A New Option for Resolving Investment Fraud Disputes

The following article was written by Laurence M. Landsman and published in the July, 2013 issue of the Illinois State Bar Association's Business & Securities Law Forum.

       Investment fraud is ubiquitous, and results in losses measured in billions of dollars. The recent financial crisis in the United States exposed a growing number of investment fraud schemes perpetrated against unsuspecting investors. In 2010, the Federal Bureau of Investigation, along with several other federal agencies, initiated a sweep known as Operation Broken Trust that focused on scams directly targeting individual investors. The four-month, groundbreaking investigation identified 120,000 victims of investment fraud who lost more than $8 billion due to various fraudulent investment schemes.

       Aggrieved investors who pursue damage claims against their investment advisors typically do not have a choice of forum to pursue their cases. Claims against brokerage firms, which are regulated by the Financial Industry Regulatory Authority (FINRA), uniformly require disputes to be arbitrated through FINRA’s dispute resolution process. In contrast, actions against registered investment advisory firms (RIAs), which are regulated by the SEC or its state equivalents, are generally subject to lawsuits in court. As a result, investors pursuing these investment fraud claims have, historically, faced unavoidable disparities in the expense and complexity of bringing securities fraud cases based only on whether their advisor is regulated by FINRA or by the SEC. 

       While the differences between the two forums endure, some investors now have a choice to resolve their investment fraud disputes in arbitration or in court.  In November 2012, FINRA announced that its arbitration forum would be available to administer investor claims against non-member firms on a voluntary basis. Attorneys considering whether to litigate claims against RIAs in FINRA arbitration rather than in court need to consider the significant differences in the costs, the availability of discovery, and the nature of the hearing on the merits.  This article offers practical guidance to lawyers deciding the appropriate forum for resolution of investment disputes against RIAs and their advisors.

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SEC Charges City of Miami with Securities Fraud

The U.S. Securities and Exchange Commission (SEC) has charged the City of Miami with violating a 2003 cease-and-desist order concerning the fraudulent sale of municipal bond offerings.  

According to the complaint, the City and its former Budget Director, Michael Boudreaux, made materially false and misleading statements while raising approximately $153.5 million from the investing public through several bond offerings in 2009.   The SEC alleges that the City and Mr. Boudreaux failed to disclose, among other things, inter-fund transfers of $37.5 million from certain City funds into its General Fund in order to mask increasing deficits in the General Fund.  The failure to disclose the surreptitious transfers during a period when the City was actively marketing bonds to investors was fraudulent, according to the SEC, because the City’s General Fund is deemed by investors and bond rating agencies as a key indicator of financial health.   As a result of the transfers, the City’s bond offerings were rated favorably by credit rating agencies.

The SEC’s complaint is particularly noteworthy because it represents the first time the agency has sought injunctive relief against a municipality that is already under an existing SEC cease-and-desist order.  In 2003, the Commission obtained an order against the City for violation of federal securities laws in connection with bonds issued in 1995.  Despite the existence of the prior order, the SEC asserts that the City “has gone on to violate these same provisions again – this time in connection with three bonds the City issued in 2009.”

Investors who purchased City of Miami municipal bonds in 2009 on the basis of misrepresentations and omissions of material fact should contact the experienced securities fraud attorneys at Block & Landsman for a free and confidential consultation.

Scottrade Fined by FINRA for Allowing a CFO to Perpetrate Stock Fraud

The fall-out continues from a $110 million fraudulent scheme created by the former Chief Financial Officer and General Counsel of Industrial Enterprises of America, Inc.  In 2011, Andrew Marguilies was convicted defrauding investors through the illegal sale of unregistered securities in Industrial Enterprises.  He is currently serving a seven-to-21 year prison term for his crime.   

In response to Marguilies’ fraud, the Financial Industry Regulatory Authority (FINRA) has now assessed a $100,000 fine to Scottrade for failing to supervise his sale of unregistered stock.  According to FINRA, Scottrade “failed to conduct an independent inquiry to determine whether the shares deposited were freely tradable.”  FINRA charged that Margulies sold $8.4 million of the unregistered securities through Scottrade.

Scottrade is not the first firm sanctioned for failing to supervise Margulies’ scheme to defraud investors.  In March, 2013, FINRA assessed a $200,000 fine against WFG Investments, Inc. for similar transgressions.  In that case, FINRA charged that WFG failed to supervise Margulies’ sale of $18 million worth of Industrial Enterprises of America stock as part of a pump-and-dump operation run in 2006 and 2007.   As with Scottrade, FINRA charged that WFG Investments also “failed to conduct an independent inquiry to determine whether the shares . . . were freely tradable.” 

Investors who lost money due to the fraudulent sale Industrial Enterprises of America stock should consult with experienced securities attorneys to determine if they have a claim they should pursue.  The attorneys at Block & Landsman are experienced in representing investors who have lost money due to securities fraud.  Call Block & Landsman for a free consultation.  

SEC is Told that the Costs of Implementing a Uniform Fiduciary Duty Standard is Excessive.

The largest trade organization in the securities industry has advised the Securities and Exchange Commission that implementation of a uniform fiduciary standard would impose substantial costs on brokerage firms needing to revamp their compliance procedures. 

Since Congress directed the SEC to overhaul the securities laws in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the agency has sought to establish uniform standards of care that will govern brokers who are registered with the Financial Industry Regulatory Authority (FINRA) as well as investment advisors who are regulated by the SEC.  Under current law, brokers are required only to recommend investments that are “suitable,” meaning that they must only have a reasonable basis to recommend a security in light of their clients’ investment objectives and financial circumstances.  By contrast, investment advisors must adhere to a more stringent fiduciary standard of care, which imposes a duty of loyalty and requires them to act in the best interests of their clients.

According to the industry trade group, the Securities Industry and Financial Markets Association (SIFMA), extending the fiduciary duty standard to registered representatives will obligate brokerage firms to expend millions of dollars to create and maintain new compliance procedures.  According to SIFMA, the cost of developing the procedures, training staff and creating new broker disclosures would cost an average of $8 million for each brokerage firm during the first year alone. 

SIFMA's cost estimate is likely to deepen the divide between proponents and opponents of the uniform fiduciary duty standard.  Recently, the National Association of Insurance and Financial Advisors, which opposes the SEC’s efforts to create a uniform standard, submitted a letter to the SEC contending that the rule would harm middle-income investors because the increased compliance costs would cause them to no longer service investors with modest assets.   In contrast, the Massachusetts Secretary of the Commonwealth submitted a letter to the SEC claiming that average investors have collectively lost substantial sums of money at the hands of brokers who do not have to act in the best interests of their clients.  

Block & Landsman is a law firm focused on litigating securities law disputes.  If you believe your advisor has improperly caused investment losses, call the attorneys at Block & Landsman for a free consultation.

SEC Targets Fraudulent Sale of Securities in the Elva Group

The SEC has uncovered and brought to an end a Ponzi scheme involving the sale of $12 million of Elva Group securities.  The SEC action, however, will not provide any relief to the victims who already lost their money to this fraudulent investment, and investors should investigate whether other persons or financial institutions participated in selling the securities.

The agency has charged Armand Franquelin and Martin Pool with violating federal securities laws by acting as unregistered broker-dealers in convincing investors to use IRA funds to invest in the Elva Group, which they represented would develop real estate and guaranteed returns up to 240% per year.   According to the SEC, Franquelin and Pool used the money for their own personal use and to make “interest” payments to early investors in the Elva Group.   The scheme lasted from January 2006 through August 2010 and successfully lured approximately 130 investors to invest millions of dollars.

Pool has consented to entry of a final judgment against him, and is permanently enjoined from future violations of the federal securities laws.  He has also agreed to the assessment of more than $1.3 million in fines and interest.   These sums, however, will provide no relief to his victims because the SEC has waived these payments due to Pool’s current financial condition.  Accordingly, while the Ponzi scheme will no longer put investors at risk, those who have already been defrauded are left without any restitution of their losses. 

For this reason, it is important that investors expand their investigation into the scheme to determine whether others may be legally responsible for the fraudulent sale of the Elva Group securities.  The securities litigation attorneys at Block& Landsman are available for free consultation to discuss options that investors have to recoup losses caused by the fraud or misconduct of their financial advisors.