Rigged Securities Markets

A 60 Minutes interview with Michael Lewis recently revealed how millions of investors are being secretly being defrauded by front-running actions of banks and brokerages.  http://www.cbsnews.com/news/is-the-us-stock-market-rigged/.   Below is an excerpt of Lewis explaining how he believes that the markets are “rigged”:

Steve Kroft: What’s the headline here?

Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism is rigged.

Steve Kroft: By whom?

Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.

Steve Kroft: Who are the victims?

Michael Lewis: Everybody who has an investment in the stock market.

Michael Lewis is not talking about the stock market that you see on television every day. That ceased to be the center of U.S. financial activity years ago, and exists today mostly as a photo op. This is the stock market that Lewis is talking about; the one where most of the trades take place now, inside hundreds of thousands of these black boxes located at more than 60 public and private exchanges, where billions of dollars in stock change hands every day with little or no public documentation. The trades are being made by thousands of robot computers, programmed to buy and sell every stock on the market at speeds 100 times faster than you can blink an eye. A system so complex, it’s all but invisible.

Michael Lewis: If it wasn’t complicated, it wouldn’t be allowed to happen. The complexity disguises what is happening. If it’s so complicated you can’t understand it, then you can’t question it.

Steve Kroft: And this is all being done by computers?

Michael Lewis: All being done by computers. It’s too fast to be done by humans. Humans have been completely removed from the marketplace.

“Fast” is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.

Michael Lewis: The insiders are able to move faster than you. They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.

Steve Kroft: What do you mean front run?

Michael Lewis: Means they’re able to identify your desire to, to buy shares in Microsoft and buy ‘em in front of you and sell ‘em back to you at a higher price. It all happens in infinitesimally small periods of time. There’s speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it”s enough for them to identify what you’re gonna do and do it before you do it at your expense.

Steve Kroft: So it drives the price up.

Michael Lewis: So it drives the price up, and in turn you pay a higher price.

FINRA BrokerCheck CRD Flawed

NYSE pic 1FINRA (the “Financial Industry Regulatory Authority”) the March 7,  2014 Wall Street Journal points out what many industry insiders have known for a long time: FINRA routinely “strips” important information from BrokerCheck, the publically available CRD system concerning broker records.  www.wsj.com/news/articles/SB20001424052702304554004579423270046013550

While an experienced attorney can find the full information concerning a broker through various means, most investors only have BrokerCheck.  The FINRA BrokerCheck system is the first line of defense for most investors.  BrokerCheck is supposed to give investors all information on a broker that might serve as a “red flag” about a broker’s propensity to commit fraud.  This leaves the system seriously flawed for those relying upon it.

The information FINRA omits includes information concerning personal bankruptcies and criminal charges.  The Journal reports that there are as many as 1600 stockbrokers in the United State that are not revealing such items on their publically available records.  The list of offenses that the Journal found to not be disclosed include hit-and-run, habitual substance abuse and assault.

Many investors are surprised when defrauded by a broker with a clean BrokerCheck CRD.  An experienced attorney can often obtain regulatory documents showing that the broker’s propensity to defraud was not unknown to the brokerage.



Variable Annuity Fraud

We help investors who believe that they are victims of variable annuity fraud.  Variable annuity fraud has always been a frequent trick of brokers looking to put their own interests ahead of their investors (often by selling to those approaching retirement which is generally an unsuitable recommendation).  The investments pay an extremely high commission and the investments are only suitable for a small section of the investing public.  This fraud hit a new low last week.

As reported in http://www.investmentnews.com/article/20140313/FREE/140319954, the Securities and Exchange Commission Thursday, March 13, 2014, filed charges against a group of brokers in a scheme wherein investors used variable annuities to wager on the lives of the terminally ill.

The brokers in question were Michael A. Horowitz of Los Angeles and Moshe Marc Cohen of Brooklyn, N.Y.

The brokers allegedly obtained the personal health and identification data of the dying patients through fraud, marking them as annuitants on variable annuity contracts that he had marketed to wealthy clients, according to the SEC’s complaint.  Under false pretenses, the brokers allegedly received their employers’ approval to sell the annuities.  The motivation with this plan, as with most fraudulent sales of variable annuities was the commission.  Variable annuities pay as large of a commission as just about any investment product that you can purchase through a securities brokerage.  The brokers reaped approximately $1 million in commissions from their sale, the SEC claimed, with Mr. Horowitz obtaining more than $300,000 and Mr. Cohen snagging more than $700,000.

Berthel Fisher Investigation into Supervisory Lapses

Berthel Fisher has recently paid a large fine concerning lapses in its supervision of the sale of certain alternative investments.  We are investigating Berthel and we are interested in speaking to investors who have suffered losses in alternative investments such as inverse exchange traded funds (“ETFs”), leveraged ETFs, real estate investment trusts (“REITs”), managed futures, oil and gas investments, equipment-leasing programs or business development companies.

Berthel “had inadequate supervisory systems and written procedures for sales” for sales of such investment products between 2008 and 2012 according to FINRA.  The result is that brokers sold such investments without the requisite knowledge or due diligence for the investments, and sold the investments to whom the investments were  not suitable, such as investors who did not want high risk investments or did not understand these complicated alternative investments.  While Berthel did not plead guilty to the allegations, Berthel also did not deny the allegations.

Supervisory and suitability violations can entitle an investor to recovery of losses.  If you have suffered such losses please contact us.

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Oppenheimer Municipal Securities Misconduct

FINRA Fines Oppenheimer $675,000 and Orders Restitution of More Than $246,000 for Charging Unfair Prices in Municipal Securities Transactions and for Supervisory Violations

The Financial Industry Regulatory Authority (FINRA) announced in a regulatory release, http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryactions/p446063.pdf, that it has fined Oppenheimer $675,000 for charging unfair prices in municipal securities transactions and for failing to have an adequate supervisory system. FINRA also ordered Oppenheimer to pay more than $246,000 in restitution, plus interest, to customers who were charged unfair prices. In addition, FINRA fined Oppenheimer’s head municipal securities trader and suspended him. Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “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.”

FINRA found that from July 1, 2008, through June 30, 2009, Oppenheimer, through Sirianni, priced 89 customer transactions from 5.01 percent to 15.57 percent above the firm’s contemporaneous cost. In 54 of those transactions, the markups exceeded 9.4 percent. Sirianni purchased municipal securities from a broker-dealer on Oppenheimer’s behalf, held the bonds in inventory for at least overnight, and then made the bonds available for resale at an unfair price to the firm’s customers. Sirianni was responsible for determining the prices paid by customers in the 89 transactions.

Oppenheimer failed to detect the unfair prices charged. Oppenheimer’s supervisory system was deficient because supervisory personnel relied solely on a surveillance report that only captured intra-day transactions to review the fairness of markups/markdowns in municipal securities transactions. From at least 2005 through June 30, 2009, if an Oppenheimer trader purchased municipal securities and held those securities in inventory for a day or longer, the subsequent sales to customers would not populate the firm’s surveillance report or be subjected to a fair pricing review.

In concluding this settlement, Oppenheimer and Sirianni neither admitted nor denied thecharges, but consented to the entry of FINRA’s findings. Sirianni’s suspension is in effect from January 6, 2014, through March 6, 2014.

Investors seeking recovery for such misconduct should contact attorney Jeffrey Pederson at 303-300-5022.

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Fraud in Emerging Market Investments

Investors in emerging markets are undergoing what has been described in the media as a “bloodbath.” www.investmentnews.com/article/20140215/FREE/140219925 .  Many investors suffering losses are unaware that many of these losses are due to fraud in the sale of these emerging market investments.

Emerging market investments have historically been known to be volatile, high-risk investments.  This heightened volatility and risk is due to factors.   These factors include the instability in foreign economies, fluctuations in currency exchange rates, differing levels of transparency in foreign corporations, and political instability in many emerging markets.  Despite these known risks, such investments are routinely sold as moderate or safe investments.  Such misrepresentations are fraudulent and entitle investors to recovery of losses.  There are many factors that can motivate a broker to misrepresent emerging market investments as safe.  The most notable motivation being the lure of heightened commissions.

If you suffered losses in emerging markets represented as safe or moderate risk we would like to speak to you.  Contact us directly at 303-300-5022.

FINRA Warns of Inappropriate 401K Rollovers

FINRA (the Financial Industry Regulatory Authority) has posted its third warning this month concerning potential loss investors face by inappropriate recommendations to rollover 401K accounts to private brokers.  www.finra.org/Newsroom/NewsReleases/2014/P412655

 ” ‘Workers and retirees should understand that in many cases they don’t have to act immediately upon switching jobs or retiring. Taking the time to compare costs and investment options can help you keep your nest egg from suffering unnecessary cracks,’ said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.”

FINRA has identified the following tips to avoid needless loss of funds when considering the rollover of a 401K:

Minimize taxes by rolling Roth to Roth and traditional to traditional. No taxes are due if you roll over assets from a traditional plan to a traditional IRA, or if you roll over your contributions and earnings from a Roth plan to a Roth IRA.

Be wary of “free” or “no fee” claims. Even if there are no costs associated with a rollover itself, there will almost certainly be costs related to account administration, investment management or both.

Realize that conflicts of interest exist. Financial professionals who recommend an IRA rollover might earn commissions or other fees as a result.

Understand fees and expenses. Both employer-sponsored plans and IRAs involve investment-related expenses and plan or account fees.

Compare investment options and other services. An IRA often enables you to select from a broader range of investment options than are available in an employer plan, but might not offer the same options your employer plan does.

Excessive Trades or “Churning”

We represent investors in suits concerning a wide variety of violations committed by stock brokers.  Probably the most widely known violation is the act of excessive trading or “churning.” Churning of securities accounts occurs when a broker acting in his or her own interest, induces transactions in the customer’s accounts which are excessive in size and frequency in light of the character of the account.  Such actions are considered to be a form of fraud. The trading is looked at as being excessive in light of the investors objectives. A certain level of trading may be fine for a speculative investor but would be excessive for a conservative investor. While the rule gives no standard, turnover in the account is commonly looked at to determine churning. Disciplinary actions in front of the SEC have determined that turnovers as low as between two and four are high enough that they could be presumed to be churning depending upon the customer’s objectives.

However, setting a fixed level of turnover as churning is problematic in an investing world comprised of more than stocks and bonds, and where differing investment vehicles can pay a broker widely disparate commissions. One answer to this is comparing the cost of the transactions against the equity in the account. For example, two buys and sells of a high-commission investment product, such as an annuity, per year could result in a cost equal to 5% or greater of the portfolio’s worth.  An entire portfolio of low-commission investment products could be turned over four times at a cost of only 2% of the portfolio’s worth. Both examples would be excessive, but the first example shows how little trading can be done to be excessive.  In the first example, the person must make at least 5% from his investments just to break even. So if a person needs a 3% return to support themselves, and need only take a small amount of risk to get that return, that person must now take a substantial increase risk commensurate with a person seeking an 8% return just to receive 3%, or else go more than a year without seeing a return.

If you believe that you have been the victim of such actions please contact us at 303-300-5022 for a free consultation.  You can also reach us from our home page at www.jpedersonlaw.com.

Stifel Nicolaus Inappropriate ETF Sales

As stated in InvestmentNews.com, Stifel Nicolaus has paid a fine for allegations of inappropriate sale of ETFs.  www.investmentnews.com/article/20140109/FREE/140109910

Broker-dealer Stifel Nicolaus & Co. and its subsidiary, Century Securities Inc., have agreed to pay more than $1 million in fines and restitution related to the sale of nontraditional exchange-traded funds (“ETFs”).

FINRA, the Financial Industry Regulatory Authority Inc. alleged that between January 2009 and June 2013, Stifel and Century Securities sold leveraged and inverse ETFs to some 65 customers for whom the investments were unsuitable. The regulator said that the firms didn’t have the proper training or written procedures in place to make sure that financial advisers had an “adequate and reasonable basis” for recommending the product.

“The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers,” Brad Bennett, Finra executive vice president and chief of enforcement, said in a statement. “Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors.”

We have represented hundreds of investors obtain recovery for losses from unsuitable securities such as those at issue in FINRA’s action.  Please contact us at 303-300-5022 if you wish to discuss your matter with us.

Beware of Brokers Recommending Municipal Bonds

Conservative investors should beware of brokers either negligently or fraudulently recommending municipal bonds.  InvestmentNews reports that Morgan Stanley has issued warnings concerning municipal bond investments for 2014. http://www.investmentnews.com/article/20131204/FREE/131209965

Invest photo 2   As stated in InvestmentNews, 2013 was a tough year for municipal bonds and analysts at Morgan Stanley forecast an 80% chance that municipal bonds will lose money again next year, primarily because of rising interest rates.  To date, the average national intermediate-term bond fund is down 2.16%.

Morgan Stanley’s base-case scenario, detailed in its “Municipal Bond Outlook for 2014” research note, calls for municipal bonds to lose between 1.7% and 4.1% next year as interest rates rise due to a strengthening economy and the beginning of the Federal Reserve‘s move to cut back on its asset purchasing program, known as quantitative easing.

Municipal bond investing has also been the subject of fraud lately as the result of high-risk municipal bonds, such as bonds from Puerto Rico, being added to municipal bond funds.

These issues are a cause for concern because many conservative investors rely upon municipal bonds as a foundation for their conservative portfolios.  Recommending such investments in the current climate to such conservative investors would be overly aggressive and inconsistent with the prohibition against recommending unsuitable investments.

Those investors suffering losses in municipal bonds may have recourse.  A free consultation can be received by either e-mailing info@jpedersonlaw.com or by calling 303-300-5022.