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

FINRA effort to prevent Schwab from further hobbling the rights of retail investors is not enough

Vernon Healy — Fri, 01 Mar 2013 11:37:36 -0800

While we applaud the Financial Industry Regulatory Authority’s (“FINRA”) effort this week to appeal the recent arbitration decision denying FINRA’s right to prevent Schwab—and other brokerage firms—from using customer agreements to bar class action claims, we are concerned it is “too little, too late” in terms of protecting the rights of investors.

Clearly, Schwab’s efforts to limit investors’ rights—which will likely be mirrored by other brokerage firms—is contrary to the best interest of investors. Last year, Charles Schwab Corp. introduced the highly touted change to its 8.8 million investor agreements that prohibited class action lawsuits and prevented the consolidation of arbitration cases. The change to the customer agreements was considered to be against FINRA Rules, a fact that FINRA itself re-affirmed when it brought a Claim against Schwab citing violation of its rules. However, in a surprising twist, the violated rules themselves have now been called into question as the arbitrators concluded that FINRA Rules may be contrary to the Supreme Court’s fairly recent interpretation of the Federal Arbitration Act. See AT&T Mobility LLC v. Concepcion 131 S.Ct. 1740 (2011).

Schwab’s motives to limit exposure to class action lawsuits and consolidated arbitration claims are highly questionable in that it further reduces investors’ options for seeking restitution. We believe the reality is that Schwab’s investor agreement modification resulted from its YieldPlus debacle. Specifically, in 2010, Schwab was forced to pay hundreds of millions of dollars to thousands of investors who invested in Schwab’s own Schwab’s YieldPlus Bond Fund, which suffered losses in excess of $800 million. The YieldPlus Fund was sold by Schwab as a cash alternative, but actually had heavy concentrations of risky and potentially illiquid mortgage backed securities.

The decision by FINRA’s review board that FINRA rules regarding arbitration and class action lawsuits violate the Federal Arbitration Act has the potential to further limiting the investor’s ability to seek redress from Wall Street. This is on the heels of ineffective regulatory implementation of many investor protection components of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the law introduced by congress in the aftermath of the most recent financial crisis. Specifically, this federal legislation empowered the Securities and Exchange Commission (“SEC”) and other regulators to fix some of the problems found within the FINRA arbitration system. However, largely due to the lobbying power of Wall Street, there has been little done to correct any issues relating to the protection of retail investors.

Particularly, among the powers given to the SEC by the Dodd-Frank Act, is the power to reform or prohibit arbitration requirements. As a result, securities regulators could simply make arbitration optional for the customer (which is how the FINRA rules are written) and prevent this gamesmanship by the brokerage firms. This would take away the “big brother” attitude of most brokerage firms that they force arbitration for the “good” of the customer/investor (Schwab contends that the change made to the Agreement was intended to be an affirmation of its belief that arbitration is a “more effective mean of dispute resolution”). The choice to file a Claim either in court or in arbitration would allow investors to make their own decision in regards to the forum. As a result, we believe that over time the arbitration system would become fairer by necessity if it wanted to insure its own survival (i.e., investors would only choose arbitration if they truly felt it was a fair alternative to court that was faster and less expensive).

Investors Should Read all Risks and Expenses Relating to Investing in Variable Annuities

Vernon Healy — Thu, 24 May 2012 10:05:28 -0700

In recent years, variable annuities have been increasingly pitched by brokers and insurance agents as an important part of the retirement plan of many investors in the United States. In fact, many of the features heavily advertised by advisors are what persuaded thousands of Americans to invest in these products, especially senior citizens. However, once variable annuities are carefully analyzed, it is clear that many of the features that are heavily promoted are misleading. Investors can find themselves locked in an investment that produces little or no economic benefit.

Variable annuities are being pitched as “guaranteed investments” with great features, including the possibility of a “guaranteed lifetime withdrawal benefit.” In fact, approximately half of all financial advisors with Series 6 or Series 7 licenses and an insurance license are now recommending variable annuities for their clients.

A variable annuity is a contract where an insurance company guarantees a minimum payment to the investor. The timing on the payments will depend on the actual terms of the particular variable annuity purchased. The variable annuity prospectus lays out all the fundamentals of which investors should be aware. A fundamental feature of all variable annuities is the selection of funds or so-called “subaccounts.” These subaccounts are where the investor’s money will be invested. Other common denominators of all variable annuities are the commissions and fees that are built into the product’s design.

Sadly, variable annuities are some of the most fee-loaded investments out there. Investors need to be aware of these upfront commissions and on-going fees before they decide to invest in these products. Initial commissions for variable annuities vary, but they range between 2 and 6 percent. In addition, other added fees may diminish or extinguish any potential benefit that was pitched to the investor in the first place. Last year, the Securities and Exchange Commission posted on its website a section explaining some of these fees.

The SEC also offers other tips and information investors should consider before investing in a variable annuity. The SEC variable annuity article highlights some of the fees investors will be responsible for, including:

• Mortality and expense risk fee: This fee is based on a predetermined percentage of the investor’s account value, which usually ranges between 1 and 2 percent. This fee is set in place by the insurance company to offset the purported risks it assumes under the annuity contract. This fee is also usually deducted from any income percentage guaranteed to the investor.

• Surrender fees: If money is withdrawn within a certain period of time after a variable annuity purchase — for example the surrender period — the insurance company will charge investors what’s known as a surrender fee. In most instances, the surrender fee is a percentage of the amount an investor decides to withdraw. Since the surrender period can last anywhere from 6 to 10 years or more, investors who can be greatly affected by surrender fees are senior citizens and investors who unexpectedly need access to their money.

• Administrative fees: This fee is designed to cover all administrative expenses, and it’s based on a percentage of the account value, which can vary greatly depending on the variable annuity purchased.

• Subaccounts fees and expenses: These fees are usually charged by mutual funds and other investment vehicles in which the annuity will be investing through the subaccounts. These costs are directly passed on from the insurance company to the variable annuity holder.

• Fees for other optional add-ons: There are extra fees charged by the insurance company associated with extra options like stepped-up death benefit, a guaranteed minimum income benefit, long-term care insurance, and others. These charges will vary greatly, depending on the specific options selected by the investor.

Investors should also be aware that annuities are taxed differently than other tax-deferred vehicles. Although it is true that by investing in a variable annuity all potential gains generated in the “subaccounts” go untaxed — unlike most regular mutual funds — all gains remain untaxed only while in the annuity.

But perhaps the most crucial factor about variable annuities is that all withdrawals are taxed as ordinary income, not as long-term capital gains. Long-term capital gains are taxed at 15 percent and ordinary income can be taxed as high as 35 percent depending on the investor’s income. In other words, all gains reflected from a variable annuity investment will be taxed up to 20 percent more than all gains reflected from a mutual fund investment or a 401(k) plan.

As mentioned above, many variable annuities are sold with what’s commonly known as a “guaranteed lifetime withdrawal benefit.” However, what many investors are unaware of is that the lifetime withdrawal benefit is subject to the fees described above. Consequently, when an investor is promised a pre-determined percentage guaranteed payment for life, all fees and expenses will be deducted from that pre-determined percentage before distribution. In other words, instead of receiving the misconceived pre-determined percentage, investors end up receiving a severely reduced percentage, which is not anticipated by investors up front.

Investors should be mindful that there are other tax-deferred vehicles that may be more effective and more suitable for their needs. For example, depending on the investor’s current situation, electing to make the maximum allowable contributions to an IRA or 401(k) plan may be a more suitable option than purchasing a variable annuity. Before investors decide to invest in a variable annuity, they should be prepared to ask several due diligence questions of their insurance agent or financial professional about the above described fees, commissions, and expenses and then determine whether a variable annuity is right for them.

Vernon Healy: Wells Fargo misrepresented safety of $4 million in high risk auction rate securities sold to elderly Naples client

Vernon Healy — Fri, 20 Apr 2012 11:45:46 -0700

Naples, Fla. — Wells Fargo sold $4 million in risky auction rate securities to an elderly Naples man — representing almost half his portfolio — after the auction rate securities market had already frozen in early 2008 and securities regulators had taken steps to halt the deception and misleading marketing in the auction rate arena, according to a claim filed by the Vernon Healy investor advocacy law firm.

Thousands of investors still hold an estimated $100 billion in frozen auction rate securities and many could be forced to hold them to maturity or sell at a steep discount on the secondary market in the fallout from the financial crisis, according to the claim.

The investor, an elderly retired airline pilot and golf course investor, is now deceased. His daughters, both of whom are in their 60s, are seeking compensatory and punitive damages against Wells Fargo, whom they claim fraudulently billed the auction rate securities as safe “cash equivalents.” The daughters have been unable to liquidate $1 million of the auction rate securities because selling on the secondary market would force a steep loss of principal, the claim states.

Most of the auction rate securities purchases occurred after the auction rate securities market effectively froze in February 2008, and long after Wells Fargo knew that there were liquidity concerns, the claim states. State securities regulators, including the Florida Office of Financial Regulation, announced the formation of a multi-state task force to investigate fraudulent misrepresentations of auction rate securities in sales to investors in April 2008 — a month before Wells Fargo sold the $4 million in auction rate securities to the elderly Naples investor — according to the claim.

“The liquidity problems … culminated in early 2008, when hundreds of ARS auctions failed and the ARS market virtually collapsed; over $300 billion became illiquid in just a few months,” the claim states. “To date, more than $100 billion continue to be frozen, and thousands of retail investors cannot dispose of their ARS unless they wait until they mature or, in the alternative, sell them on the secondary market at a deep discount.”

Wells Fargo, then Wachovia, entered into a consent agreement with the Florida Office of Financial Regulation on April 17, 2009, in which the regulators found that Wells Fargo “fostered the misconception that ARS were cash-like instruments by providing account portfolio summaries to certain of its customers that listed ARS as cash equivalents,” the claim states.

Florida’s Office of Financial Regulation found Wells Fargo in violation of Florida Statutes Chapter 517 and fined Wells Fargo more than $5.6 million for dishonest and unethical practices as well as failure to supervise its employees, the claim notes.

Vernon Healy securities attorneys represent investors in all manner of securities fraud and financial negligence.

For more information, contact:

Chris Vernon
Vernon Healy
(239) 649-5390
www.vernonhealy.com

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

Vernon Healy — Thu, 26 Jan 2012 06:58:54 -0800

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

Vernon Healy — Thu, 18 Aug 2011 02:12:23 -0700

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

Vernon Healy — Tue, 09 Aug 2011 13:51:41 -0700

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

Vernon Healy — Tue, 24 May 2011 06:34:01 -0700

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

Vernon Healy — Mon, 28 Feb 2011 12:05:54 -0800

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

Vernon Healy — Mon, 07 Feb 2011 06:56:37 -0800

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

Vernon Healy — Fri, 21 Jan 2011 14:27:30 -0800

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...