The Investor's Lawyer

Another Affinity Fraud: Safevest LLC

Last week the SEC obtained a court order against Safevest LLC and its two principals.  The US District Court for the Central District of California issued an order freezing assets and appointing a temporary receiver over Safevest and its affiliates.  The SEC alleged that Safevest misappropriated funds from investors.  The group targeted Christians in a multi-level marketing type fashion, claiming that investor funds would be pooled together to invest in commodities futures trading, to earn 1.5% or more per day, and that investors would be able to receive their funds back within 72 hours of request. 

In reality, according to the SEC, no investor funds were invested in commodities futures trading, but funds were misappropriated to pay for the personal expenses of the principals.  According to the SEC, Safevest raised $25 Million from over 500 investors since May 2007, and $18 million was paid out to investors in a Ponzi-scheme like fashion. 

Unfortunately, news like this is too common in recent times.  Investors must be aware of what they're getting into and fully check out the product and the broker/adviser.  And folks can't ignore red flags that something is wrong - such as lack of registration/licensing.

FINRA Relases Investor Alert on Equity-Indexed Annuities

The sales of equity-indexed annuities (EIA) have increased over the past several years.  EIAs are complex products that contain features of both a fixed annuity and a variable annuity.  It seems that whether these products are securities is subject to a debate by the issuer, the state insurance regulator, and the securities regulators.  What is not subject to debate is that you should fully understand such a product before you purchase it. To help towards that goal, FINRA has issued an Investor Alert seeking to explain, in basic terms, the differnece between an EIA and fixed and variable annuities, and some of the common terms of an EIA.

What investors considering any annuity should understand is that most of these are considered long-term products.  Attempting to liquidate and cash out early may result on substantial early-redemption charges.  Moreover, depending on the age of the investor, there may be tax consequences for liquidating the annuity.  Before purchasing any product, investors should understand fully the features, commissions, fees and costs, and the risks involved.

Don't Fall Victim to Early Retirement Scams

No work.  Travel.  Visiting family and friends.  Staying up late and sleeping in.  Retirement sounds good, doesn't it.  Especially to many of us still working.  But, don't believe everything you hear about how you can retire early.  Maybe you can, maybe you can't, but don't become a victim of a broker pushing an early retirement scheme. 

Recently, the regulators have been reviewing instances where groups of employees have been advised, by outside brokers, that they can retire early, cash out a 401(k) or pension plan, make high returns, and live off of 7% or so of their money, forever.  Don't believe it.  Remember, when things sound too good to be true, they usually are.

The truth is that no one can predict exactly how much money you'll need in retirement, nor can they predict how much of a return you'll make on your investments in a one-year period, and certainly not over  a period of many years.  Before you make a decision to retire early, seek wise counsel and get a couple of opinions about your financial health.  Don't be too quick to cash out and hit the road.

For more information, see FINRA's recent release on avoiding dangerous early retirement schemes here.

New Hampshire Slams Ameriprise and Manager

The New Hampshire Bureau of Securities Regulation this month announced a settlement with Ameriprise pursuant to which the firm will pay the state about $3.8 Million in fines, costs of investigation and investor refunds.  The action relates the firm's alleged failure to report significant issues, including forgeries, to the Bureau, as required by a 2005 settlement agreement with the state.  In this 2008 action, the state found that Ameriprise failed to report its investigation of at least 96 instances of forgery by six of its agents in the Portsmouth, NH office.  Apparently, the forgeries were of customer signatures that agents affixed to documents to make it appear that the customers had received a financial plan, when the customer had not.  This apparently was done so that the brokers could meet sales goals.  Problem is that the investors were likely charged money from their account to pay for these plans that they did not request and did not receive.

Also, the state took action against Larry Port, who was the group VP and responsible for supervision of the Portsmouth Office.  Under the terms of the settlement, Port is prohibited from engaging in the securities business - both sales and management - in New Hampshire for five years.  The Bureau noted that he had a "cavalier attitude about forgery."

This is a significant action taken by a state regulator.  Last Fall I wrote about the initiation of this action by New Hampshire and a settlement with the State of Georgia over at BD Law Blog my other blog.  The State of Georgia settled an action against Ameriprise last fall, finding that the firm failed to supervise reasonably two brokers and detect forgeries. 

Investors - remember to check your statements carefully, looking for fees, charges and transactions that you did not authorize.  Don't let an overzealous broker seeking to meet sales goals take advantage of you.

SEC Launches PAUSE - "Public Alert - Unregistered Soloiciting Entities"

Based upon complaints that it has received over the years, as well as on information from state and foreign securities regulators, the SEC yesterday launched an new initiative called PAUSE: Public Alert - Unregistered Soliciting Entities.  The online press release and links to the PAUSE investor information can be found here, on the SEC's website.

The PAUSE webpages on the SEC's website provides a list of entities that apparently make investment solicitations to investors, as well as a list of bogus securities regulators or regulatory bodies that supposedly govern these possibly illegitimate operations.  According to the release, "For each soliciting entity on the PAUSE Web pages, the SEC's staff has determined either that there is no U.S.-registered securities firm with that name, or that there is a U.S. registered securities firm with the same or similar name and solicitations appear to have been made by people not affiliated with that firm." 

Along with being sure to always check out your advisor or broker through FINRA's Brokercheck system, this is another great took in the investor's toolkit. 

FINRA Issues Investor Alert for Investors Holding Auction-Rate Securities

Today, FINRA issued an Investor Alert  to provide information to investors holding auction-rate securities.  FINRA does a decent job explaining the basics of these securities and why they may be currently illiquid for many investors.  It also explains the basic options that investors have in terms of holding, selling, attempting to sell in the secondary markets, etc.  But, there is one additional option available to some investors: to seek assistance and redress from their brokerage firm, particularly in cases where the securities were misrepresented to them to induce the investor to purchase the products, or where other industry rules and regulations were violated.  This is not to say that all investors are entitled to some type of recovery.  Indeed, each cash stands on its own and the investor must be able to prove that he or she has suffered damages, and that the brokerage firm is responsible under some legal theory of recovery.  If you think that you fall in this category, consult a competent securities attorney. 

Auction Rate Securities Lead to Investor Losses

Following the subprime debt mess of last year, another investment product looks like its gearing up to result in problematic losses to investors this year.  The auction rate securities market is suffering from a lack of buyers and facing hard times, and leaving some investors who purchased these products as a short-term investment wondering if they'll recover their investment, much less any interest on return on their money.  Auction rate securities are municipal securities that feature a variable interest rate which is set by a "Dutch" auction process. 

Lately, there have been many news stories in print and web publications detailing investors losses, or their inability to redeem their auction rate securities.  In many of these stories, the investors explain that the products were sold to them as safe investments, similar to cash or to a money market fund.  Other stories show that investors did not understand the complicated rate setting process, did not understand that the auction markets had risk or could fail, and did not understand that they could lose some or all of their money.  In many cases its likely that investors did not understand these key factors because their broker did not, and did not take the time to research the product, read its prospectus and explain the information to his or her client. 

The collapse of the auction rate markets has also caught the attention of securities regulators.  Last month the Municipal Securities Rulemaking Board (MSRB), issued a notice  to broker-dealers reminding them that disclosure and suitability obligations apply to auction rate securities, particularly when sells are made to individual investors as opposed to institutional investors.   And last week, FINRA issued a regulatory notice to broker-dealers increasing the margin maintenance requirement for auction rate securities to 25% for auction rate securities backed by fixed income products.  So, for investors who hold these securities on margin, their broker may come calling for a cash deposit to decrease the leverage in these investments.  Importantly, the FINRA notice also cautioned firms to "give careful consideration to the classification of these securities on customer statements as cash or cash equivalents."  The notice further cautioned firms to review their websites for language that characterized these products as short-term securities. 

Securities lawyers are now seeing more complaints from investors that they were not fully informed as to the facts when sold auction rate securities.  Some complaints detail that their broker explained that the products were like cash, were similar to a money market fund, or were very safe, short-term investments.  Some investors claim that their broker did not disclose the risks associated with the products, nor explain the auction process, how the variable rates are set, and how the investment may not be liquid and the investor not able to sell the investment.  Further, it appears that some firms listed these products as cash or cash equivalents on their account statements distributed to customers. 

If you have purchased auction rate securities and have been unable to sell them or have lost money, it may be time to consult a competent securities arbitration attorney for a consultation. 

 

Be Sure You Know What's in It For Them...

for your broker, that is.  Before purchasing an investment product from a commissioned broker, you should understand what's in it for them.  What's their commission on the product?  Is it higher for the product they are recommending to you than for other similar products?  That may be an important piece of information for you to understand prior to making a decision to purchase.  And, you'll only find out if you ask.  If you ask and don't get an answer, that may be a clue for you.

FINRA recently announced a disciplinary action it took against Ameriprise Financial Services, Inc. (Case 2005000682901) in which it fined the firm $145,000 and censured it based on allegations that Ameriprise awarded non-cash compensation (such as stock options and restricted stock) to field leaders through sales incentives that gave additional weight or favored sales of the firm's proprietary products, in violation of NASD Rules.  Ameriprise settled the matter without admitting or denying the allegations.

I believe that most brokers are honest folks trying to help out their clients, but when its my money on the line, I'm gonna get all the information I can to make an informed decision.  What will you do? 

Trust, but Verify.

Last week, FINRA announced that it filed a formal disciplinary complaint against a Margate, NJ broker who FINRA alleges misappropriated nearly $400,000 from one of his clients - a 97 year-old nursing home resident.  According to the release, when the customer was hospitalized and as her health deteriorated, the broker used her checking account and debit cards to pay for his personal expenses and committed other rule violations.  What's very troubling about this is that the customer had been a customer of the broker for more than 20 years!  At this point, these are all simply allegations of misconduct, and the broker has the opportunity to respond to the Complaint and request a hearing before a hearing panel before findings are made and, if found to be true, sanctions are to be imposed.

in the 1980s, President Ronald Reagan often said "trust but verify" when referring to relationships with the Soviet Union.  This phrase applies to our financial accounts as well.  Hopefully, you have found a broker or adviser that you can trust and have thoroughly checking their background, and that of their firm, before investing with him or her (see our earlier post about how to check out your broker here.)  But, you must also remain vigilant, or have another trusted family member, friend, or professional, monitor the activity in your account.   Trust, but verify.  After all, its your money.

Understanding "Professional Designations" - Making Sense of Alphabet Soup.

CLU, CFA, CFP, BCE, CAC, CTEP, RFC, RIS, WMS.  What in the world are all of these, and how do you know.  A useful tool is FINRA's professional designation index that can be found online here. For each of the alphabet soup designations, FINRA's index provides information on the issuing organization, examination type, continuing education requirements, investor complaint process, public disciplinary process, and ways to check the individual's status online.  This is a great tool for investors in making some sense out of the letters tacked on adviser's names, and will give you some insight into whether these have some meaning, or may be relatively meaningless.  But remember, investors should do much more in checking out their prospective broker/adviser other than understanding the professional designations.