The SEC is pressing large investment banks to provide more disclosure on structured notes. Surging sales of structured notes, which are often complex and hard to understand, have caused concerns about how banks are valuing the products and how they are assessing their risk.

Another problem is that investment banks often call structured notes as "principle-protected" investments. The phrase already has led to some lawsuits as the term is misleading in view of the high risk-level of the products.

Massachusetts securities regulators have found significant violations and have settled with Ameriprise Financial Services, Inc., Commonwealth Financial Network, Royal Alliance Associates Inc., Securities America and Lincoln Financial Advisors Corp. The firms will pay settlements of $8.6 million in restitution to investors and $975,000 in fines.

Complaints by investors led to findings that the firms had engaged in a "pattern of impropriety on the sales" of non-traded REITs. Among other ills, those products often are illiquid, volatile and underperforming.

Amid increasing pressure from regulators, Berthel Fisher & Co. Financial Services Inc., VSR Financial
Services Inc. and Cetera Financial Group Inc., which has four independent-contractor-broker-dealers under its umbrella, have revised policies and/or added guidelines and procedures relating to the suitability for the sale of certain alternative investments – such as private placements and non-traded
REITs.

Berthel Fisher and VSR are well-known in the independent-broker-dealer industry for their focus on selling such alternative products.  Cetera Financial Group has been an active buyer of independent broker-dealers and is widely expected to launch an initial public offering soon. 

As for VSR, it is reducing the amount of illiquid alternative investments that clients can hold in their accounts, especially for the elderly.  Now, VSR clients can have 35% of their accounts in illiquid investments instead of 40% to 50%.  Moreover, for clients who are 70 to 75, the maximum percentage of illiquid investments they can own is 25% of a portfolio.  For clients between 75 and 84, the new maximum is 15%.  Lastly, VSR will not accept orders for illiquid investments for clients 85 and older.

On May 21, 2013, LPL Financial LLC (“LPL”) agreed to pay $7.5M to settle charges it failed to adequately oversee 28 million “doing business as” e-mails over 2007 through 2013.  Further, LPL made misstatements to FINRA during its investigation of 35 separate e-mail system failures.  In addition, LPL was also ordered to create a restitution fund to compensate brokerage customers potentially affected by its failure to produce e-mail.

In particular, from 2007 to 2013 LPL’s e-mail system failed at least 35 times, according to FINRA.  LPL was unable to meet its obligations to capture e-mail, supervise its reps and respond to requests from regulators.  LPL also had no system in place whatsoever to monitor these emails.  LPL never admitted nor denied the charges.  This is the second time this year that LPL has faced significant charges about compliance and oversight of its brokers and systems.  Back in February, LPL stated it had paid a $500,000 fine and set aside $2 million in restitution to Massachusetts investors who bought nontraded REITs from LPL  brokers. 

If you are an investor who has suffered losses investing with LPL Financial LLC, and/or wishes to discuss email restitution fund recovery options, please contact one of our attorneys at 312-332-0000 to discuss your recovery options.

The attorneys at Eccleston Law Offices have expanded their investigation of Erickson Retirement Community (“Erickson”) STAMPS (subordinated tax advantaged mezzanine put securities) which were sold by B.C. Ziegler and Company. 

Specifically, Eccleston Law Offices is investigating Monarch Landing as well as The Clare at Water Tower.  According to Erickson’s website, it engages in developing and managing retirement communities for middle-income people in the United States.  The STAMPS are believed to be subordinated unsecured debt issued for the general corporate purposes of Erickson, including investments in its projects.  They carried an initial interest rate of 11% and a ten-year term. 

If you are an investor that has suffered losses investing win Erickson Retirement Community STAMPS sold by B.C. Ziegler and Company, or any other investment professional, please contact one of our attorneys at 312-332-0000 to discuss your recovery options.

On May 6, 2013, the SEC charged the City of Harrisburg, PA with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available
to municipal bond investors was either incomplete or outdated.  Specifically, an SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address.  Further, the SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. 

Unfortunately, as a result of Harrisburg’s non-compliance from 2009 to 2011, in order to obtain current information about Harrisburg’s finances, investors were required to search for city’s other public statements but very little information about the city’s fiscal situation was publicly available elsewhere.  As a result, the SEC separately issued a report on May 6^th addressing public official’s disclosure obligations and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.

According to the SEC’s order, Harrisburg’s mid-year fiscal report for 2009 was designed to provide simply a snapshot of budget-to-actual figures at the middle of the year.  This mid-year point totaled $2.3 million but the report did not reference any of the guarantee payments the city had made on the municipal resource recovery facility debt.  The SEC order mandates Harrisburg to cease and desist from committing or causing Section 10(b) of the Securities Exchange Act of 1934 violations and Rule 10b-5.  Harrisburg neither admitted nor denied the findings in the SEC’s order and in the settlement.

Brokerage firms often offer financial advisers loans, which are payments to lure advisers, and thus their clients, to the firm and keep them there.  If the financial adviser meets various performance requirements and does not defect to a rival then the loans are typically forgiven. 

The SEC requires firms to hold a significant amount of capital.  Specifically, the SEC requires one dollar for each dollar lent to protect against loan losses.  Morgan Stanley, on the other hand, holds 8 cents for every dollar lent, which is far less than its rivals like Wells Fargo and Bank of America, by moving those loans outside of the firm.  However, some executives, with knowledge of the loan structures, suggested that some firms have not moved the loans outside of the broker-dealer because doing so might draw regulatory scrutiny and would require them to rewrite thousands of client contracts.

The SEC will be more aggressive in the next couple of years with efforts to bar securities law violators from financial firms.  In particular, the SEC will use its powers under The Dodd-Frank Wall Street Reform and Consumer Protection Act to bar advisors and other financial professionals that are “bad advisors” from investment advisory firms, broker-dealers, municipal securities dealers, municipal advisors, transfer agents and credit rating agencies, the unit’s co-chief George Canellos said on
April 26, 2013. 

Before Dodd-Frank was signed into law in 2010, the SEC could only prohibit securities law violators from working in the kind of entity where they worked at the time of the infraction.  Now, under Dodd-Frank, the SEC is able to impose “collateral bars,” which prohibit a violator from associating with firms in other parts of the financial industry.  The SEC enforcement division has already instituted many such bars.

Matt Degenhart (“Degenhart”) recently agreed to settle a FINRA enforcement action in which the offense oddly addresses the underlying facts.

According to the Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted, the facts are as follows.  In August 2012, one of Degenhart’s clients complained to him that she was not earning any interest on deposits in her checking account and needed money to cover upcoming legal
expenses.  The AWC asserts that in response Degenhart advised the customer against investing her checking funds in stocks.  On the other hand, Degenhart allegedly suggested that she give him the funds on deposit in her checking account, and he would “help her earn a little more interest on it than she currently was receiving.” 

LPL Financial (“LPL”), the nation’s fourth-largest brokerage firm and the largest in much of rural
America, is growing in size and, unfortunately, in its list of problems with regulators.

As LPL has expanded, state and federal authorities have censured the company and its brokers with unusual frequency, as demonstrated by recent New York Times article.  Among other complaints, regulators penalized LPL brokers for selling complex investments to unsophisticated investors, for speculative trading in customer accounts, and, in a few cases, for outright stealing from clients.  In the last year and a half, state regulators in Illinois, Massachusetts, Montana, Oregon and Pennsylvania have penalized LPL for failure to oversee its brokers properly.  Surprisingly, LPL’s brokers have faced the most common industry reprimands, and have done so more frequently than even its larger competitors (Wells Fargo, Morgan Stanley and Merrill Lynch).