernon Healy attorneys are experienced in securities arbitration and litigation. The firm is currently representing multiple Lehman structured product investors in FINRA arbitration as well as clients who have been unable to liquidate non-traded REITs, or private REITs.

The firm assists clients attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as business and commercial litigation.

For more information, contact:
Christopher T. Vernon, attorney at law
Susan Healy, attorney at law
(239) 649-5390
Toll Free: (877) 649-5394
email:  info@vernonhealy.com

Naples, Florida