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Archive for the ‘Uncategorized’ Category

UBS Yield Enhancement Strategy (YES)

Aidikoff, Uhl & Bakhtiari is investigating the sale of the Yield Enhancement Strategy (“YES”) recommended by financial advisors to UBS customers.  The investigation focuses on UBS sales practices and representations made in connection with the recommendation of the UBS YES program for fixed income customers.

UBS’s Yield Enhancement Strategy (“YES”) reportedly had over $5 billion under management with more than 1,200 investors.  Investors in the UBS YES program agreed to commit capital to the program in the form of cash or other securities.  The capital collateralized options trading in an investor’s account.  Primarily marketed to fixed income investors, the bonds merely provide collateral for the options trades.

High net-worth investors seeking conservative investments to preserve their principal were encouraged to participate in the YES program.  The firm is believed to have told prospective customers that UBS YES was a low-risk strategy employed to generate additional income.

The YES program utilized an options strategy, known as the Iron Condor, which created the appearance of better returns or cash flow during periods of low volatility and generated hefty fees and commissions for UBS and its financial advisors.

In December 2018, the CBOE Volatility Index reached its highest level since 2011 and losses began piling up for investors in the YES program.  If you were a purchaser of UBS Yes, please contact us for an evaluation of your specific facts and circumstances.

S&P 500 Drops To New 2018 Low, DJIA Closes Down 500 Points

Stocks tanked on Monday, pushing the S&P 500 to a new low for the year amid growing concerns that the Federal Reserve’s plan to raise interest rates could be too much for the economy and stock market to handle.

The Dow and S&P 500, which are both in corrections, are on track for their worst December performance since the Great Depression in 1931, down more than 7 percent so far for the month. The S&P 500 is now in the red for 2018 by 4 percent.

Shares of Amazon and Goldman Sachs led the declines.

DoubleLine Capital CEO Jeffrey Gundlach said Monday that he believes the S&P 500 will drop below the early 2018 lows. All 30 stocks in the Dow and all 11 sectors in the S&P 500 posted losses on Monday.

Wedbush Securities Inc. and Edward William Wedbush

A judgment issued by the United States Court of Appeals for the Ninth Circuit became final in which the firm was fined $300,000. Mr. Wedbush was fined $50,000 and suspended from association with any FINRA® member in any principal capacity for 31 days. The United States Court of Appeals for the Ninth Circuit denied the firm and Mr. Wedbush’s petition for review. The sanctions were based on findings that, for five-and-a-half years, the firm committed 158 regulatory reporting violations. Specifically, the firm reported a total of 129 events late on Forms RE-3, Uniform Application for Securities Industry Registration or Transfer (Form U4) and Uniform Termination Notice for Securities Industry Registration (Form U5), and Rule 3070 Reports; reported 18 events inaccurately; and failed to file a total of 11 Forms RE-3, U4 and U5. The findings stated that the firm and Mr. Wedbush failed to reasonably supervise regulatory reporting, failed to effectively and reasonably implement the firm’s supervisory system related to regulatory reporting, failed to act decisively to detect and prevent future regulatory reporting rule violations and failed to implement corrective measures that were timely and sufficient to address the regulatory reporting failures.

The suspension is in effect from August 20, 2018, through September 19, 2018. (FINRA Case # 2007009404401)

Jonathan George Sweeney (Oceanside, California)

An AWC was issued in which Sweeney was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Sweeney consented to the sanction and to the entry of findings that he made material misrepresentations and omitted material information in an unsuitable recommendation 14 Disciplinary and Other FINRA Actions July 2018 to his customer. The findings stated that Sweeney caused the customer to surrender two variable annuities and use the proceeds to purchase two new variable annuities. Sweeney, in order to convince the customer to accept his recommendation, intentionally misrepresented material facts to the customer. Specifically, Sweeney falsely represented that the new annuities provided her with the same benefits as the original annuities. In addition, Sweeney knew, yet intentionally omitted to disclose, several material adverse facts to the customer. Sweeney did not tell the customer that she would lose the enhanced living and death benefits to which she was entitled under the original annuities if she surrendered the original annuities if she surrendered the original annuities, nor did he tell her the value of these enhanced benefits. Sweeney also did not tell the customer that she would forfeit the enhanced growth features of the original annuities by switching to the new annuities, and that the accumulation values for her living and death benefits under her original annuities were higher than the cash surrender values, or that cashing out her original annuities would cause her to realize certain losses based on the performance of her various subaccount investments that she would not otherwise incur. The findings also stated that Sweeney effected the annuity exchanges without having a reasonable basis to believe that such sales and purchases were suitable for the customer in view of her age, retirement status, financial needs, and her desire to have guaranteed lifetime income streams and enhanced death benefits to pass on to her beneficiaries. Sweeney also did not have a reasonable basis to believe that his recommendation to the customer was suitable because he knew that the new annuities did not provide her with product enhancements or improvements, but rather caused her to forfeit significant benefits and become subject to a new surrender period. As a result of this conduct, Sweeney violated FINRA Rules 2111, 2330(b) and 2010. The findings also included that. Sweeney reused original signatures from forms his customers had signed to complete new forms that his customers had not signed. He then submitted the new forms to his firm as original documents. (FINRA Case #2016050142601)

Laidlaw & Company (UK) Ltd. (London, England)

An AWC was issued in which the firm was censured, fined $25,000 and required to provide a written certification to FINRA that its systems, policies and procedures, with respect to each of the areas and activities cited in the AWC, are reasonably Disciplinary and Other FINRA Actions 3 July 2018 designed to achieve compliance with applicable securities laws, regulations and rules. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish and maintain a supervisory system and WSPs reasonably designed to ensure that representatives’ recommendations of leveraged and inverse exchange traded funds (non-traditional ETFs) complied with applicable securities laws and NASD and FINRA rules. The findings stated that the firm did not have a supervisory system reasonably designed to enable the firm’s supervisory personnel to review non-traditional ETF transactions. The firm’s WSPs did not require supervisors to review open positions in non-traditional ETFs held for extended periods of time, or resulting in unrealized losses and did not impose product-specific limitations on firm representatives’ ability to recommend trading in or holding non-traditional ETFs. Additionally, prior to July 2015, the firm relied on supervisors to conduct a manual blotter review to detect potentially unsuitable non-traditional ETF transactions. Beginning in July 2015, the firm began using an exception report showing transactions in all ETFs, including non-traditional ETFs. This exception report did not show holding periods for non-traditional ETFs. (FINRA Case #2015043362701)

Reef Securities, Inc. and Paul Frank Mauceli Jr.

A Letter of Acceptance, Waiver and Consent (AWC) was issued in which the firm was censured and fined $40,000. Mauceli was fined $5,000 and suspended from association with any FINRA® member in any principal capacity for four months. Without admitting or denying the findings, the firm and Mauceli consented to the sanctions and to the entry of findings that the firm, acting through Mauceli, the firm’s president, failed to notify investors in a timely manner of a right of rescission following the issuance of an updated general partners audited balance sheet and approval of a revised prospectus. The findings stated that the firm served as the broker-dealer selling an oil and gas drilling and income fund limited partnership for an issuer. The firm, acting through Mauceli and the issuer, decided not to send the revised prospectus and a notice offering each investor an opportunity to confirm or rescind his or her investment decision, despite the requirements of the prospectus, due to low prices in the oil and gas market. FINRA discovered that the firm had not provided the revised prospectus and notice to the vast majority of the investors in the income fund. After FINRA raised the issue, the firm eventually sent the revised prospectus and notice to the remaining investors, whereupon several investors rescinded their investment. The findings also stated that the firm distributed communications related to a real estate investment trust offering to investors that failed to provide balanced presentation or a sound basis for evaluating the investments being promoted, contained misleading and unwarranted claims and, in addition, made prohibited investor profit projections. The suspension is in effect from May 7, 2018, through September 6, 2018. (FINRA Case #2015043469001)

Dennis Ernest Beeby (San Diego, California)

An AWC was issued in which Beeby was assessed a deferred fine of $10,000, suspended from association with any FINRA member in all capacities for eight months and ordered to pay deferred disgorgement of commissions received in the amount of $55,000, plus interest. Without admitting or denying the findings, Beeby consented to the sanctions and to the entry of findings that he never disclosed his participation in private securities transactions in writing or otherwise to his member firm and never received its approval to participate in the transactions. The findings stated that the firm’s relevant WSPs prohibited representatives from engaging in any private securities transaction without its prior express written permission. Beeby recommended the purchase of securities in the form of oil and gas working interests in the development of an oil and gas lease by a corporation to several of his customers. The working interest securities were not offered through Beeby’s firm. Four customers purchased a sum total of $700,000 in oil and gas working interests. Beeby handled all aspects of the sales, including recommending the investment, providing paperwork for investors to sign, signing some of the transaction documents and managing ongoing communications regarding the investment. Beeby also received a commission of $55,000 for the sales.

The suspension is in effect from April 2, 2018, through December 1, 2018. (FINRA Case #2016052305501)

FINRA takes new enforcement action against Charles Acheson Laverty

Laverty was named a respondent in a FINRA complaint alleging that that during consecutive associations with several member firms, he borrowed $1,350,000 from an elderly married couple in violation of each firm’s policies. The complaint alleges that three of the firms prohibited their representatives from borrowing money from their customers.

Although a firm permitted loans between representatives and customers under limited circumstances, any such loan required the written approval of the chief compliance officer. The firm’s chief compliance officer never provided any such approval to Laverty. The complaint also alleges that Laverty concealed the loans from his firms and falsely stated on annual compliance questionnaires and on a heightened supervision attestation that he had not borrowed money from customers. For an example, Laverty lied on a firm’s compliance questionnaires concerning soliciting or accepting a loan from or making a loan to a client and having a judgment against him. On a firm’s annual compliance questionnaire, Laverty’s answers were false because earlier he had borrowed $45,000 from the elderly couple. Moreover, the Superior Court of California, County of Riverside, entered a judgment against Laverty for $114,456.25 in a lawsuit by the Security Bank of California against him arising from his failure to repay a promissory note. Laverty was aware of this judgment.

The complaint further alleges that Laverty concealed the loans from FINRA and provided false on-the-record (OTR) testimony during a previous FINRA investigation into his borrowing activity. During an OTR taken in that investigation, FINRA questioned Laverty about loans from five particular customers, and then asked, “Mr. Laverty, did you borrow from any other customers?” Laverty answered, “No” and insisted that he had only borrowed from these five customers. Laverty’s answers were false. Laverty had, in fact, also borrowed from the elderly couple. In addition, Laverty executed a $1.4 million promissory note for the loans that the elderly couple had extended to him and quickly breached the agreement by making none of the required monthly payments. The elderly couple filed a Statement of Claim against Laverty and the firms through which he registered. One of the firms filed a Form U5 Amendment disclosing the Statement of Claim and informing FINRA, for the first time, that Laverty had improperly solicited and accepted loans from the elderly couple. Neither of these elderly customers lived to see their claims resolved. Nevertheless, days before a scheduled arbitration, the elderly couple, through their successor in interest, settled their claim against Laverty. Soon thereafter, Laverty breached his obligations under the settlement by failing to make a required payment. FINRA suspended Laverty for failure to comply with the settlement. In addition, the complaint alleges that Laverty willfully failed to update his Form U4 to disclose an unsatisfied judgment entered in the Security Bank of California lawsuit and a federal tax lien.

FINRA Sanctions Fifth Third Securities, Inc., $6 Million

The Financial Industry Regulatory Authority (FINRA) announced today it has fined Fifth Third Securities, Inc., $4 million and required the firm to pay approximately $2 million in restitution to customers for failing to appropriately consider and accurately describe the costs and benefits of variable annuity (VA) exchanges, and for recommending exchanges without a reasonable basis to believe the exchanges were suitable. This is the second significant FINRA enforcement action against Fifth Third involving the firm’s sale of variable annuities.

Variable annuities are complex investments commonly marketed and sold to retirees or people saving for retirement. Exchanging one VA with another involves a comparison of the complex features of each security. Accordingly, VA exchanges are subject to regulatory requirements to ensure that brokers have a reasonable basis to recommend them, and their supervisors have a reasonable basis to approve the sales.

FINRA found that Fifth Third failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA exchanges. It also found that the firm’s registered representatives and principals were not adequately trained on how to conduct a comparative analysis of the material features of the VAs. As a result, the firm misstated the costs and benefits of exchanges, making the exchange appear more beneficial to the customer. By reviewing a sample of VA exchanges that the firm approved from 2013 through 2015, FINRA found that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the sample. For example:

  •  Fifth Third overstated the total fees of the existing VA or misstated fees associated with various additional optional benefits, known as riders.
  • Fifth Third failed to disclose that the existing VA had an accrued living benefit value, or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.
  • Fifth Third represented that a proposed VA had a living benefit rider even though the proposed VA did not, in fact, include a living benefit rider.

FINRA found that the firm’s principals ultimately approved approximately 92 percent of VA exchange applications submitted to them for review. However, in light of the firm’s supervisory deficiencies, the firm did not have a reasonable basis to recommend and approve many of these transactions.

Susan Schroeder, FINRA’s Executive Vice President and Head of Enforcement, said, “FINRA remains vigilant in examining how member firms market variable annuities, which are complex products pitched to retirees and people saving for retirement. Returning $2 million in restitution to harmed investors is a key part of FINRA’s investor protection mission.”

In addition, FINRA found that Fifth Third failed to comply with a term of its 2009 settlement with FINRA. In the 2009 action, FINRA found that, from 2004 to 2006, Fifth Third effected 250 unsuitable VA exchanges and transactions and had inadequate systems and procedures governing its VA exchange business. For more than four years following the settlement, the firm failed to fully implement an independent consultant’s recommendation that it develop certain surveillance procedures to monitor VA exchanges by individual registered representatives.

In settling this matter, Fifth Third neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Clifton Stanley Ponzi scheme charges brought by SEC

On April 6, 2018, the Securities and Exchange Commission charged two Texas companies and their principals in a $2.4 million Ponzi scheme and in a related, $1.4 million offering fraud targeting retirees.

The SEC’s complaint alleges that, from 2010 to 2017, Clifton E. Stanley ran a Ponzi scheme through his retirement planning and real estate investment business, The Lifepay Group, LLC. Stanley is alleged to have lured at least 30 elderly victims to invest approximately $2.4 million of their retirement savings with baseless promises and claims of outsized investment returns. He kept the scheme afloat for years by paying early investors with later investors’ funds and by convincing investors to roll over their investments.  The SEC further alleges that Stanley pilfered from the estate of an elderly woman’s family trust, diverting nearly $100,000 to fund the Lifepay Ponzi scheme. In addition, the SEC’s complaint alleges that, beginning in 2015, Stanley and Michael E. Watts orchestrated a second offering fraud through a company they controlled, SMDRE, LLC. Stanley and Watts allegedly used a collection of misrepresentations and empty promises to convince a group of predominantly elderly victims to invest roughly $1.4 million in SMDRE.

Stanley is alleged to have used roughly $1.3 million of the Lifepay offering proceeds for personal expenses, including country club memberships, daily living expenses, travel, and entertainment expenses. In addition, Watts and Stanley allegedly engaged in shell game transactions so they could use the vast majority of SMDRE investor funds for personal expenses and to keep the Lifepay Ponzi scheme afloat.

The SEC’s complaint charges Stanley, Watts, Lifepay, and SMDRE with violating the registration and antifraud provisions of the federal securities laws. Stanley was also charged for conduct stemming from his role as an unregistered broker.

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