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Blog & Investigations

The Law Office of Kevin Galbraith conducts investigations and comments on current events in the financial, regulatory and legal arenas to make investors and financial services professionals aware of key developments that impact them. Readers may consult both current and archived investigations and blogs on this page.

Any investor or financial services professional who believes he or she may be impacted by an issue addressed in one of these items should immediately contact our firm by calling 212.203.1249 or emailing kevin@galbraithlawfirm.com for a free, confidential consultation.


Money Magazine Article Features Firm Client—Victim of Elder Financial Abuse and Brokerage Firm’s Negligence

April 4, 2017

Money Magazine article features one of our firm's clients—a victim of elder financial abuse by an online fraudster and negligence by her trusted brokerage firm—and explains how we are helping her fight back. Article is here. The article is online today and will appear in the June print edition. Many thanks to reporter Megan Leonhardt for her skill, sensitivity and dedication to protecting senior investors. And to our client for shining a light on this growing problem.



FINRA Alert: 2017 Enforcement Priorities Announced

January 31, 2017

Earlier this month, FINRA (the Financial Industry Regulatory Authority) announced its enforcement priorities for the coming year. The priorities will set the course for FINRA’s investigators as they inquire, examine, probe and sometimes bring enforcement actions against financial services professionals and their firms.

As a service to our readers—both investors and financial services professionals—we are highlighting FINRA’s priorities here, and we invite you to contact us with your specific questions and concerns.

FINRA will be taking a hard look at the following items, which can be broadly categorized as having to do with compliance, supervision and risk management:

  • High Risk and Recidivist Brokers: FINRA has created a dedicated examination unit to “rigorously review these brokers’ interactions with customers, including their compliance with rules regarding suitability, know-your-customer, outside business activities, private securities transactions, commissions and fees.” FINRA will also focus on brokerage firms’ efforts to protect their customers from these high-risk and repeat-offender brokers. (We have written about the phenomenon of bad brokers shuffling from one firm to the next while their firms sometimes get off unscathed.)

  • Protecting Senior Investors: As the baby-boom generation reaches retirement age, they are increasingly targeted by unscrupulous financial advisors, and FINRA is working to prevent them from being harmed by elder financial abuse. (Our blog on financial elder abuse is here.) The priorities letter explains: “FINRA will assess firms’ controls to protect senior investors from fraud, abuse and improper advice. We are seeing numerous cases where registered representatives have recommended that senior investors purchase speculative or complex products in search of yield. While the quest for higher yield is not per se problematic, FINRA will assess whether such recommendations were suitable given an investor’s profile and risk tolerance, and whether firms have appropriate supervisory mechanisms in place to detect and prevent problematic sales practices.”

  • Suitability and Concentration: Brokers are only permitted to recommend investments that are “suitable” for their customers, taking into account their age, investment experience, investment objectives and risk tolerance. In the coming year, FINRA will prioritize enforcing this requirement. “FINRA continues to observe instances where firms recommend products that are unsuitable for customers, including situations where customers and sometimes registered representatives do not understand important product features.” We have seen this dynamic in many of our clients’ cases, including in a current case where the broker admits—on a recorded line—that she believed the investment was “guaranteed.” We recently wrote about the dangers of “overconcentration,” or the “too many eggs in one basket” problem, and we are glad to see FINRA will be working on the problem.

If you are an investor with questions about your broker’s background, whether you have been the victim of elder financial abuse, or whether your broker’s recommendations have been suitable for you; or if you are a financial advisor with questions or concerns about how FINRA’s enforcement priorities may affect you, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Playing with Fire: The High Risks of Overconcentration

January 3, 2017

Erick T. Haman

Today, I’d like to examine the very real dangers of “overconcentration” in a particular investment or industry sector. Overconcentration is best defined as an investment portfolio marked by a significant holding in a single stock, bond, note or other investment vehicle, when measured against the value of the portfolio as a whole. This phenomenon most frequently results from an inherited stock position, a broker who falls in love with a certain company or sector—say energy, bio-tech or social media—or an investor who decides to swing for the fences. No matter what the origin, an overconcentrated position can create a dangerously volatile investment portfolio, one subject to extreme swings and nasty collateral consequences.

FINRA (the Financial Industry Regulatory Authority) has routinely warned brokerage firms and customers of the risks associated with overconcentration. Somehow, though, the risk that amplified losses will result from having a large portion of your holdings in a particular investment, asset class or market segment are often overlooked.

FINRA Rule 2111 requires brokers to “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.” In general, a customer’s investment profile would include the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance.

In addition to a customer’s investment profile, a broker must consider whether a recommended purchase or sale will cause an overconcentration in a particular investment or investment class.

Despite the clear guidance of FINRA, some brokers ignore concentration risk and recommend transactions without carefully considering the customer’s investment profile, and without clearly disclosing—in plain language—what can go wrong if the investor follows the recommendation and puts too many of their “eggs in one basket.”

We recently filed a FINRA arbitration on behalf of a group of unsophisticated investors whose 401(k) accounts were grossly mishandled by their broker. The broker, employed by a well-known firm, recommended—and in many instances bought without even discussing—an extremely risky set of investments in a single sector: energy. In fact, this firm invested the majority of our clients’ hard-earned retirement savings into a single stock. Due to the inexcusable conduct of their broker, our clients suffered massive losses from which they have been unable to recover. Now, only by bringing a FINRA arbitration do they stand a real chance of rebuilding their retirement savings.

As the case moves forward, we will gather and present evidence in an effort to force the firm to repay the losses, plus all the management fees that were charged, as well as our legal fees, so that they can be made whole and get their retirement plans back on track.

If you have suffered substantial losses as a result of unsuitable recommendations by your brokerage firm, or are concerned that someone you know may fit that profile, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.8134 or email erick@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Report Reveals Dangerous Gaps in Investor Knowledge

December 15, 2016

This week the FINRA Education Foundation released a report titled “Investors in the United States 2016.” The results, based on a sample of 2,000 investors, highlight dangerous gaps in investor knowledge that could well lead to financial disaster.

An infographic accompanying the report points up a couple of the most troubling findings. First, while 69% of survey respondents read a review before visiting a restaurant and 38% checked Carfax before purchasing a used car, only 23% consulted FINRA, the SEC or a state regulator about the background of a financial professional before hiring and investing with that person.

Think about that for a second—people are three times more likely to read Yelp, Zagat or a similar source before they pick a restaurant than they are to check whether a stock broker has been sued, declared bankruptcy, been disciplined by a regulator or been fired for investment-related misconduct before they entrust their life savings to that broker. It’s true there are gaps in FINRA’s BrokerCheck system, which we’ve written about before, but it’s certainly better than nothing, and can often act as an early-warning system for investors who are poised to make a big mistake with their money.

The second gap that caught our attention is the fact that just 56% of the investors surveyed agreed with the statement “I understand how my advisor gets compensated.” Broker compensation models differ from firm to firm and even from account to account. For example, a broker might get paid an annual fee of 1% of “assets under management” on one account, but charge a different customer 2.5%. Or the broker might get paid per trade. And even within this second, commission-based framework, certain preferred (often wealthier and more sophisticated) investors will get a far lower commission rate than others. These variations add up to real dollars, thousands of dollars a year and tens or even hundreds of thousands over the life of an account, depending on the account value and transaction frequency.

Another aspect of broker compensation that goes largely unnoticed is the different incentives brokerage firms set up for their employees to sell specific products. For example, on an investment product for which the firm’s investment-banking arm also acts as an underwriter, brokers will often earn more money for every sale than they would by selling a different product. That can be fine as long as the broker and firm disclose the incentives to the investor when recommending the investment, and as long as they carefully consider the alternatives when determining what is suitable and what is in the investor’s best interest. On the flipside, when a broker recommends the more expensive, riskier product in part because it pads his or her paycheck, instead of the safer, more transparent but less lucrative functional equivalent, that’s where we see the dark side of broker-compensation incentives.

If you have questions about a broker’s background or compensation, or suspect you have suffered losses as a result of broker fraud or other misconduct, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Elder Financial Abuse: Help May Be on the Way

November 21, 2016

Erick T. Haman

As baby boomers approach and enter retirement, securities regulators, legislators and law enforcement agencies are sharpening their focus on the growing incidence of “Elder Financial Abuse.”

Having identified the threat several years ago, FINRA (the Financial Industry Regulatory Authority) recently took concrete action to help protect seniors. It proposed a rule requiring brokers to make “reasonable efforts” to identify a “trusted contact” for investment accounts held by senior clients. The rule would also formally empower brokers to “freeze” a senior’s account, preventing the disbursement of funds and notifying the designated contact if the broker suspects the client may be a victim of financial abuse. (Under the proposed rule, brokers could also freeze accounts of those under 65 who have a mental or physical impairment that “renders the individual unable to protect his or her own interests.”)

Over the past several years, our firm has seen an uptick in the number of cases in which senior investors are victimized either by outright fraudsters or taken advantage of by unscrupulous brokers who churn their accounts or sell them high-risk, high-commission financial products that are unsuitable for their investment objectives and risk tolerances. Most recently, we filed a FINRA arbitration on behalf of a victim of Elder Financial Abuse who had been targeted online.

Elder Financial Abuse occurs when an older adult is manipulated into transferring money or investments to another person, who then uses them for his or her personal benefit. With the aging of the baby boomers, who collectively control over 50% of total U.S. household investment assets, Elder Financial Abuse has been on the upswing. In response, many states already require certain classes of professionals to report to law enforcement suspected Elder Financial Abuse.

Sadly, family members and friends are most frequently the perpetrators of Elder Financial Abuse. These financial predators abuse their relationship with the victim, exploiting their trust.

FINRA and the SEC jointly released a report on compliance, supervision, and best practices to protect senior investors in 2008. And it is now an industry standard for brokerage firms to require their financial advisors to report any indications of suspected Elder Financial Abuse to branch management, compliance personnel and/or the legal department.

The SEC and FINRA have taken many steps to ensure that brokerage firms are on alert for indicators of Elder Financial Abuse and take protective action when the signs are present. Among the commonly accepted “red flags” for Elder Financial Abuse are: 1) a sudden reluctance to discuss financial matters; 2) sudden, atypical, or unexplained withdrawals or other changes in financial situation; and 3) unusual or first-time wire transfers.

The client on whose behalf we recently filed an arbitration claim exhibited every one of these three classic red flags. And yet her trusted brokerage firm, despite a decades-long relationship, failed to take a single step to protect her. Its negligence paved the way for her devastating losses, the bulk of which was her inheritance from her recently deceased husband. We are now prosecuting the claim on her behalf, working to recover the money she was manipulated into transferring.

If you have been a victim of Elder Financial Abuse or are concerned that someone you know may be a victim, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Hits Voya Financial Advisors with $2.75-Million Fine

November 7, 2016

We recently filed a FINRA arbitration on behalf of a retired school teacher in New Orleans who had been sold annuities by a Voya (formerly ING) broker on the premise that a 7% return was “guaranteed.” Anytime our client questioned why her statement showed that the value of her annuity was decreasing, she was reassured—on recorded phone lines, no less—that there was nothing to worry about.

When it was later revealed that of course there was no guarantee, and that the broker had completely mispresented—and possibly misunderstood—the annuity she had sold to our client, the company refused to do the right thing, offering only “nuisance value” to get her to withdraw her complaint.

So now we will prosecute the claim on behalf of our client, seeking to recover not only her losses but also the costs of the arbitration and our attorney’s fees. In light of the evidence, it never should have come to this.

On the heels of our claim, FINRA announced a $2.75 million fine against Voya resulting from its unsuitable sales of annuities to retail investors like our client. Voya allowed—and encouraged by tying the annuities to sky-high commissions—its brokers to sell complex annuities to its customers without regard for their financial status, investment objectives, risk tolerance and investing experience. It also failed to properly supervise its brokers who were selling them.

Annuities have been making headlines lately, and not the good kind. The New York Times recently published an article called “Even Math Teachers Are at a Loss to Understand Annuities.” It explains that while annuities may sound good, they are almost never a good solution. Securities expert consultant Craig McCann puts it simply: “No agent selling these or investors buying these has the foggiest idea of how these work,” and they “never” make sense, even for very risk-averse investors.

If you have been sold an annuity and are concerned that it may not have been suitable for you, or that its risks were not honestly disclosed, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Safirstein Metcalf and The Galbraith Law Firm Announce the Investigation of MetLife Securities Inc.’s Misconduct with Variable Annuities

NEW YORK, July 20 2016—Safirstein Metcalf and The Galbraith Law Firm announce that they are investigating misconduct by MetLife Securities Inc. in connection with variable annuities.

FINRA, the Financial Industry Regulatory Authority, has fined MetLife Securities $20 million and ordered it to pay $5 million in restitution to its variable annuity customers. FINRA found that MetLife had made “negligent material misrepresentations and omissions on variable annuity (VA) replacement applications for tens of thousands of customers.” MetLife’s misrepresentations, the regulator found, “made the replacement [variable annuity] appear more beneficial to the customer, even though the recommended VAs were typically more expensive than customers' existing VAs.”

FINRA reported that MetLife’s variable annuity replacement business generated “at least $152 million in gross dealer commission for the firm over a six-year period.”

FINRA found that MetLife made material misrepresentations or omissions in at least 72% of the over 35,000 variable annuity replacements. In other words, based on a random sample, the securities watchdog found wrongdoing in connection with more than 25,000 individual applications for variable annuity replacements. Examples of such wrongdoing included:

  • MetLife told customers that their existing variable annuity was more expensive than the recommended replacement, when in fact, the current one was less expensive;
  • MetLife failed to disclose to customers that the proposed replacement would reduce or eliminate important features in their existing annuity, such as accrued death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider; and
  • MetLife understated the value of customers’ existing death benefits.

All of these misstatements and omissions may also constitute violations of state and federal securities laws, as well as of FINRA and SEC rules and regulations. The unlawful conduct uncovered by FINRA may form the basis of legal liability for MetLife Securities.

If you invested in a variable annuity through MetLife Securities (between 2010-2016) and want to know more about our investigation, please contact Sheila Feerick at 212-201-2855 or email info@safirsteinmetcalf.com.

Metcalf Safirstein LLP and The Galbraith Law Firm LLC represent investors (both retail and institutional) who have suffered financial losses as a result of misconduct.

Attorney advertising. Prior results do not guarantee a similar outcome.



Variable Annuities Strike Again: FINRA Fines Firm for Supervisory Failures and Senator Warren Warns of Kickbacks

December 15, 2015

FINRA has fined New Jersey’s Comprehensive Asset Management Services, Inc. $475,000 for failing to supervise its employees who sold variable annuities to the firm’s customers. According to FINRA’s Department of Enforcement, the firm failed to carefully look at its customers’ “ages, investment experience and objectives” before permitting its employees to sell them annuities. This kind of lax oversight makes it very likely that the firm—like many others—has sold variable annuities to its customers without even considering whether they are suitable.

The common thread with variable annuities is that while they promise a steady income stream, they do so at a very high cost. The agents recommending the annuities are paid steep up-front commissions, typically much higher than on other investment products that are available to them. There are also exorbitant surrender charges, sometimes upwards of 5 to 7%. Add to that a “mortality and expense fee” that can run 1 to 2% every year, and you can start to feel like you’re in that Seinfeld episode where David Puddy tops off his list of vehicle surcharges with one called “additional overcharge.”

Senator Elizabeth Warren recently issued a report highlighting some of the worst excesses associated with annuity sales. The report details what it calls “perks and kickbacks” paid to salespeople by the annuity issuers. With European vacations, beach getaways, jewelry and golf trips doled out in exchange for strong sales performance, it’s not hard to see how ethical conflicts can arise. It is in that context where the best interests of the customer can take a backseat to the material interests of the sales agents.

I’ve written before about how conflicted advice costs American investors approximately $17 billion per year. In the world of variable annuities, the risk of receiving conflicted advice—and paying a very steep price for following that advice—is real.

If you have been sold a variable annuity and are concerned that it may have been caused by conflicted or unsuitable advice from your financial advisor, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Broker-Dealer Realty Capital Securities (RCS) Charged with REIT Fraud: Schwab, Fidelity and Cetera Suspend REIT Sales

December 2, 2015

The state of Massachusetts has charged Realty Capital Securities (RCS) with fraudulently rounding up proxy votes to support real estate deals sponsored by AR Capital. RCS, a wholesale broker-dealer, and AR Capital are both owned by RCS Capital Corp. (RCAP). The Investment News has a good summary.

Reacting to these charges, Cetera Financial Group, also owned by RCAP, has suspended sales of AR Capital real estate investment trusts (REITs) and other alternative investments all ten Cetera broker-dealers. Even more striking, AR Capital has stated that it will stop creating and selling new alternative investment products. In a statement, William Kahane, co-owner of AR Capital, cited the Labor Department’s proposed fiduciary standard and new client account statement pricing standards for non-traded REITs and other investments as reasons for AR Capital’s withdrawal from a market that it has recently dominated. But one could reasonably ask whether those explanations are a smokescreen for the true reason—being charged with fraud.

Three days later, both Fidelity and Schwab also announced they were suspending sales of AR Capital REITs.

This news is yet another major blow to AR Capital. Last year, the company’s REIT sales fell close to 50% when American Realty Capital Properties Inc. revealed a $23 million accounting misstatement for the first half of 2014 that was intentionally left uncorrected.

This turmoil in the REIT and alternative investment markets adds to investor skepticism of many of these products where high transaction fees, self-dealing, a lack of due diligence and poor liquidity can result in large losses.

If you have suffered an investment loss from an REIT or similar alternative investment product and are concerned that it may have been caused by conflicted or unsuitable advice from your financial advisor, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



New Engagements Representing Financial Services Professionals

October 14, 2015

In order to keep readers informed of their legal rights, and to help prospective clients understand our practice, we like to highlight some of our representative engagements. Today, we focus on two engagements on behalf of financial services professionals.

In the first case, a deeply experienced and well regarded trader was wrongly forced to resign his position. The FINRA member firm, a nationally known company, forced our client out by giving him an ultimatum: resign or be placed in a patently unfair “performance improvement plan” designed to ensure the employee would fail to achieve the unrealistic benchmarks, which would then empower the firm to fire him “for cause.”

In response to this firm’s unconscionable actions toward our client, we have filed a FINRA claim to ensure that he is compensated for his lost income and can continue to support his family. On his behalf, we are bringing claims against the firm for wrongful termination, breach of contract and deceit.

In a second case, we represent an accomplished and highly respected financial professional who was wrongfully terminated and damaged by a false and defamatory Form U5 filing by his former employer. Our client was abruptly fired just before he was scheduled to receive a significant bonus, and then was replaced with less qualified individual. The firm’s decision to fire our client was a transparent effort to prevent him from receiving his upcoming bonus, as well as the severance package he would otherwise have been be entitled to. To add insult to injury, the firm then filed with FINRA a Form U5 that falsely described the circumstances of his departure.

In response to the firm’s unlawful and reprehensible treatment of our client, we have asserted legal claims of wrongful termination, breach of contract, defamation, deceit and intentional infliction of emotional distress. We are working to not only make sure our client is financially compensated for this mistreatment, but are also seeking expungement of the false Form U5 that the firm filed with FINRA.

At The Galbraith Law Firm, we work to protect both investors and financial services professionals by forcefully asserting their legal rights. If you have concerns about how a financial services company has behaved as an employer, or questions about the FINRA arbitration process in general, please contact a securities attorney for a free confidential consultation: 212.203.1249 or kevin@galbraithlawfirm.com.



Conflicted Investment Advice Costs Families $17 Billion A Year

September 30, 2015

A recent op-ed in the New York Times revealed that conflicted advice from financial advisors to investors causes approximately $17 billion in losses to American families every year. The authors, professor Lily Batchelder and economist Jared Bernstein, strongly advocate a rule that all financial advisors servicing retirement accounts be required to put their clients’ interests ahead of their own.

The Department of Labor is currently working toward implementation of this rule, which would prevent brokers from “nudging their clients into investment products that pay the advisors more for their recommendation, but offer less return for the investors.” In legal terms, the proposed rule would enforce a “fiduciary standard” on these financial advisors, meaning they “have to put their customers’ best interest before their own profits.”

Most people—75% by some estimates—believe that their financial advisors already have this obligation. But it’s not true. In fact, the financial services industry has already spent tens of millions of dollars trying to block this rule. These industry lobbying efforts beg the question: what is it exactly that the industry is so afraid of? The lobbyists say that the rule would make it more expensive for investment advisors to operate and could even make it impossible for middle- or low-income people to afford their advice. But as the authors write, more advice does not necessarily equal good advice: “By that logic, sending Bernard L. Madoff to jail was bad for middle-class savers because they had fewer advisors to pick among.”

In real-dollar terms, think of this example: A financial advisor, because of a higher commission coming to him or her, recommends that a client purchase an investment product that has a one-percent lower annual return than another product that would offer less revenue for the advisor. Over a 35-year retirement savings period, that original conflicted recommendation would result in a nest egg 25% smaller than it could have been. That is a huge difference, and one that could be avoided if a fiduciary standard were enforced.

The bulk of financial advisors want what is best for their clients. Sometimes, though, the compensation arrangements within their firms make it very hard to provide truly objective advice that elevates the customers’ interests above all else. That inherent conflict is exactly the reason why the fiduciary standard is an idea whose time has come. In fact, it is long overdue.

In the coming days and weeks, stay tuned as Congress, the Department of Labor, industry lobbyists and investor advocates battle over this crucial issue. The safety of your retirement savings just may depend on the outcome.

If you have suffered an investment loss and are concerned that it may have been caused by conflicted advice from your financial advisor, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Arbitration: Explosive Study Reveals Lack of Diversity Among Arbitrators and Lack of Transparency on Arbitrator Bias and Conflicts

October 7, 2014

The Public Investors Arbitration Bar Association (PIABA) today released an important study exposing some very troubling facts about arbitration at the Financial Industry Regulatory Authority (FINRA).

Despite FINRA’s public claims to provide a diverse pool from which its arbitrators are drawn, in truth 80% of the arbitrators are men, and the average age of those arbitrators is 69. In fact, 40% are 70 or older and 17% are aged 80 or older. And in two documented cases, FINRA actually provided the names of deceased arbitrators to parties undertaking the arbitrator-selection process.

Obviously, simply because an arbitrator is elderly does not mean that he or she cannot render a fair decision. That said, an arbitrator pool that is so heavily skewed toward arbitrators in their 70s and 80s is not representative of the general investing public whose disputes are nearly always settled by FINRA panels.

And the same thing goes for the lack of gender balance among FINRA arbitrators. This study does not argue that any individual male arbitrator will be incapable of reaching a fair decision in a case brought by a female investor. But as the rest of society takes affirmative steps to move toward gender balance, FINRA lags. Investors deserve better.

In the press release accompanying the publication of this study, PIABA President-Elect Joseph Peiffer, a New Orleans attorney, said: “As basically the only remaining game in town, FINRA owes the public a duty to ensure a level playing field in arbitration, which includes providing parties with neutral and impartial arbitrators as well as a transparent arbitrator disclosure process. Because FINRA has failed to provide this the need for independent oversight over FINRA’s arbitration forum is even greater today.”

The study also points out significant problems with the arbitrator disclosure process, including a failure to ensure that arbitrators disclose their potential conflicts or biases.

And the study goes on to recommend nine concrete reforms, including the adoption of the Investor Choice Act of 2013, making securities arbitration optional for investors and giving them the right to go to court instead.

These are important issues that investors should be aware of, and that our elected leaders should address.

At The Law Office of Kevin Galbraith, we work to protect investors and assert their legal rights if they have suffered investment losses as a result of their brokerage firms’ misconduct. If you have questions regarding investment losses, the conduct of your brokerage firm or the FINRA arbitration process, please contact a securities attorney at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Arbitration: For Most Investors—The Only Game in Town

July 23, 2014

Nearly every time an investor opens a brokerage account, he or she agrees to arbitrate any disputes with the brokerage firm at the dispute-resolution wing of FINRA, the Financial Industry Regulatory Authority. Just by signing the account-opening forms, the investor gives away the right to litigate legal claims in court and agrees to submit to a very different dispute-resolution process administered by Wall Street’s self-regulatory organization.

FINRA arbitration has its proponents and its critics—and both sides of the argument have plenty of fodder—but at least for now, it’s the only game in town when it comes to holding a broker accountable for fraud, inappropriately recommending high-risk or illiquid investments and other types of misconduct.

So it’s important to understand how FINRA arbitration works, warts and all. In a recent article in the New York Times, journalist Tara Siegel Bernard takes a careful and evenhanded look at the forum and the process.

The article points out that “While arbitration has its share of benefits—it’s much quicker and cheaper than litigation—some securities lawyers who represent investors argue that they would get better results before a jury of their peers. But other legal experts point out that many investors wouldn’t have a chance to be heard if it weren’t for arbitration; federal securities laws, along with some states’ laws, are not always investor-friendly.”

These are important observations; affordability and efficiency are two of the biggest benefits of FINRA arbitration. Typically a case at FINRA will take between twelve and fifteen months from start to finish, far shorter than the years it sometimes takes cases to wind their way through state and federal courts. And there are plenty of cases that do not fit neatly into the legal framework of federal securities laws, but that have great merit and value when brought at FINRA, where arbitrators are able to “do equity.”

The article goes on to analyze some of the numbers we have about how well investors do in FINRA arbitrations, reporting that the most recent statistics indicate that customers prevail in about 42% of the cases they bring. As Bernard points out, though, what it means to “win” is up for debate. For example, a case in which one of my clients recovers 100% of her losses is counted as a “win” on par with a case in which another investor recovers a tiny percentage of losses. So clearly there is room for added transparency on how investors fare at FINRA, and that’s just one type of transparency that many observers and participants have been advocating for years.

The Times article also reports that many observers believe that FINRA needs to do a better job training its pool of arbitrators and ensuring that they are qualified to fulfill their crucial role. That is consistent with what I’ve seen in my years of representing investors before FINRA panels. Many arbitrators are dedicated, deeply experienced, professional and fair-minded. Those arbitrators are able to conduct a hearing that leaves all parties with the sense that they were given a full and fair opportunity to air their dispute. But some arbitrators fall short of that standard, and there should be zero tolerance for arbitrators who are not up to the job, leaving investors feeling their claims were given short shrift.

No matter what one concludes about the pluses and minuses of FINRA arbitration, as Bernard notes, “For people who decide to pursue arbitration, legal experts suggest finding a lawyer with significant experience in [FINRA] arbitration.”

At The Law Office of Kevin Galbraith, we work to protect investors and assert their legal rights if they have suffered investment losses as a result of their brokerage firms’ misconduct. If you have questions regarding investment losses, the conduct of your brokerage firm or the FINRA arbitration process, please contact a securities attorney at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Senior Investors: A Short Guide to Suitability

July 9, 2014

Guest post by April Harris, Fordham University School of Law JD Candidate (2015)

With age comes wisdom, and for many older investors, wealth. For some seniors, their “save for a rainy day” approach has paid off such that a lifetime of regular retirement contributions paired with the right holdings has resulted in a healthy nest egg and so, an income stream to help fund their retirement.

And yet, despite their years of experience with investing, seniors are far from immune to fraud, unsuitable recommendations and other forms of financial misconduct by their brokers. In fact, seniors must be especially vigilant when it comes to their investments for two reasons. First, bad brokers frequently target seniors. And second, if seniors suffer substantial losses, they have very little opportunity to make up for the damage.

An October 2013 FINRA press release notes “Americans age 65 and older are more likely to be targeted by fraudsters and more likely to lose money once targeted.”

With this in mind, how can seniors guard against financial fraud, unsuitable recommendations and other misconduct? What should they be mindful of before entrusting their nest egg to a financial advisor?

Risk tolerance is often one big difference between senior citizens and younger investors. For most of us, retirement signals a transition from wage and salary earnings to a combination of monthly payouts (e.g., Social Security benefits and pensions) and invested assets that fluctuate in value, often held in retirement accounts or other tax-advantaged accounts. As we age and eventually retire, we often focus our investment strategy on conservative and stable holdings (e.g., less stocks, more bonds and other fixed-income instruments) that can protect against significant losses in times of market volatility.

So before buying any financial product, an investor—including a senior investor—should ask his or her broker, “Is it suitable for me? Does it fit the goals I’ve set out for this stage of my life?”

“Suitability” is the standard for judging whether a broker’s recommendation is appropriate. FINRA Rule 2111(a) requires that advisors “have a reasonable basis to believe that a recommended transaction or investment strategy…is suitable” for the investor. The rule then lists the factors a broker must consider when recommending an investment product or strategy to the client. These factors include “the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”

Considering the huge and ever-increasing number of financial products that are available to retail investors these days, what should seniors think about when responding to recommendations from their financial advisors? Three crucial considerations are liquidity, length and life expectancy: what we can think of as the “3 Ls.” These three factors are a good starting point for seniors who are serious about protecting their portfolios from investment fraud and unsuitable recommendations that might subject them to dangerous market volatility:

Liquidity

  • Remember, retirement signals an income shift from wages or salary to assets, so seniors should be wary of any products with limited liquidity.

  • Inquire about “early withdrawal” penalties or any other limitations on accessing the assets.

  • Ask Your Financial Advisor: How easy is it to access these funds without incurring fees once I buy this product?

Length

  • Generally, long-term gains are taxed less severely than short-term gains and a good financial advisor considers the client’s tax status when making investment recommendations.

  • Ask Your Financial Advisor: What should I know about the tax implications of this product?

Life Expectancy

  • Seniors typically want products that will yield returns within a reasonable amount of time.

  • Ask Your Financial Advisor: How long should I expect to wait before I will see a return on this investment?

This is just an introduction to some considerations that older investors ought to keep in mind when evaluating investments that their financial advisors recommend. Seniors should both do their own research and have frequent, in-depth conversations with their financial advisors and accountants to be sure they understand and are comfortable with their investment portfolios.

One final thought for senior investors (and investors of any age, really): Ask yourself, “Can I explain every product in my portfolio in plain English?” If not, it’s time to ask some hard questions of your broker and if after those conversations, you still cannot, you should consider dropping those investments that you cannot explain from your portfolio. The last thing senior investors want is an unpleasant surprise in their portfolios, particularly one that could have been avoided by asking some hard questions before investing.

If you have suffered substantial losses to your retirement account while following your financial advisor’s recommendations, please contact a securities attorney at The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Mutual Fund Scam: “Survivorship Bias” and Masking Luck as Skill

July 3, 2014

Investors wanting to diversify their portfolios often turn to equity mutual funds to get exposure to a variety of companies and industry sectors. The $15-trillion mutual fund industry in the United States was built on this desire for diversification, and mutual fund companies devote massive resources in their sales and marketing efforts.

Unfortunately for investors, one widespread marketing pitch employed by mutual fund companies is deceptive. When a company claims that its funds have “consistently outperformed the S&P 500,” investors should be skeptical.

In his incisive, humorous, plain-English book exploring how statistics can be used and abused, “Naked Statistics: Stripping the Dread from Data,” author and professor Charles Wheelan explains how it works.

The mutual fund industry has aggressively (and assiduously) seized on survivorship bias to make its returns look better to investors than they really are. Mutual funds typically gauge their performance against a key benchmark for stocks, the Standard & Poors 500, which is an index of 500 leading public companies in America. If the S&P 500 is up 5.3 percent for the year, a mutual fund is said to beta the index if it performed better than that, or trail the index if it does worse. One cheap and easy option for investors who don’t want to pay a mutual fund manager is to buy an S&P 500 Index Fund, which is a mutual fund that simply buys shares in all 500 stocks in the index. Mutual fund managers like to believe that they are savvy investors, capable of using their knowledge to pick stocks that will perform better than a simple index fund. In fact, it turns out to be relatively hard to beat the S&P 500 for any consistent stretch of time…. Of course, it doesn’t look very good to lose to a mindless index that simply buys 500 stocks and holds them. No analysis. No fancy macro forecasting. And much to the delight of investors, no high management fees.

What is a traditional mutual fund company to do? Bogus data to the rescue! Here is how they can “beat the market” without beating the market. A large mutual fund company will open many new actively managed funds…. For the sake of example, let’s assume that a mutual fund company opens twenty new funds, each of which has a roughly 50 percent chance of beating the S&P 500 in a given year…. Now, basic probability suggests that only ten of the firms’ new funds will beat the S&P 500 the first year; five funds will be it two years in a row; and two or three will be it three years in a row.

Here comes the clever part. At that point, the new mutual funds with unimpressive returns relative to the S&P 500 are quietly closed…. The company can them heavily advertise the two or three new funds that have “consistently outperformed the S&P 500”—even if that performance is the stock-picking equivalent of flipping three heads in a row. The subsequent performance of these funds is likely to revert to the mean, albeit after investors have piled in. The number of mutual funds or investment gurus who have consistently beaten the S&P 500 over a long period is shockingly small.

The whole book is fascinating and well worth your time, and this section helps us understand how important it is to be on guard against impressive-sounding claims made by financial advisors, mutual fund companies and others who stand to profit from convincing you that they are the proverbial “smartest guys in the room.”

If you have suffered an investment loss as a result of your broker pitching an investment without disclosing its risks or explaining less expensive alternatives to achieve the same objectives, please contact a securities attorney at The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Know Your Broker: A Quick Guide on How to Protect Yourself When Hiring a Financial Advisor

June 19, 2014

Guest post by April Harris, Fordham University School of Law JD Candidate (2015)

In a recent Investment News article, Mason Braswell explores the hiring practices of the securities brokerage firm IAA Financial. Braswell writes, “[o]f the 37 Finra-registered brokers at the firm, 31 have been with at least one brokerage firm that had been expelled by regulators.” At a time when FINRA is purportedly scrutinizing brokers who move repeatedly among firms, that number is sure to raise eyebrows.

So investors who are customers of IAA Financial may want to think twice about who is managing their money. And more generally, alarming hiring practices like those of IAA Financial should spur investors to think carefully about their advisor’s employment history and regulatory track record before handing over their hard-earned assets. As Braswell points out, some brokerage firms bury their heads in the sand—or at least look the other way—when it comes to making new hires.

So armed with this information about how some brokerage firms hire financial advisors, how can investors make smart decisions when picking a financial advisor, or continuing a relationship with an existing one?

Braswell points to FINRA’s BrokerCheck as one source investors should consult when investigating a broker or firm’s background. And there are others as well. Below is a brief discussion of BrokerCheck and other existing tools investors can employ when conducting a background search on a broker or firm:

BrokerCheck
BrokerCheck is a good starting point for investors who want to examine a broker or firm’s regulatory conduct. FINRA created this tool to allow investors to search by individual or brokerage name. It lists “disclosure events,” namely, criminal, civil, and regulatory actions, customer complaints, arbitrations, and terminations. So by searching BrokerCheck, investors can see whether a broker or brokerage firm has disclosures that should be of concern, like a long list of customer complaints or tangles with regulators. BrokerCheck has gaps, however, so an investors research should not end there.

PACER
PACER is another means investors can check up on brokers and brokerage firms. Provided by the Federal Judiciary, PACER permits free public access to federal district and appellate cases and dockets. An account is required, however once registered, users can search by party name for any legal actions a broker or firm may have been involved in. Data is available the moment the case is electronically filed, so all updates are in real time.

State Securities Regulators
SEC regulation and enforcement is limited to federal securities law, however securities regulators exist at the state level as well. Here, investors can look into any state-led disciplinary actions against brokers and brokerage firms. Investors can find their own state regulator by consulting the North American Securities Administrators Association.

Basic Internet Research
And finally, investors can also conduct their own basic research simply by using Internet search engines like Google, Yahoo or Bing and typing in the name of the financial advisor or brokerage and seeing what results come up. Because so much information is now publicly available online, investors can effectively use the Internet dig into a firm or advisor’s past. Of course, the Internet is a widely accessible forum and not everything that turns up in a search is accurate, so investors would be wise take any revelations with a grain of salt, but there’s little question it’s a good place to start.

At The Law Office of Kevin Galbraith, we work to protect investors and assert their legal rights if they have suffered investment losses as a result of their brokerage firms’ misconduct. If you have questions regarding investment losses or the conduct of your brokerage firm, please contact a securities attorney at The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Financial Punditry Should Be Taken with a Gigantic Grain of Salt

May 22, 2014

Guest Post by Erick Haman, Fordham University School of Law JD Candidate (2015)

With Clash of the Financial Pundits, Joshua Brown and Jeff Macke tell the history of financial media and punditry while evaluating its worth looking to the future. Brown, himself a pundit on CNBC, is the creator of The Reformed Broker, one of the most widely followed financial blogs in the world. He has been named the top financial person to follow on Twitter by the Wall Street Journal, Barron’s and TIME Magazine. Macke, a professional investor and market commentator on Yahoo Finance was an original cast member on CNBC's Fast Money and ran a hedge fund in San Francisco.

As Clash of the Financial Pundits explains, financial pundits have been around for a long time, and it doesn’t look like they are going anywhere anytime soon. The book tells the story of Roger Babson’s Black Friday speech in 1929. During that speech, for the first time, the New York Stock Exchange telegraphed Babson’s message to traders working on the floor. This was the day in 1929 where the top was put out on the market. While this was not the first time Babson had espoused these views, this time the traders decided to listen to him and took drastic action. While this decades-old example shows how powerful and potentially dangerous pundits can be, Brown does believe that financial pundits can provide value as well.

In a recent interview with National Public Radio, Brown explained that “the value of punditry … is that there are really smart people that can educate you about what’s happening in the market. The danger is when you take that to the next step and you decide that something might be actionable that isn’t.”

As many critics have noted, the advice given by financial pundits does not always work out well for the viewer who makes the mistake of actually acting on the advice. Respected financial advisor and Wealth Logic founder Allan Roth analyzed the performance of several of the picks made by Mad Money’s Jim Cramer. Let’s just say the results were less than stellar.

It is important to remember that much—even most—of what these pundits say should be taken as entertainment. And just as important, he advice they give is of course not tailored to the viewers’ financial profiles or investment goals. It’s for mass consumption.

In addition, advice given by pundits like Jim Cramer can impact the price of stocks, with the impact reversing quickly, consistent with pricing pressure caused by viewers jumping on his recommendations. As explained by Moneywatch’s Larry Swedroe, “[w]hile the demand for Cramer’s stock picks increases, there is also an increase in the volume of short selling (bets that the stock will fall). In the opening minutes of the day following a recommendation, short sales increase to almost seven times their normal levels, and they remain elevated for three days. Who are these short sellers? Likely candidates are hedge funds who are exploiting naïve investors.”

These studies explain and highlight the importance of viewers being skeptical of any financial advice given by a financial pundit. As Brown explained, “[t]he way to think about financial media is the same way that you think about the weather. It's when the storm is hitting that all of a sudden everyone is glued to Bloomberg and CNBC… [I]n the absence of those types of storms, the financial media—who want viewers, they want clicks on their sites and on their apps—they have to gin up their own emergencies.”

At The Law Office of Kevin Galbraith, we work to protect investors and assert their legal rights if they have suffered investment losses as a result of their brokerage firms’ misconduct. If you have questions regarding investment losses or the conduct of your brokerage firm, please contact a securities attorney at The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Fines Morgan Stanley Smith Barney $5 Million for Supervisory Failures in Connection with Initial Public Offerings

May 19, 2014

The Financial Industry Regulatory Authority (FINRA) announced recently that it had imposed a $5 million fine on Wall Street brokerage firm Morgan Stanley Smith Barney. The fine resulted from the firm’s practices in selling shares in initial public offerings (IPOs) to its retail investor clients. FINRA’s press release described the firm’s failures:

From February 16, 2012, to May 1, 2013, Morgan Stanley Smith Barney sold shares to retail customers in 83 IPOs, including Facebook and Yelp, without having adequate procedures and training to ensure that its sales staff distinguished between "indications of interest" and "conditional offers" in its solicitations of potential investors.

In plain English, this means that the firm treated its clients’ preliminary, non-binding expressions of interest in buying shares in the IPOs of Facebook, Yelp and other companies the same as if the clients had agreed to bind themselves to an agreement to buy those shares. The firm even adopted a policy that treated “indications of interest” and “conditional offers” as if they were the same thing, which they are decidedly not.

Morgan Stanley Smith Barney’s misconduct in this area might sound esoteric or even technical, but its effect was very real. It resulted in investors’ buying shares in companies without knowing they were doing it. Morgan Stanley Smith Barney is a huge firm, with nearly 25,000 brokers working in over 800 branch offices, and it has millions of retail investor customers, so the impact may well have been widespread. And particularly in the case of Facebook, an unknowing investment could well have been disastrous, given the botched IPO and immediate tanking of the share price. Details of the firm’s misconduct are contained in the Letter of Acceptance, Waiver and Consent.

Then, after setting in motion this confusing procedure that failed its customers, Morgan Stanley Smith Barney failed to train its sales force or put in place any kind of education program or materials that would have helped set the brokers straight. The firm’s failure to supervise its brokers almost certainly resulted in the firm’s customers not understanding whether they were agreeing to buy shares or just having preliminary conversations

There are many reasons why retail investors should be wary of investing in IPOs, particularly the heavily hyped offerings of companies like Facebook, King Media, Zynga and others. We’ve written about those reasons on this blog before, and they’ve been well reported in major media outlets as well.

If an investor, knowing all risks inherent to participating in an IPO, makes an intentional choice to do buy in, so be it. But an investor should never be in the position of wondering whether he or she agreed to buy. That’s elementary, and Morgan Stanley Smith Barney fell down on the job.

If you have suffered an investment loss as a result of your broker pitching an IPO using misleading tactics or buying you shares in an IPO without your knowledge, please contact a securities attorney at The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Morgan & Morgan and The Law Office of Kevin Galbraith Announce the Investigation of John Thomas Financial, John Thomas Bridge and Opportunity Fund LP I and the John Thomas Bridge and Opportunity Fund LP II

April 1, 2014

Morgan & Morgan, working with The Law Office of Kevin Galbraith, announces that it is investigating claims on behalf of investors of John Thomas Capital Management, renamed as Patriot 28 LLC. This investigation concerns conduct by various individuals regarding two hedge funds known as the John Thomas Bridge and Opportunity Fund LP I and the John Thomas Bridge and Opportunity Fund LP II (together, the "Funds"), and the Funds' adviser (the "Adviser"). Since September 2011, the Funds have been known as Patriot Bridge and Opportunity Fund LP and LP II and the adviser has been known as Patriot 28 LLC.

If you invested in these Funds and want to know more about the investigation please contact Peter Safirstein at 1-800-732-5200 or email info@morgansecuritieslaw.com; or contact Kevin Galbraith at 1-212-858-7650 or email kevin@galbraithlawfirm.com.

In March 2013, the SEC announced charges that Houston hedge-fund manager George Jarkesy Jr. and his firm, John Thomas Capital Management, since renamed Patriot 28 LLC, defrauded investors by inflating valuations on assets held by two hedge funds.

Morgan & Morgan is one of the nation's largest 200 law firms. In addition to securities fraud, the firm also practices in the areas of antitrust, personal injury, consumer protection, overtime, and product liability. All of the Firm's legal endeavors are rooted in its core mission: provide investor and consumer protection and always fight "for the people."

Kevin Galbraith is a leading securities fraud attorney located in the financial district of Manhattan. He is a fierce advocate who forges creative solutions and achieves top results for his clients. Mr. Galbraith represents investors from coast to coast and overseas. With more than a decade of experience fighting for investors who were harmed by the misconduct of Wall Street brokerage firms, he has helped his clients recover millions of dollars in investment losses.

Attorney advertising. Prior results do not guarantee a similar outcome.

Contacts:
Morgan & Morgan
Peter Safirstein, Esq.
28 West 44th Street
Suite 2001
New York, NY 10036
1-800-732-5200
info@morgansecuritieslaw.com

The Law Office of Kevin Galbraith
Kevin D. Galbraith, Esq.
140 Broadway, 46th Floor
New York, NY 10005
1-212-858-7650
kevin@galbraithlawfirm.com



Departing Brokers Should Brace For Battle: Even When Financial Advisors Follow All the Rules, Jilted Brokerage Firms Wreak Havoc

March 19, 2014

When a financial advisor wants to move from one brokerage firm to another, there is a specific set of rules that the broker must follow in order to avoid liability to the broker’s former firm. Those rules are set out in the Protocol for Broker Recruiting.

But even when a broker follows those letters to a T, sometimes the brokerage firm the advisor is leaving decides to punish the broker for perceived disloyalty. This approach, which can include scorched-earth tactics, often takes the form of FINRA arbitration and other litigation. While the experience can take a toll, both financial and emotional, it can have a happy ending.

Think Advisor published a fascinating, in-depth article on what happened when John Lindsey, a very successful Edward Jones broker for nearly twenty years, decided to break away. It was not a pretty picture, and it does not reflect well on Edward Jones in particular.

Lindsey, with the help of experienced legal counsel, ultimately prevailed in his fight against Edward Jones. And now he is spreading the word about how he won, in hopes of showing others that they should not feel as if they are “owned” by their employers. It’s an impressive victory and contains important lessons for financial advisors.

From my perspective, the main takeaway for brokers from Lindsey’s experience is this: if you are going to move your business from one brokerage firm to another, it’s not enough to be ethical and honest. You also need to be prepared to fight for your right to work where you choose. And part of that preparation is retaining an attorney who can help defend and enforce that right.

If you are a financial advisor who is considering moving your business from one brokerage firm to another, please contact The Law Office of Kevin Galbraith at 212.203.1249 or email a securities attorney at kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Roundup: A Quick Survey of Key Stories and Events on Wall Street and in the Broader Financial World

March 12, 2014

Pershing Square Capital’s Herbalife Bet Draws Intense Media Scrutiny and Herbalife Is Now Under Investigation

The New York Times published a deep-dive exploration of hedge-fund titan William Ackman’s big bet against nutritional supplement and vitamin marketer Herbalife. The piece delves into the multi-pronged strategy Ackman’s Pershing Square Capital has employed to spur regulatory scrutiny of the company’s business practices. The campaign to shine a light on the company seems to be gaining momentum, as the FTC has opened an investigation.

Whatever the outcome, the stakes are huge it is worth watching the controversial and sometimes messy interplay of Wall Street, Congress, federal and state regulators and civil rights groups.

FINRA Allows Brokers to Hide Key Parts of their Professional Histories

A major study by the Public Investors Arbitration Bar Association (PIABA) has revealed that brokers and brokerage firms are able to shield from public view the truth about crucial aspects of their personal and professional histories. A link to the press release announcing the study and to the study itself is here.

This is an absurd situation. Countless investors rely on FINRA’s BrokerCheck to help inform their decisions to hire, retain or fire a broker. Those investors rightly expect that FINRA, the sole regulator in charge of all the brokers in the U.S., will provide full, accurate information about those brokers. This study shatters investors’ expectations and breaks any trust that may have existed between investors and the regulator that is supposed to be protecting them. FINRA needs to fix this—and fast.

Jefferies to Pay $25 Million to SEC for Fraudulent Sales of Mortgage-Backed Securities

Just a week after a federal jury found Jefferies trader Jesse Litvak guilty of defrauding investors in connection with the firm’s sales of mortgage-backed securities to investors, the firm has agreed to pay $25 million in recognition of its failure to supervise its MBS traders.

The takeaways: (1) When in doubt, disclose; and (2) build a compliance and supervisory system that heads off these types of problems before they take a huge bite out of the bottom line.

Fabulous Fab Fined $825,000 for Defrauding Investors

A federal judge in Manhattan has ordered Fabrice “Fabulous Fab” Tourre to pay $825,000 in fines for defrauding investors in a mortgage deal that blew up during the global financial crisis. The former Goldman trader was found liable for his role in the deal gone bad, and his colorful emails became the stuff of courtroom legend.

The takeaways: (1) emails are forever; and (2) financial firms need to communicate to their traders that disclosure and strong ethics are the cornerstones of good business, and no bonus is worth stepping over the line between truth and falsity.

If you have suffered losses as a result of a broker’s fraud or other misconduct, or if you are working to instill a culture of compliance and ethical conduct at your financial services firm, please contact The Law Office of Kevin Galbraith at 212.203.1249 or email a securities fraud attorney at kevin@galbraithlawfirm.com for a free confidential consultation.



Warning: FINRA’s BrokerCheck Reports about Financial Advisors Omit Crucial Facts that Would Help Protect Investors from Bad Brokers

March 7, 2014

A major study by the Public Investors Arbitration Bar Association (PIABA) has revealed that brokers and brokerage firms are able to shield from public view the truth about crucial aspects of their personal and professional history. A link to the press release announcing the study and to the study itself is here and the full text of the release is below.

Many investors rely on the “BrokerCheck” tool on the website of the Financial Industry Regulatory Authority (FINRA), which is a self-regulatory organization overseeing securities brokerage firms in the United States. And while BrokerCheck can help investors learn some important facts about financial advisors they are considering hiring, or with whom they already work, PIABA’s comprehensive new study brings to light the fact that BrokerCheck omits vital information that can only be found through state-by-state research, which is totally impractical for your average retail investor.

The study’s key findings include:

  • When a broker-dealer fired a registered broker, BrokerCheck reports excluded the reason for the termination and other commentary regarding the termination, although this information is available from states.

  • Information about whether a broker was ever under internal review “for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct” is not reported by BrokerCheck, but is disclosed by states.

  • A personal bankruptcy filed by a broker is not reported by BrokerCheck, but is revealed in state reports.

  • A federal tax lien filed against a broker in excess of $100,000 is not disclosed by BrokerCheck, but is disclosed in state reports.

  • Information about failed tests for industry qualification examinations is not disclosed through BrokerCheck, which does not reveal the scores achieved and the number of times a broker failed such tests. It only shows which exams were passed but not the score or how many times a broker may have failed before finally passing. State reports do include this more detailed information.

This is an absurd situation. Countless investors rely on BrokerCheck to help inform their decisions to hire, retain or fire a broker. Those investors rightly expect that FINRA, the sole regulator in charge of all the brokers in the U.S., will provide full, accurate information about those brokers. This study shatters investors’ expectations and breaks any trust that may have existed between investors and the regulator that is supposed to be protecting them. FINRA needs to fix this—and fast.

If you have suffered a loss as a result of your broker’s fraud or other misconduct, or if you are concerned that your broker may not be telling you the truth about some aspect of his or her personal or employment history, please contact The Law Office of Kevin Galbraith at 212.203.1249 or email a securities fraud attorney at kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.

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Full Text of the PIABA Press Release:

PIABA WARNING: FINRA WITHHOLDS CRITICAL “RED FLAG” INFORMATION IN BROKER BACKGROUND CHECK DISCLOSURES TO INVESTORS

It’s Time to Harmonize FINRA and State Disclosures to Public: FINRA’s BrokerCheck Routinely Deletes Information about Bankruptcies, Tax Liens, Firings, Flunked Tests, Sales Practice Abuse Investigations, and Other “Red Flags” for Investors.

WASHINGTON, D.C. – March 6, 2014 – Investors who rely on the BrokerCheck disclosure system maintained by the Financial Industry Regulatory Authority (FINRA) to check out the background of their current or potential stockbrokers are not getting access to crucial information about financial professionals even though such information is available from many state securities agencies operating under robust public record laws, according to a new analysis from the Public Investors Arbitration Bar Association (PIABA).

PIABA is warning that the extent of omitted “red flag” background information is so serious that unwitting investors relying on BrokerCheck may very well select brokers with whom they would not do business if they had access to the more complete picture available to FINRA but now being hidden.

The PIABA report underscores in stark terms the high stakes for investors: “The information that FINRA omits in its reports is objectively important to investors seeking to make an informed decision about selecting a broker. The result is that consumers who use the BrokerCheck system to conduct their due diligence may make an incorrect assumption that all relevant information has been disclosed and may opt to rely on a broker they would have avoided had they known more information.”

Available at http://www.piaba.org, the PIABA analysis find that FINRA has elected to provide limited information about brokers even in the face of calls for fuller disclosure from the Securities and Exchange Commission (SEC), state securities regulators, consumer groups, and other organizations. The PIABA analysis makes clear that the only way for the BrokerCheck system to function as intended to educate and protect investors is to require that FINRA disclosures be made consistent with the more complete reporting provided by state securities agencies.

Attorney Jason R. Doss, president, PIABA, said: “All investors should be able to obtain complete and consistent information about brokers. Period. The quality of the disclosure you get about brokers should not depend on which state you live in. There is no rational basis for FINRA to hide key ‘red flag’ information that investors in some states can get from state-level agencies. Given that FINRA has failed repeatedly to take action to increase the disclosures in BrokerCheck, Congress and the SEC need to compel them to do so if necessary.”

“The veil of secrecy that exists in the current BrokerCheck system should be lifted to allow consumers access to a comprehensive, reliable source so that they can make informed decisions about a profession that has extraordinary influence over their life savings,” said Christine Hines, Public Citizen’s consumer and civil justice counsel. “It is indefensible for FINRA to withhold critical information, already under its control, from the public.”

“Investors go to BrokerCheck to get information about their broker. They should not have to then follow-up with their state securities regulator to possibly obtain additional, relevant information about that broker that is already in FINRA’s possession. They should be able to get all of the relevant information from one central location,” said Christine Lazaro, director of Securities Arbitration Clinic, St. John’s University School of Law.

Denise (Denny) Voigt Crawford, former Texas Securities Commissioner (1993-2011) and former president, North American Securities Administrators Association (1996-1997 and 2009-2010), said: "I have been a long-time, very vocal critic of FINRA's indefensible policies regarding the release of information via the CRD. It really is appalling that FINRA is given the authority to collect detailed information about financial professionals yet is not required to make a full disclosure of that information. This practice is very detrimental to the interests of investors, policy makers and the public generally."

For its new analysis, PIABA compared FINRA BrokerCheck and state-level disclosures for a number of brokers. PIABA found the following:

  • When a broker-dealer fired a registered broker, BrokerCheck reports excluded the reason for the termination and other commentary regarding the termination, although this information is available from states.

  • Information about whether a broker was ever under internal review “for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct” is not reported by BrokerCheck, but is disclosed by states.

  • A personal bankruptcy filed by a broker is not reported by BrokerCheck, but is revealed in state reports.

  • A federal tax lien filed against a broker in excess of $100,000 is not disclosed by BrokerCheck, but is disclosed in state reports.

  • Information about failed tests for industry qualification examinations is not disclosed through BrokerCheck, which does not reveal the scores achieved and the number of times a broker failed such tests. It only shows which exams were passed but not the score or how many times a broker may have failed before finally passing. State reports do include this more detailed information.

FINRA maintains the Central Registration Depository (CRD) database on its behalf and on behalf of state securities agencies, which means that BrokerCheck and the states draw on the same pool of information.

FINRA promotes BrokerCheck as a major resource for investors. States also make available information from CRD records, but have not generally invested the same kind of time and effort in publicizing the availability of the often more complete information.

The PIABA report notes: “Despite this uneven access, FINRA has not harmonized its disclosures with the information disclosed by the states with the most robust public records laws. In failing to do so, FINRA has narrowly construed statutory instruction to make the CRD database’s information public, ignored the requests of the SEC to increase access, disregarded public requests from multiple academics for more information, neglected multiple requests from the North American Securities Administrators Association, and turned a blind eye to requests from the Public Investors Arbitration Bar Association.”

The report makes the point that it is important that investors have access to the information about termination, bankruptcies and tax liens, industry exam failures and whether a broker was ever under internal review as they would impact the decision-making process of who an investor hires to manage their life savings. In the case of a termination, if an investor reviewed the BrokerCheck report, they may be misled into believing a broker left a firm on amicable grounds since the report does not include the reportable facts and circumstances under which the broker left the firm.

In the case of a bankruptcy or tax lien, a reasonable investor would have good reason not to engage or hire a broker who has demonstrated that he or she cannot properly manage their own finances. In the case of industry exams, BrokerCheck only shows which exams a broker has passed but not if a broker failed an exam prior to that. An investor may believe that this type of information speaks to the basic competency of their broker.

Additionally, it is unimaginable that any reasonable investor would not want or need to know the answer to this question: ‘Currently is, or at termination was, the individual under internal review for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct?’ Yet, this information is only publicly available from some state regulators, not from BrokerCheck.

FINRA maintains the qualification, employment and disclosure histories of 5100 broker/dealers and approximately 660,000 of their securities employees in the electronic CRD system. FINRA and the North American Securities Administrators Association (NASAA) established the CRD system in 1981. For each associated person licensed by FINRA, the CRD system contains disclosure information with respect to the associated person having been named in a criminal matter, having been the subject of a regulatory disciplinary action, having been the subject of a civil judicial action, and having been the subject of an investor arbitration proceeding.

ABOUT PIABA

Public Investors Arbitration Bar Association is an international, not-for-profit, voluntary bar association of lawyers who represent claimants in securities and commodities arbitration proceedings and securities litigation. The mission of PIABA is to promote the interests of the public investor in securities and commodities arbitration, by seeking to protect such investors from abuses in the arbitration process, by seeking to make securities arbitration as just and fair as systemically possible, and by educating investors concerning their rights. For more information, go to www.piaba.org.

MEDIA CONTACT: Ailis Aaron Wolf, (703) 276-3265 or aawolf@hastingsgroup.com.

EDITOR’S NOTE: A streaming audio replay of the news event is available on the Web at http://www.piaba.org/.



FINRA Moves Forward with Plans on “Expungement” and Arbitrator Classification

February 24, 2014

FINRA, the Financial Industry Regulatory Authority, is moving forward with plans on two little-noticed fronts that could offer substantial improvements to mandatory arbitration of disputes over investment losses. In a venue many think is stacked against investors, these changes are both long overdue and very welcome.

First, FINRA announced that it would file with the SEC a proposed rule change that would prohibit brokerage firms from requiring customers to agree to allow stockbrokers’ licenses to be wiped clean—“expunged”—in exchange for paying settlements to resolve the customers’ claims of fraud, unsuitable recommendations or other misconduct. There is plenty of disagreement within the securities and legal communities about this issue—and all sides raise valid points—but I come down on the side of openness and disclosure, and against unfair pressure exerted on investors.

When investors suffer substantial losses due to the misconduct of their stock brokerage firms, they are required to submit any legal claims to binding arbitration through FINRA. Often a dispute is resolved by the firm paying the investor to drop the claim. And many times, the firm will require the customer to agree not to oppose it when it goes to the FINRA arbitration panel and asks that the license of the broker involved in the misconduct be “expunged.” Frequently the customer will agree to the request just to recover some of his or her losses and put the dispute to rest, even though if expungement is granted, it leaves the mistaken impression that the investor’s claim was frivolous or without merit. If the proposed rule change goes through, customers will no longer be placed in this position, and that can only be a good thing.

And second, FINRA is poised to change the rules on arbitrator classification. Right now, as long as five years have passed, an arbitrator who worked for decades as a Wall Street broker, or made a career representing broker-dealers as an attorney, can be classified as a “public” arbitrator. This classification gives the impression of impartiality, no matter how deep the arbitrator’s ties to the securities industry are. Under the proposed rule, those arbitrators would have to be classified as “non-public” or “industry” arbitrators. This proposed change, while esoteric, could actually be a real improvement to the fairness of the FINRA arbitration process.

Caitlin Mollison touched on both of these changes in Investment News. And Mason Braswell focused on the arbitrator-classification issue in the same publication.

Many investors and their attorneys feel that the FINRA arbitration process is stacked against them. While I don’t necessarily subscribe to that view, any effort to increase neutrality and transparency—to really give investors a fair shake when they have disputes with their brokerage firms—is welcome.

If you have suffered a loss as a result of your brokerage firm’s fraud, unsuitable recommendations or other misconduct and want to explore whether filing a FINRA arbitration is the right step, please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Investors in Puerto Rico Bonds and Bond Funds Slammed After Credit Rating Slashed to “Junk” Status by S&P

February 5, 2014

Standard & Poors has cut the credit rating on Puerto Rico’s general obligation bonds to “junk” status. The downgrade to junk was a long time coming, with many investors viewing Puerto Rican debt as speculative for months. Nonetheless, the continuing fiscal problems on the island coupled with the recent downgrade will have a massive impact on investors around the world.

David Hitchcock, an S&P analyst, discussed the downgrade decision with Bloomberg TV.

Many investors look to municipal bonds like Puerto Rico general obligation bonds for safety and income. They crave the tax advantages and steady interest these types of bonds promise to deliver.

Institutions have loved them, too, with approximately 70% of municipal bond mutual funds holding Puerto Rican debt. UBS in particular went all in on the bonds for its customers, recommending that they invest heavily on a Puerto Rico bond fund, and that they borrow on margin to boost the size of the investments.

But now, with a full-blown fiscal crisis at hand on the island, the love affair is cooling, to put it mildly. As the Righteous Brothers might have put it, investors have lost that loving feeling.

As Michelle Kaske reported for Bloomberg, the bonds themselves are suffering huge losses, having shed over 20% of their value in 2013, performing around eight times worse than the municipal market as a whole. Bond funds holding Puerto Rico bonds are wobbling. And UBS is facing a raft of regulatory and private litigation in connection with their role in peddling the funds.

This story is far from over. FINRA claims against UBS are piling up. Regulatory action against the firm is ramping up. And Puerto Rican debt is still at risk of yet another downgrade. It’s hard to watch and it’s impossible to look away.

If you have suffered a loss as a result of your broker recommending Puerto Rico bonds or bond funds that include Puerto Rico bonds, please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Wrap Fees and “Reverse Churning” – Are You Paying Big Fees for No Good Reason?

January 25, 2014

Over the past several years, many brokerage firms have edged away from the traditional commission-based compensation model. Burned by claims of churning—trading their clients’ accounts at high velocity to generate big commissions—the firms have embraced a fee-based model instead.

The new model allows firms to collect substantial fees in an era where online discount brokerages have lowered commissions to a level that is nearly impossible for brick-and-mortar firms to match. And while the newer model makes sense for some investors, everyone should ask two blunt questions of their brokers: (1) why are you recommending this to me, and (2) does it make financial sense?

Often there are solid reasons for your financial advisor to charge you a percentage of assets under management. For example, if your account is heavily traded, the newer model may actually save you money when compared to what you would pay in commissions on all the trades. Or if your financial advisor does frequent, substantial analysis of the markets and your portfolio and provides valuable guidance in how to position your assets, that level of service can be well worth the fee.

But if your account is relatively stable and trades infrequently, and you feel your financial advisor is either inattentive or just “going through the motions,” you should schedule a meeting to talk about whether the current arrangement is in your best interest.

The SEC has recently identified fee-based accounts and “reverse churning” as an examination priority. Mason Braswell and Mark Schoeff Jr.’s article in Investment News, “SEC Takes Deep Dive on Conflicts of Interest,” explores this issue. And you can read the SEC’s priorities here.

If you have are concerned that you have been subjected to unjustified fees or “reverse churning,” please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



The Wolves of Wall Street May Be Endangered, But They’re Not Extinct Yet

January 16, 2014

The Wolf of Wall Street is poised to take home some precious hardware at the Oscars, but disciples of the real-life Jordan Belfort have fallen on hard times.

The chief securities regulator of Massachusetts, William Galvin, is taking aim at Stratton Oakmont alumni Christopher Veale, accusing him of excessive trading—churning—in the account of an 81-year-old client of the firm he worked at until 2012, Brookville Capital Partners.

As reported by Zeke Faux in a Bloomberg article, Galvin is going hard after unscrupulous brokers and their firms.

The Bloomberg article quotes Galvin:

“Rogue brokers have long been a plague on the investing public,” Secretary of the Commonwealth William Galvin said in the statement. “My office, along with other state and federal regulators, is determined to move aggressively against them as well as the firms that hire them.”

According to reporter Zeke Faux, Veale has worked at seventeen brokerage firms since he left Stratton Oakmont in 1996, and apparently he took the lessons of Jordan Belfort to heart, if Secretary Galvin’s allegations are true. He allegedly charged his customer over $300,000 in commissions and hidden fees over a three-year period.

After he left Stratton Oakmont and before he joined Brookville Capital Partners and his current New York firm, Legend Financial, he made a stopover at another notorious “bucket shop,” John Thomas Financial, led by the now-barred Tommy Belesis. This kind of career path is all too common, skipping from one disreputable firm to the next, just a step ahead of the regulators.

Despite the best efforts of Galvin, FINRA, the SEC and other regulators, old-school boiler rooms manage to survive, pushing penny stocks and churning the accounts of their vulnerable clients after hooking them with a cold call. Unfortunately, it’s not just a Hollywood throwback, it’s a 2014 reality.

If you have suffered a loss as a result of your broker using high-pressure, “boiler-room” tactics such as cold calling, pitching penny stocks and trading your account at high velocity, please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



SEC Bars Tommy Belesis, Former Chief of John Thomas Financial and Orders Disgorgement and Restitution

December 10, 2013

The Securities Exchange Commission (SEC) has barred from the brokerage business former John Thomas Financial chief Tommy Belesis for his role in steering customers into hedge funds and influencing the fund manager and advisor to breach their fiduciary duties.

In addition to the one-year ban, the SEC ordered Belesis to pay disgorgement, interest and a civil penalty totaling over $500,000. The misconduct at issue in the SEC cease-and-desist letter related to two John Thomas Financial hedge funds for which the firm solicited approximately $30 million in investor money with the promise that the fund manager would act independently in making investment decisions. This impression turned out to be false, according to the SEC.

This SEC punishment is not the only regulatory trouble for Belesis. He is also the subject of a complaint by FINRA’s enforcement department. According to a report by Investment News, FINRA’s complaint alleges that:

“Mr. Belesis bullied brokers and lied to senior staff as part of a fraudulent plan to profit from a penny stock. JTF was known for its culture of intimidation, in which brokers were expected to spend hours cold-calling potential customers.”

In response to the FINRA complaint, John Thomas Financial closed up shop, ending its registration as a broker-dealer.

Not just a relic of the high-flying 1980s, these kind of boiler-room tactics are alive and well, and investors should be wary of any firm that “cold calls” them pitching investments.

If you believe you have been harmed by the misconduct of your financial advisor or brokerage firm, you should contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free, confidential consultation.



FINRA Fines Oppenheimer for Overcharging Its Municipal Bond Customers

December 9, 2013

The Financial Industry Regulatory Authority (FINRA) has fined brokerage firm Oppenheimer & Co., Inc. $675,000 and has ordered it to pay restitution of over $246,000 to customers who were overcharged by Oppenheimer in their municipal bond purchases.

In addition to the fine and restitution order against Oppenheimer, FINRA also fined the firm’s top municipal bond trader, David Sirriani, $100,000 and suspended him for sixty days.

As FINRA’s head of market regulation, Thomas Gira, explained: “FINRA has no tolerance for firms or individuals who charge customers excessive markups. Oppenheimer charged customers unfair prices in numerous municipal securities transactions and failed to properly supervise municipal securities transactions with its customers.”

Oppenheimer’s misconduct, which resulted in substantial damages to investors, appears to have been concentrated in the 2008 and 2009 time period.

FINRA also found that Oppenheimer failed to adequately supervise the activities of Sirriani and his municipal bond trading desk. It determined that Oppenheimer’s systems were inadequate to detect Sirriani’s misconduct.

FINRA’s press release announcing its punishment of Oppenheimer can be found here.

If you believe you have been harmed by the misconduct of your financial advisor or brokerage firm, you should contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free, confidential consultation.



FINRA Crackdown on “High-Risk” Brokers May Go Too Easy on Their Firms

December 4, 2013

FINRA has been touting its get-tough credentials lately, and the financial press has begun paying attention.
The Wall Street Journal (subscription required) recently reported that:

Under pressure from Washington to crack down on rogue stockbrokers, the Financial Industry Regulatory Authority is highlighting a fast-track program it began earlier this year to go after what it calls “high-risk brokers.”

The results: Forty-two of the most troubled brokers were targeted for “expedited investigation,” and 16 of them were thrown out of the securities industry, Finra Chairman and Chief Executive Richard Ketchum wrote in a Nov. 13 letter to Sen. Edward Markey (D., Mass.).

The high-risk brokers program was launched in February, and Mr. Ketchum wrote that it shows that Finra officials realize “the potential harm individual brokers can cause investors and the need to confront them more quickly.”

This effort is worthwhile, and FINRA’s Enforcement Division is rightly proud of this concrete step aimed at investor protection. However, in my view it likely does not go far enough, mostly because it appears that FINRA is targeting these individual brokers in isolation instead of holding their firms responsible for their misconduct.

Bad brokers cannot be viewed in a vacuum. Often there are financial dynamics at the root of unethical conduct by brokers. In other words, bad brokers engage in their bad behavior in their quest for higher commissions, fees and bonuses. And there are often cultural factors at play, too. A firm that sends the message that revenues are more important than compliance is tacitly encouraging this kind of “high-risk” broker to put his or her own interests ahead of the customer’s.

As securities commentator Larry Doyle observed on his Sense on Cents blog:

Do you think high-risk brokers engaged in an array of unsavory practices are always acting on their own? Do you think there is a chance, if not a likelihood, that pressure applied by management to generate revenue—often by seriously bending if not breaking the rules—is the real driving force behind a meaningful percentage of the practices that harm investors?

These are important questions, and if FINRA is going to deliver on its investor-protection mission, it is going to have to look beyond individual bad actors and start holding their firms liable for all the damage they cause to retail investors.

If you believe you have been harmed by the misconduct of your financial advisor or brokerage firm, you should contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free, confidential consultation.



The Law Office of Kevin Galbraith Has Filed a New FINRA Claim against UBS Financial Services Alleging Unsuitable Recommendations and Overconcentration

December 2, 2013

The Law Office of Kevin Galbraith has filed a new FINRA claim on behalf of an investor who lost over $500,000 due to his brokerage firm’s unsuitable recommendations and overconcentration.

A longtime customer of UBS Financial Services, our client has been retired for over a decade and lives modestly using funds he carefully set aside for retirement during his career. He consistently told his financial advisor that he wanted safe investments that would generate some income to help cover his living expenses and would not subject him to significant market risk. UBS purported to understand his instructions, marking in his account records that he was a “conservative” investor.

Despite our client’s clearly stated conservative investment objectives, his age and the fact that he is retired with no outside income, UBS recommended that he build a portfolio that was over 99% concentrated in equities. This imbalanced, overconcentrated portfolio was highly vulnerable to stock market volatility and was entirely unsuitable for an investor with our client’s profile.

When the global financial crisis hit in 2008 and 2009, our client’s portfolio was devastated. In order to avoid financial catastrophe, he was forced to sell out his portfolio at steep losses.

Our client’s losses were the direct result of UBS Financial Services’ unsuitable recommendations and overconcentration in equities. Through FINRA arbitration, we seek to hold UBS accountable for its misconduct.

If you are a customer of UBS or another major Wall Street firm and have suffered substantial losses due to the firm’s unsuitable recommendations, overconcentration or other misconduct, you should contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation.



Businessweek Article Explores “Expungement” After Settlement

November 7, 2013

Zeke Faux of Bloomberg Businessweek recently published an article exploring the critical issue of brokers settling FINRA arbitration claims brought by their customers, then applying to the arbitration panel to erase or “expunge” the complaint from their public records.

Expungement is a remedy available to financial advisors who believe they have received unwarranted marks on their licenses. These brokers are typically concerned that the marks could hurt their business and career prospects when current or prospective clients look at FINRA’s BrokerCheck database to explore their professional background.

When used properly, expungement is a perfectly valid avenue for a financial advisor or other registered representative to pursue. Problems arise, though, when the process is abused. For example, in many instances a brokerage firm might attempt to make settlement contingent on a customer agreeing not to take part in the expungement hearing. Employing this kind of pressure tactic with a customer who has already suffered substantial financial losses simply shouldn’t happen.

In the Businessweek article, I am cited on this topic:

Brokers often refuse to settle unless the clients agree to stay out of the expungement hearing, says Kevin Galbraith, a lawyer in New York…. Most choose to take the money and end the headache, he says.

This is a critical issue in the arena of FINRA arbitration, and the Public Investors Arbitration Bar Association recently published a study finding that arbitrators granted expungement after cases were settled 97% of the time in a sample of cases taken from 2009 through 2011. In one instance, a single broker was able to wipe out 35 marks from his record!

Clearly, the expungement system as it is currently set up is not working. FINRA has promised to review the issue and to take the steps necessary to correct the problems. How quickly and how effectively it acts remains to be seen.

If you are an investor concerned about potential misconduct by your broker, or a broker wanting to discuss the expungement process and how it can work properly, you should contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation.



Don’t Believe the Hype – I.P.O.s Can Be Great for Issuers, Dangerous for Investors

October 31, 2013

In an op-ed for the New York Times, Teresa Tritch warns investors against getting caught up in the hype surrounding the resurgent I.P.O. market. In a memorable turn of phrase, she writes “There’s a certain electricity in the air—and I’m reaching for a gas mask.” Tritch counsels that I.P.O.s “should raise suspicion, not excitement.”

The reasons to be leery of I.P.O.s are straightforward. First, a company’s decision to raise money through the public equities markets can be a sign that they have run out of other ways to grow.

And second, the IPO market is markedly outpacing the economic recovery. As Tritch writes, “In general, the number of I.P.O.s and the amount of money raised track with the health of the economy. When the economy stalls, so do I.P.Os. When it recovers, so do I.P.O.s.”

But for the past several years, the stock market has risen much faster than the economy at large has grown, propped up by the Federal Reserve’s monetary stimulus policies.

This dynamic should get investors’ antennae up and serve as a reminder that when making investment decisions, it generally makes sense to beware of the “latest and greatest” and stay focused on companies whose business model actually makes sense to you. With that in mind, you may avoid falling victim to the hype that serves very little purpose other than to line the pockets of I.P.O. issuers’ insiders’ pockets.

If you have suffered a loss as a result of your broker pitching an I.P.O. using misleading tactics, please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



Senator Urges Stronger Stockbroker Oversight by FINRA and the SEC

October 30, 2013

It appears that investors have a new advocate in Washington. Investment News (free subscription required) reports that Senator Edward J. Markey (D-MA), who won a special election to succeed Secretary of State John Kerry, is raising important questions with FINRA and the SEC about their oversight of bad stockbrokers.

The Investment News article reports that Senator Markey is “calling on financial regulators to crack down on brokers who violate securities rules and continue to practice,” citing a recent Wall Street Journal report that revealed that approximately 5,000 bad brokers who were banned by FINRA continue to provide financial advisory services.

In a letter to SEC chair Mary Jo White, Senator Markey urged a fix and also suggested that “all arbitration awards and settlements should be reported by BrokerCheck.” He wrote that “Expungement should truly be rare, and arbitrators should not be allowed to decide that an award should be expunged. Rather, Finra should establish an internal process that determines whether a particular award or settlement meets stringent expungement criteria.”

The Senator also pointed out another problem with FINRA’s arbitration system: uncollectible awards. He noted that there were $51 million in unpaid awards from 2011 alone, writing “Current regulations allow brokerages to open with far too little capital—certainly not enough to pay an arbitration award…. The SEC needs to investigate these deadbeat brokers and amend existing or promulgate new rules to address this problem.”

In response to Senator Markey’s letter, FINRA issued a statement indicating that it was reviewing the expungement rules and procedures.

Expungement for a broker can be an entirely appropriate remedy in the rare case where a truly frivolous claim is brought by an investor. But the process by which it is sought and granted is broken. Senator Markey is right to point out the problem and it is critical that FINRA take meaningful steps to correct the problem.

The Senator should also be applauded for drawing attention to the fact that some unscrupulous broker-dealers operate with far too little capital and just fold when a sizeable award is entered against them, leaving the “winning” claimant with a hollow victory.

Investors need people like Senator Markey watching out for their interests—rather than those of Wall Street banks—in Washington.

If you are an investor who has been harmed by the misconduct of a broker, please contact The Law Office of Kevin Galbraith for a free, confidential consultation at (212) 858-7650 or kevin@galbraithlawfirm.com.



Lehman Structured Note Holders Should Act to Protect Their Legal Rights

October 30, 2013

Investors who purchased Lehman “structured notes” through UBS Financial Services should be aware that a settlement reached in a pending class action will affect their legal rights.

Within the past few days, these investors should have received notice of the settlement, which estimates that investors will receive approximately 13.4 cents on the dollar, less attorney’s fees. So between the bankruptcy recovery and this settlement, UBS customers will clear less than one-third the value of their Lehman investments.

UBS customers do not need to accept this modest settlement.

Kevin Galbraith has represented dozens of UBS customers who purchased structured notes, including so-called “100% Principal Protection Notes,” “Barrier Notes” and “Return Optimization Securities” issued by the now-bankrupt Lehman Brothers, with great success. His track record includes multiple high-dollar awards by FINRA arbitration panels and dozens of high-percentage settlements.

Anyone who lost $50,000 or more in a Lehman structured note investment made through UBS should contact The Law Office of Kevin Galbraith for a free, confidential consultation at (212) 858-7650 or kevin@galbraithlawfirm.com.



The Law Office of Kevin Galbraith Is Investigating UBS Financial Services of Puerto Rico on Behalf of Investors in Bond Funds

October 22, 2013

Our office is investigating UBS Financial Services Inc. of Puerto Rico over its sales of leveraged bond funds. Our investigation targets not only the sales practices of financial advisors but also the firm’s widespread sale of these proprietary funds, including the Tax Free Puerto Rico Fund II.

In May 2012, the SEC issued a Cease-and-Desist Order against UBS Puerto Rico, and UBS agreed to pay $26 million in disgorgement and fines to resolve charges that it sold mispriced closed-end funds to its customers. The mispricing related to UBS proprietary bond funds that invested in Puerto Rican municipal bonds.

The New York Times has reported that UBS opened an internal investigation into the sales of the proprietary leveraged bond funds to its customers. The article reported that some of the funds were highly leveraged, and that UBS brokers compounded that risk by encouraging their customers to borrow on margin to make their investments.

Leveraged bond funds are high-risk products that are unsuitable for ordinary investors, and The Law Office of Kevin Galbraith reminds investors that simply because one component of an investment sounds safe—for example, municipal bonds—does not mean that it is safe. In fact, many such investments are high-risk. Here, UBS customers are suffering huge losses due to the apparent misconduct of the firm and its financial advisors.

If you purchased a proprietary Puerto Rican bond fund from UBS Financial Services Puerto Rico, please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation concerning your legal rights.



The Law Office of Kevin Galbraith Is Investigating John Carris Investments For Its Unlawful Sales of Fibrocell Science, Inc. Stock

October 11, 2013

The Law Office of Kevin Galbraith is conducting an investigation of John Carris Investments for its sales of Fibrocell Science, Inc. stock to its customers without making the disclosures that it is legally required to make.

FINRA has charged the company and its CEO, George Carris, with fraud and stock manipulation. FINRA’s press release is below.

If you are a customer of John Carris Investments and were solicited to purchase this stock, you should contact us at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Files Amended Complaint Charging Fraud and Stock Manipulation

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has filed for a Temporary Cease-and-Desist Order against John Carris Investments, LLC (JCI) and its CEO, George Carris, to immediately halt solicitations of its customers to purchase Fibrocell Science, Inc. stock without making proper disclosures. FINRA alleges that during May 2013, JCI fraudulently solicited its customers to buy Fibrocell stock, without disclosing that during the same time period, Carris and another firm principal were selling their shares.

FINRA also issued an amended complaint against JCI, Carris, and five other firm principals alleging additional fraudulent activity and securities violations. In the complaint, FINRA alleges that while JCI acted as a placement agent for Fibrocell, Carris and the firm artificially inflated the price of Fibrocell stock by engaging in pre-arranged trading and by making unauthorized purchases of Fibrocell stock in customers' accounts.

FINRA also alleges that Carris and JCI fraudulently sold stock and notes in its parent company, Invictus Capital, Inc., by not disclosing its poor financial condition. In the complaint, FINRA states that JCI and Carris misled Invictus investors by paying dividends to Invictus's early investors with funds that were, in fact, generated by new sales of Invictus securities. JCI and Carris did not have any reasonable grounds to expect economic gains for Invictus investors. As of March 2013, Invictus Capital had defaulted on $2 million of Invictus notes sold to earlier John Carris Investments customers, did not have funds to repay them, and has stated that it may be required to use proceeds from its ongoing offering to make repayments. JCI continues to solicit new investments in Invictus – an investment that FINRA alleges is wholly unsuitable.

In addition, FINRA alleges that JCI issued false documentation that failed to reflect the firm's payments for Carris's personal expenses (such as tattoos, pet care and a motorcycle), and failed to remit hundreds of thousands of dollars in employee payroll taxes to the United States Treasury.



The Law Office of Kevin Galbraith Cautions Investors about the Risks of Private Placements

October 1, 2013

The Law Office of Kevin Galbraith is tracking recent guidance issued by FINRA concerning the loss, disclosure and liquidity risks that are presented by so-called “private placements.” FINRA’s press release is below.

A private placement is an investment offered to high-net-worth individuals and institutions in which the investor purchases unregistered securities issued by a company. These investments, sometimes known as “Reg. D offerings,” are often pitched as attractive opportunities that are unavailable to ordinary investors. Brokers soliciting investments in private placements often neglect to mention that such investments carry with them significant risks of loss and a lack of liquidity, since the securities tend to be thinly traded.

If you have invested in a private placement without appropriate disclosure, or if you believe a private placement was recommended to you that was unsuitable for your investment objectives or risk tolerance, you should contact us at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.



FINRA Issues New Investor Alert: Private Placements—Evaluate the Risks Before Placing Them in Your Portfolio

WASHINGTON—The Financial Industry Regulatory Authority (FINRA) issued a new investor alert called Private Placements—Evaluate the Risks before Placing Them in Your Portfolio to caution investors that investing in private placements is risky and can tie up their money for a long time. A private placement is an offering of a company's securities that is not registered with the Securities and Exchange Commission (SEC) and is not offered to the public at large. Many private placements are offered pursuant to Regulation D of the Securities Act of 1933. In general, you must be an "accredited investor" to invest in a private placement.

"Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing. Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing," said Gerri Walsh, FINRA's Senior Vice President for Investor Education.

FINRA is advising investors that if they are provided with a private placement memorandum or other offering document, they should carefully review it and make sure that statements by their broker are consistent with it.

Private Placements contains a series of tips to help investors determine if a private placement is right for them, including the following.

  • Find out as much as you can about the company's business and understand how and when you might liquidate your private placement securities.
  • Ask your broker what information he or she was able to review about the issuing company and this private placement.
  • Be extremely wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you.

Be extremely wary of private placements you hear about through spam emails or cold calling. They are very often fraudulent.



FINRA Issues Guidance Regarding the Revised Suitability Rule that Governs Investment Recommendations to Customers

September 20, 2013

FINRA has issued Regulatory Notice 13-31 to provide guidance to brokerage firms, financial advisors and other securities industry employees regarding the revised “suitability” rule that became effective in July 2013.

The suitability rule mandates that when brokerage firms and financial advisors make recommendations to investors to buy, sell or hold investments, they must “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.” Firms must obtain accurate information concerning the customer’s age, investment experience, time horizon, liquidity needs and risk tolerance—when making recommendations.

FINRA’s guidance to firms spells out the approach it takes in conducting examinations to confirm compliance with the suitability rule and identify shortcomings.

As FINRA explains, “Examinations for compliance with the suitability rule typically begin with an analysis of a firm’s controls. This is largely based on interviewing principals responsible for preparing the firm’s policies and procedures for this area and, considering the products the firm sells and the types of customers with which the firm conducts business, assessing the firm’s readiness to control risks related to suitability.”

The Regulatory Notice goes on to explain that “FINRA examiners tested supervisory and compliance systems and determined that firms, in general, implemented reasonable approaches regarding suitability. The depth and breadth of FINRA examiner testing is generally determined by the supervisory systems and controls the firm developed, the products and strategies the firm recommends, the firm’s business activities, the firm’s customer base, and other relevant information considered by FINRA staff during the examination planning and execution process.”

To review the full notice, please follow this link.

If you are an investor or financial advisor with questions about the suitability rule and the compliance standards set out by FINRA, you should contact us at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation.