PIABA Foundation and Alliance for Investor Education Launch Investor Education Town Hall Meeting

The Securities Arbitration Commentator (SAC) recently took notice of a new investor education project that was spearheaded by our own Jason Doss.  Mr. Doss is a recent past president of the Public Investors Arbitration Bar Association, or PIABA, and the current president of the PIABA Foundation.  PIABA is an association of attorneys from around the country who represent investors against brokerage firms and their financial advisors. These investment-related disputes are resolved in arbitration proceedings and are often centered around investment fraud.  The damage done to victims of investment fraud – both financial and emotional – can be devastating.

Having seen the devastation up close for many years, Mr. Doss wanted to help alleviate as much of it as possible.  “Wouldn’t it be a good if we could help investors before they became victims,” he said.

Mr. Doss helped create the PIABA Foundation and has led the organization as its President to fulfill its mission of educating and protecting investors.  Mr. Doss and the PIABA Foundation then collaborated with the Alliance for Investor Education (AIE) in producing a National Investor Town Hall Meeting on October 29 in San Diego that SAC blogged about.  Mr. Doss also co-authored a book entitled “The Investors Guide to Protecting Your Financial Future,” and a short documentary entitled “Trust Me.”  The video uses the inability of government to prevent repeated financial collapses as a starting point for learning how investment fraudsters operate and what investors can do to protect themselves.  The video features the accounts of two actual investment fraud victims and commentary by several investor attorneys.

The Town Hall, book and video were a great success from all accounts.  The promotional video marketing the event received 75,000 views on social media.  Said SAC, “We’ve heard of AIE before.  It may become a force in the field of investor education, if this Town Hall concept catches interest.”  That is the Plan!

Record Oil Industry Bankruptcies Take a Toll on Investors

Reuters reports that bankruptcies in the U.S. oil industry have reached record levels.  The number of bankrupt oil and gas companies is 59 and counting, and we are not even half-way through the wave of bankruptcy filings, according to a Reuters article entitled U.S. oil industry bankruptcy wave nears size of telecom bust.  As the article’s title indicates, the number of oil and gas bankruptcies is closing in on the 68 bankruptcy filings by telecom companies during the 2002-2003 telecom bust.

Given in the sustained low interest rate environment, many income-oriented investors have been steered by their investment advisors into oil and gas investments and other alternative or non-conventional investments.  However, non-traded investments like oil and gas limited partnerships are among the most speculative, high-risk investments available.  The category of oil and gas investments is one of the “Top Investor Threats” identified by the North American Securities Administrators Association (“NASAA”), which is the organization of state securities regulators.  They are often sold to investors by brokers and brokerage firms because of the high sales commissions paid to such brokers.

Please call us if you have questions about your oil and gas investments or other investments.  We offer a free initial consultation.  If based on that consultation we feel that further review is needed, we will analyze your situation and provide a recommendation on whether and how to proceed at no charge to you.  Cases are typically handled on a contingent fee basis – i.e., the attorney’s fee is a percentage of any amount we recover on your behalf.

Investors have lost $1.78 Trillion so far this year

Fortune magazine reports that investors have lost $1.78 Trillion so far this year!  Investors should review the asset allocation of their portfolios and determine whether or not it is appropriate given their risk tolerance, investment objective and time horizon.  Financial advisors and their firms have a duty to their clients to make suitable investment recommendations and to avoid recommending unsuitably risky investments.

A portfolio’s asset allocation – the percentage of stocks, bonds and cash – is responsible for over 90% of a portfolio’s performance, according to modern portfolio theory. A portfolio composed of 100% stocks is inappropriate for most investors.  The Vanguard S&P 500 Stock Index Fund has lost about 10% year-to-date as of February 12.  The Vanguard Balanced Index Fund has lost about 6% year-to-date.  The former is invested 100% in the 500 largest cap stocks.  The latter is a mix of 60% S&P500 stocks and 40% bonds.

We have many years of experience in representing investors in securities arbitrations against brokers who have breached such duties.  If you have any questions about your investments, we would be happy to evaluate your situation and make a recommendation at no charge to you.

State Securities Regulators Propose Model Act to Protect Vulnerable Adults from Financial Exploitation

On September 29, 2015, the North American Securities Administrators Association (NASAA) released for public comment a proposed model to help broker-dealers, investment firms, and employees to better recognize if a senior or other vulnerable adult is being financially exploited.

Judith Shaw, the NASAA President and Maine Securities Administrator, said, “Working together we can and will close the holes in our safety net of support and protection for vulnerable adult investors.”

The model entitled “An Act to Protect Vulnerable Adults from Financial Exploitation” has four key objectives:

  1. Require qualified employees of broker-dealers and investment advisors who reasonably believe that someone has been exploited to promptly notify Adult Protective Services (APS) and their state securities regulator, as well as a third party designated by the vulnerable adult as long as the party is not suspected of be participation in the exploitation.
  2. Allow delay of disbursements from an account of a vulnerable adult if financial exploitation is suspected.
  3. Allow qualified employees—any agent, investment adviser representative or person who serves in a supervisory, compliance, or legal capacity for a broker-dealer or investment advisor—to provide relevant records regarding suspected or attempted financial exploitation to relevant authorities.
  4. Provide immunity from administrative or civil liability for broker-dealers and investment advisors for taking actions permitted under the act.

This act applies to individuals 60 and older as well as people protected under APS.

Consumer Reports: Fraudsters Target the Elderly

In the November 2015 issue of Consumer Reports, light is shed on the fact that roughly 1 in 20 senior adults claim to have been financially abused and why seniors seem to be among the most frequent targets of fraudsters. These perpetrators disguise themselves as government officials such as the FBI or the IRS and claim that the potential victims owe money, they will also offer prizes, sweepstakes, and gifts to give incentive for victims to hand over information such as social security numbers. Some will even use a person’s family as incentive to fork over thousands upon thousands of dollars, such as the case of Beth Baker. Mrs. Baker lost $65,000 in a scheme where she was led to believe her beloved grandson had fallen into legal trouble in Peru and needed her help to release him from prison and pay for legal fees. Baker was instructed not to tell anyone about what was happening and that if she did, terrible things would happen to her grandson and to put the funs on Green Dot MoneyPak cards—these cards are virtually untraceable. Within in the span of five days, Baker lost almost all of her liquid savings.

Fraudsters are able to gain footholds in their senior victims by preying on the elderly’s vulnerabilities such as isolation, loneliness, trusting natures, relative wealth, and in some instances declining mental capabilities. They also use mirroring techniques in order to develop a false bond with their victims and also aid in extracting personal information from their victims. According to Consumer Report the amount of money swindlers have captured is roughly $30 billion annually. Unfortunately only 1 in 44 cases of elderly financial abuse are actually reported. According to the former head of the Manhattan district attorney’s Elder Abuse Unit and current general counsel for EverSafe (a fraud-monitoring service for seniors), “Victims are often deeply ashamed…They worry that if they’re viewed as vulnerable, they’ll lose their independence.” One study that was conducted by the Chicago Health and Aging Project showed that people who fell victim to financial exploitation were hospitalized at a greater rate than people who were not.

Some ways recommended by Consumer Report to avoid falling victim to financial schemes is to sign up for robocall interception services such as Nomorobo, opt out of commercial mail solicitations, have someone trustworthy help you pay your bills, vet all contractors, check financial adviser’s credentials, arrange for limited account oversight, set up an emergency plan and entrust someone to be your power of attorney, visit an elder law attorney. As a loved one visit your elderly often, help set up a limited account, and in extreme circumstances file for guardianship or conservatorship.

NASAA Annual Report Shows Senior are the Most at Risk

On September 22, 2015 the North American Securities Administrators Association released their Annual Enforcement Report. The study was conducted from 49 jurisdictions throughout the United States and showed that twenty-five percent of enforcements actions taken in 2014 occurred where seniors were the victims. According to NASAA President and Washington Securities Director William Beatty, “This number is conservative, in part, because of a reluctance by victims to approach authorities.” Beatty also noted that an average senior-related case involved roughly three senior victims per case and the issues lying in unregistered securities such as promissory notes, private offerings or investment contracts, and the latter of which being the most common among senior abuse cases.

The NASAA report also shows that in 2014 the state securities regulators conducted 4,853 investigations and took 2,042 enforcement actions. Through such actions approximately $405 million dollars in restitution was returned to victims, $174 million in fines against defendants, and prison sentences totaling 1,629 years were given.

Unfortunately unlicensed individuals and firms are the most common among state securities enforcement with a reported 746 enforcement actions. It has also been found that 230 enforcement actions were taken against licensed broker-dealers, 190 actions against investment advisor representatives, 156 against brokerage firms, and 146 against investment adviser firms.

As of 2014, state action withdrew 2,857 securities licenses and denied, revoked, suspended, or conditioned an additional 728 licenses.

What in the World Are Puerto Rican Bonds Doing In My Municipal Bond Fund?

The Puerto Rican bond default is a “slow motion train wreck” that has been occurring now for several years with Puerto Rico having publicly announced its intention not to pay its bond debt. Yet half of U.S. municipal bond mutual funds hold Puerto Rican bond debt, and the exposure of the top ten such mutual funds ranges from approximately 18% to 41%, according to an August 3, 2015 InvestmentNews article entitled “Puerto Rico’s uncertain future leaves muni bond fund investors in limbo.”

According to the article, the top ten U.S. municipal bond funds in terms of Peurto Rican bond exposure are as follows:

1. Franklin Double Tax-Free Income A (FPRTX) 41.15%
2. Oppenheimer Rochester MD Municipal A (ORMDX) 36.76%
3. Oppenheimer Rochester VA Municipal A (ORVAX) 34.89%
4. Oppenheimer Rochester Fund Municipals A (RMUNX) 23.22%
5. Oppenheimer Rochester Ltd Term NY Munis A (LTNYX) 21.14%
6. Oppenheimer Rochester Ltd Term Muni A (OPITX) 20.16%
7. Oppenheimer Rochester AZ Municipal A (ORAZX) 20.03%
8. Oppenheimer Rochester Michigan Muni A (ORMIX) 19.98%
9. Oppenheimer Rochester NC Municipal A (OPNCX) 18.91%
10. Oppenheimer Rochester NJ Municipal A (ONJAX) 18.51%.

Investors in tax-favored municipal bond funds are typically looking for a relatively safe source of income. However, Puerto Rican bonds are extremely speculative, high-risk investments, and municipal bond funds that hold a significant percentage of Puerto Rican bonds may be far more risky than investors were led to believe. Investors in Maryland, Virginia, New York, Arizona, Michigan, North Carolina, New Jersey, and presumably many other states may be surprised to learn that their supposedly home state-oriented municipal bond fund contains a significant percentage of high-risk Puerto Rican bonds.

It appears that these top ten muni bond funds have lost approximately 9% to 24% of their value since 2013. Such losses may be significant for investors looking for tax-favored income with conservative risk.

If you believe your bond fund may have lost value due to exposure to Puerto Rican bonds, we will analyze your portfolio and discuss your options at no cost to you.

Not Putting Customers’ Interests First is a Central Failing of Wall Street

On January 6, 2015, the Financial Industry Regulatory Authority (FINRA) published its tenth annual Regulatory and Examinations Priorities Letter. In that letter, FINRA identified five areas, which it described as “recurring challenges,” that have harmed investors and resulted in compliance and supervisory breakdowns at member firms. At the top of FINRA’s list of problem areas is the continuing failure of some brokerage firms and their registered representatives to put customer interests ahead of their own. Here is how FINRA described this recurring problem:

“Putting customer interests first: A central failing FINRA has observed is firms not putting customers’ interests first. The harm caused by this failure may be compounded when it involves vulnerable investors (e.g., senior investors) or a major liquidity or wealth event in an investor’s life (e.g., an inheritance or Individual Retirement Account rollover). Poor advice and investments in these situations can have especially devastating and lasting consequences for the investor. Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers – and reduce their regulatory risk – by putting customers’ interests first. This requires the firm to align its interests with those of its customers.”

This central failing is related to, and sometimes caused by, the other four recurring problem areas that FINRA identified: firm culture; supervision, risk management and controls; product and service offerings; and conflicts of interest. “Many of the problems we have observed in the financial services industry have their roots in firm culture” – i.e., a poor culture in which top management tolerates or even encourages improper sales practices and lax supervision. Fee and compensation structures that incentivize brokers to push certain products continue to lie at the heart of many conflicts of interest, according to FINRA. For example, high-commission, complex investment products with misleading “teaser rates” are often sold to investors by brokers who do not fully understand the risks of the product, and, therefore, do not disclose those risks to the investor.

The financial services industry, by and large, has not addressed these problems to the satisfaction of its own self-regulatory organization (FINRA). FINRA has proposed a rule to help it detect sales practice violations by brokers, called the Comprehensive Automated Risk Data System (CARDS). Under CARDS, firms would be required to periodically submit to FINRA data relating to securities and account transactions, holdings, and account profile information, excluding personal identifying information. The financial services industry is so upset about CARDS that it is going to war with FINRA over the proposed rule. See New York Times article entitled “In Push for Change, Finra Is Opposed by the Wall St. Firms It Regulates.”

Its argument is that CARDS would expose customers’ personal identifying information to security breaches via reverse engineering, even though CARDS would not collect such personal identifying information. Fred H. Cate, a senior fellow at the Center for Applied Cybersecurity Research at Indiana University in Bloomington, was quoted as saying that, while there were some valid concerns about data security, “it felt to me like an industry that doesn’t want to comply with the rules, sort of dragging out every argument it could think of, as opposed to focusing on what practical steps could be included to be sure information is secure.”

The message for the public is clear – the financial services industry does not want to be forced to put investors’ interests ahead of its own, and does not want FINRA to be an effective regulator.

Workers Saving for Retirement Need Brokers To Act as Fiduciairies, Government Research Finds

A just-released government memorandum finds that people investing for retirement have lost billions of dollars as a result of abusive sales practices, and that brokers handling retirement accounts should be held to a stricter fiduciary duty standard to better protect workers’ retirement savings, according to an InvestmentNews article entitled “Brokers under White House scrutiny for costing workers billion in retirement savings.” The memo, which was drafted by the Chairman of the President’s Council of Economic Advisers (“CEA”), Jason Furman, reports that investor losses of between $8 billion and $17 billion are attributable to broker/financial adviser misconduct.

The CEA memo advocates that brokers and financial advisers be governed by a fiduciary duty, which requires them to act in the investor’s best interest, and to place investors’ interests ahead of their own. It states in part: “Consumer protections for investment advice in the retail and small-plan markets are inadequate…,” and only the placement of a fiduciary duty upon brokers and financial advisers offers “meaningful protections” to investors.

The brokerage industry has long objected to and lobbied against the imposition of a fiduciary duty standard of care as being too high and burdensome a duty. For four years, industry representatives have argued that having to act as a fiduciary would be too costly and would eliminate lower cost options for investors. “Any signal that the DOL [Department of Labor’s fiduciary duty] proposal is moving forward would cause us concern,” a brokerage industry lobbyist was quoted as saying.

The InvestmentNews article reports that the CEA memo and debate come in the midst of a “massive shift” away from defined benefit plans (e.g., pension plans) to defined contribution plans (i.e., 401(k) plans). The net effect of this is to shift the risks that retirement plans will not produce sufficient returns to fund a retirement away from professional money managers onto the back of workers who have no experience in the management of retirement plans.

As the CEA memo points out, many workers have been the victims of broker/adviser misconduct that arises out of an inherent conflict of interest. “Academic research has clearly established that conflicts of interest affect financial advisers’ behavior and that advisers often act opportunistically to the detriment of their clients,” the memo was quoted as saying.

For example, a broker who receives payment for the sale of a mutual fund or other investment has an interest in recommending it, even if it is not in the client’s best interest because there are other more suitable investments. Under the current “suitability standard” that the brokerage industry wants to keep, it would be okay for a broker to recommend a less suitable investment that the broker had a financial interest in recommending as long as it was not unsuitable based on the client’s investment profile.

The CEA memo was reportedly circulated to senior White House officials, and it is expected that President Obama will support the proposed fiduciary duty standard for brokers.

Investors Need to be Careful About Who Has Custody of Their Money

The Securities and Exchange Commission recently filed fraud charges against a Fort Lauderdale, Florida-based investment advisor and related funds in the federal district court for the Southern District of Florida. The SEC’s complaint names Frederic Elm (formerly known as Frederic Elmaleh), his unregistered advisory firm Elm Tree Investment Advisors LLC, and three funds: Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP.

According to the SEC, Elm perpetrated a Ponzi scheme – in effect recycling new investor money to earlier investors, and using investor funds the funds for personal expenses, such as a $1.75 million home, luxury automobiles, and jewelry. In this way, Elm allegedly stole at least $17 million from unsuspecting investors. This kind of misconduct violates the anti-fraud provisions of federal securities laws and SEC rules.

The investors sent their investment funds to Elm by wire transfer or by mailing a check. Elm deposited the funds in various bank account that he controlled. In this way, Elm had custody and control over the investors’ funds, and was able to misappropriate the funds.

Investors should be wary of sending money anywhere other than to an account set up for them at a well-known, trustworthy financial institution. Normal operating procedure is for investment advisors to manage a client’s money held in an account at a reputable firm, which would have actual custody of the funds and safeguards in place to prevent the kind of theft alleged by the SEC.