Oppenheimer & Co. Hit With FINRA Fine for Failing to Anti-Money Laundering Violations

            The Financial Industry Regulatory Authority (FINRA) continues a trend by securities regulators imposing affirmative duties on brokerage firms to detect certain illegal activities in their clients’ accounts.  FINRA’s latest action targets Oppenheimer & Co., Inc., for allowing nearly $1.5 million in unregistered penny stocks to be sold in customer accounts.  This is the second time Oppenheimer has been found to have violated its Anti-Money Laundering (AML) obligations.

            According to FINRA’s findings, between August 2008 and September 2010, several customers deposited large amounts of penny stocks shortly after opening Oppenheimer accounts, liquidated the holdings and then transferred the proceeds out of the accounts.  The penny stocks, which are low-priced, speculative securities, were not registered or otherwise exempt from registration.   During this time period, Oppenheimer sold more than one billion shares of the penny stocks.  FINRA determined that the sales occurred due to failures of the Oppenheimer AML program to focus on securities transactions and its failure to monitor patterns of suspicious activity associated with penny stock trades.  Among other problems, FINRA found that the firm’s procedures were inadequate and unable to determine whether stocks being sold were restricted or freely tradable. 

            AML requirements are necessary protections against a wide array of illicit securities transactions, many of which can directly harm unsuspecting investors.  The securities litigation attorneys at Block & Landsman investigate possible AML violations to determine whether an investor’s losses were caused by improper trading or a failure to supervise.  

Majority of Investment Fraud Victims Allow the Fraudsters Off the Hook

            Recently, the Financial Industry Regulatory Authority (FINRA) published a comprehensive survey on the scope of financial fraud and the characteristics of likely victims.   The report, entitled “Financial Fraud and Fraud Susceptibility in the United States,” presents a troubling view of the breadth of investment fraud schemes and the vulnerability of investors.

            The report shows that investors are inundated with a vast array of fraudulent schemes through a variety of sources, and are unfortunately ill-equipped to recognize the signs of fraud.  According to the report, financial fraud solicitations are commonplace, with 8 in 10 investors reporting that they were solicited to participate in a potentially fraudulent offer.  Many of these investors are vulnerable because they cannot identify the classic red flags of fraud.  And, among all victims, older Americans are more likely to be targeted by fraudsters and were more likely to lose money once targeted.

The report also offers this important insight into those investors who do suffer losses from fraud -- most feel powerless to affirmatively respond and protect themselves.  Of the investors who acknowledged being defrauded, a majority (55%) failed to report the fraud.  The most prevalent reason identified for failing to report fraud was the belief that it would not have made a difference (53% of victims).  Other major reasons for not reporting fraud were that victims did not know where to turn (40%), they wanted to put the episode behind them (32%) or they were embarrassed (27%).  These anemic numbers are obstacles to victims obtaining compensation for their losses and encourage fraudsters to continue their schemes without fear of being held to account.  While the report stops short of postulating a causal relationship, a persuasive argument can be made that incidences of fraud can be reduced if a higher percentage of victims are empowered to take action against the advisers who commit fraud. The more frequently victims seek compensation for their losses, the more likely firms will increase their oversight of rogue brokers to prevent paying damages in arbitration proceedings.  Additionally, a higher incidence of reporting fraud to the SEC, to FINRA, or to their state Departments of Securities will likely result in a greater number of regulatory investigations that can strip fraudsters of their licenses to sell securities.    

            Empowering investors to take action in response to fraud will take a concerted and enduring effort to educate them about their options.  There is a considerable need for these type of efforts because of the significant damage done by investment fraud.  A joint review conducted by the FINRA Investor Education Foundation and the Stanford Center on Longevity estimated that fraud costs Americans more than $50 billion every year.

            Investors who want to pursue claims against their advisers should contact experienced securities fraud attorneys.  For more than twenty years, the lawyers at Block & Landsman have represented investors seeking compensation for investment fraud.  If you want to investigate whether your investment losses were caused by fraud, call Block & Landsman for a confidential and free consultation.

The SEC Applies its New Policy of Mandatory Admissions of Fault

           In June 2013, the Securities and Exchange Commission (SEC) Chairperson, Mary Jo White, announced that the agency would extract admissions of wrongdoing from certain defendants in contrast to its longstanding “neither admit nor deny” policy.  On August 19, 2013, the SEC announced a settlement of a case against Philip Falcone and his advisory firm, Harbinger Capital Partners, that is the first application of the new SEC policy.  While the announcement provides a broad outline of wrongdoing to which the SEC will deem mandatory admissions applicable, the case does not establish comprehensive guidelines to be applied in all cases.  Accordingly, the SEC’s obscure standards for mandatory admissions of fault will undoubtedly leave potential defendants wondering whether the new admission policy will apply to them.

            Harbinger Capital Partners is an SEC-registered investment advisory firm owned and controlled by Philip Falcone. Harbinger is the investment adviser to Harbinger Capital Partners Special Situations Fund (“SSF”), among other funds. As the Senior Managing Director and Chief Investment Officer of Harbinger, Falcone had primary responsibility for all of the investment and business decisions made for the firm as well as the Harbinger-managed hedge funds.  Falcone is a highly successful hedge fund manager whose substantial wealth largely came from betting against the subprime mortgage market, which paid-off in 2008 when the market crashed. Under Falcone’s control, Harbinger’s assets under management peaked at approximately $26 billion in 2008.

            During 2008, Falcone deliberately underpaid his personal income taxes by a significant amount. By July 2009, he was aware that the amount of his unpaid tax liability exceeded $100 million, but he refused to address the delinquency in a legal manner.  For instance, he failed to liquidate any of his substantial assets to pay the tax obligation, and he failed to contact federal and state tax authorities to negotiate installment payments.  Rather, he obtained a loan from SSF using his SSF interest as collateral.  This transaction was plainly improper, as neither the SSF offering memorandum nor the SSF limited partnership agreement permitted such a loan.  Although the SSF operating documents allowed him to appoint an investor committee to review and approve the related party loan, he failed to do so.  Instead, he feigned legality by hiring a law firm to given the opinion that the loan was permissible, but failed to reveal all material facts to the firm. 

Falcone compounded his misconduct by failing to disclose his related-party loan for several months, and even then it was only as a footnote in SSF’s audited financial statements.  During the delay in disclosure, Falcone and Harbinger solicited investments in new Harbinger funds, which solicitation would have been adversely affected by the loan disclosure. Failing to disclose the loan also allowed Falcone to avoid negative publicity of his financial condition and continue his lavish lifestyle.

Falcone used the loan proceeds to the prejudice of SSF investors.  Specifically, prior to withdrawing the $113.2 million loan, Falcone and Harbinger had blocked SSF investors from withdrawing any of their funds for over one year. When Falcone obtained the money, approximately 60% of SSF investors had unfulfilled requests to redeem their interests in SSF.  In June 2010, a previously imposed lock-up period ended and more than 80% of SSF’s investors requested redemptions.   SSF, however, was unable to meet redemption requests due to ta lack of available funds caused by Falcone’s improper loan.

In addition to the extensive admissions, the Consent Judgment entered against the Harbinger defendants also provides that they “will not make or permit to be made any public statement to the effect that the Harbinger Defendants do not admit the allegations of the complaints, or that this Consent contains no admissions of the allegations.”  In a seeming contradiction intended to preserve some leverage to the defendants to avoid civil liability to the direct victims of their fraud, the Consent also states that nothing in the agreement affects defendants’ “right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.”  Whether this language ultimately allows defendants who admit fault to limit their admissions to only the SEC proceedings will certainly be the subject of intensive litigation.

The Harbinger case introduces a broad outline of circumstances under which the SEC will apply its new policy of demanding admissions of wrongdoing as part of a settlement. In general terms, the SEC has identified a category of cases to which a mandatory admission would be applicable -- defendants who knowingly create schemes to defraud for their personal benefit to the financial disadvantage of investors in violation of existing fiduciary duties, and who actively conceal the fraud from investors and others. Such a broad standard, however, would apply to a large number of cases brought by the SEC, and it is unlikely the agency intended such a wholesale reworking of its settlement standards.  Rather, it is more likely that the SEC will refine the standards on a case-by-case basis so that the factors to be considering in demanding an admission as part of a settlement will develop and be revealed over a period of time.  Accordingly, while industry members and their attorneys now know the type of case to which mandatory admissions of fault can apply, their particular circumstances and level of advocacy remain relevant considerations to whether mandatory admissions will apply in any particular dispute.

Atlanta-Based Securities Firms Charged With Stealing Client Funds

The Securities and Exchange Commission (SEC) filed a complaint seeking emergency injunctive relief against Bridge Securities, LLC and Bridge Equity, Inc., as well as their owner Paul Marshall, for misappropriating customer funds to pay for Marshall’s extravagant lifestyle.  According to the SEC, the defendants diverted $2 million from advisory clients, several of whom are elderly. 

            Marshall created the Bridge advisory firms in December 2010 and February 2011.  The following year, the defendants advised their clients that the Bridge entities transferred accounts to a new J.P Morgan to hold customer funds and securities and to clear trades.  Defendants then caused clients to transfer funds to various bank accounts at J.P. Morgan Chase Bank, N.A. in the name of Bridge Equity and over which Marshall maintained exclusive control.

            Defendants misrepresented to its clients that investments were being made for their benefit in J.P. Morgan accounts, when in fact Marshall used the money for personal expenses, including luxury trips, child support and alimony payments, and private school tuition and camps for his children.  Using a common tactic to cover up fraud by an advisory firm, the defendants concealed their fraud by creating fraudulent account statements to convince customers that their accounts held non-existing investments and provided false returns. 

            The SEC’s complaint indicates that the defendants misconduct is ongoing, as it alleges that some of the misappropriations occurred as recently as July 2013.  Accordingly, the SEC seeks, among other things, entry of an emergency temporary order restraining the defendants from further violations of the securities laws.

            Investors who have been defrauded by their advisors and others should hire the experienced securities attorneys at Block & Landsman to investigate their claims and determine all the parties who are liable for their losses. 

U.S. Legislators Seek to End Mandatory Arbitration for Consumers

The securities industry has adopted mandatory arbitration as the de facto method of resolving disputes against broker-dealers and their registered representatives.   Brokerage firm account agreements universally require clients to waive their rights to file lawsuits in court and instead arbitrate their claims before the Dispute Resolution division of the Financial Industry Regulatory Authority (“FINRA”).   

While recent improvements to FINRA procedures have made the arbitration process more even-handed than it historically had been, investors are still required to forego a variety of benefits of litigating in court that are unavailable in arbitration.   Although arbitration is appropriate for some investors’ disputes, its limitations on discovery and testimony of witnesses not subject to FINRA’s jurisdiction can significantly hinder an investor’s ability to prove a respondent’s liability.

Recently, Senator Al Franken (D-MN) and Representative Hank Johnson (D-GA) introduced bills in the U.S. Senate and the U.S. House of Representatives, respectively, seeking passage of the Arbitration Fairness Act.  The proposed law would eliminate mandatory arbitration in consumer contracts, and instead make the alternative dispute resolution forum available to investors and other consumers as an optional alternative to filing a lawsuit.   While the bills face a long and challenging process to becoming law, their introduction reflects recent efforts to expand the rights of investors to litigate disputes in a fair and efficient manner.  In fact, the more fair FINRA’s dispute resolution procedures become, the more likely that investors would opt for arbitration even if given the choice of going to court.

Investors who have disputes against their financial advisers should contact the securities litigation attorneys at Block & Landsman for a confidential and free consultation.