Securities Fraud

Published on: August 25, 2011

FIDUCIARY DUTY: THE DIFFERENCE BETWEEN BROKERS AND ADVISERS

Financial advisers are bound by their fiduciary duty. Put simply, fiduciary duty is when one party (in this case, the financial adviser) must, by law, act in the best interest of another party (in this case, the client). Financial advisors have a legal obligation to act in the best interest of their client as they are entrusted with the care of their money. If a financial advisor does not adhere to his or her fiduciary duty, then securities arbitration can be brought against that person.

Fiduciary duty: the difference between brokers and advisers

Broker-dealers, on the other hand, only must adhere to the far less rigid “suitability standard.” This means they only have to make “suitable” recommendations. This makes sense in the old view of a broker as a salesman. After all, a clothing retailer isn’t required to only sell you jeans that don’t make you look fat. However, brokers aren’t simply salesmen anymore. Especially in recent years, the line that separates brokers from advisers has grown fuzzy and all but disappeared. Advisers buy for their clients and brokers advise clients in their purchases. It is for this reason that many believe that brokers should be held to the same, or at the very least similar, standards as advisers.

In January of this year, the SEC recommended that brokers be held to a common fiduciary duty as advisers. According to the SEC’s Study on Investment Advisers and Broker-Dealers, “Broker-dealers and investment advisers are regulated extensively, but the regulatory regimes differ, and broker-dealers and investment advisers are subject to different standards under federal law when providing investment advice about securities. Retail investors generally are not aware of these differences or their legal implications.”

Published on: August 24, 2011

FORMER STOCKBROKER CHIA SENTENCED TO PRISON FOR STEALING $2 MILLION FROM INVESTORS

by InvestorLawyers

Court proceedings concluded this month for 15 investors who fell victim to stockbroker fraud in which Lawrence E. Chia, a former Michigan stockbroker, stole around $2 million by “investing” their money in “Crystal Sky” and then mailing falsified subscription statements. “Crystal Sky” was the name Chia gave to his fake bond fund and all mailed statements were completely fictitious.

Former stockbroker chia sentenced to prison for stealing $2 million from investors

Chia’s broker misconduct took place between 1997 and July 2002, when he was a resident and stockbroker in Troy. He pleaded guilty to one count of mail fraud on December 2, 2010, but sentencing was not passed until August 8, 2011. According to prosecutors, once he had taken his clients’ money, instead of investing it, he used the funds to trade on his personal investment account and pay personal expenses. He then led investors to believe their money had been safely invested by mailing the falsified statements.

In response to this case, authorities are stressing the importance of investor diligence in thoroughly checking their statements for any indication of foul play.

Published on: August 17, 2011

THE SEC’S “OFFICE OF THE WISTLEBLOWER” OPENS

by InvestorLawyers

The SEC’s new whistleblower office, which officially opened August 12, hopes to have a significant effect on corporate and stock broker fraud.

The SEC’S “office of the whistleblower” opens” OPENS

Under this new program, cash awards will be issued to corporate employees who report fraud to the SEC in order to expose corporate crime. Individuals who report fraud under this program could receive up to 30 percent of the amount that is collected from the guilty party. To qualify, the tipster must volunteer new information that leads to a successful collection of at least $1 million in fines.

“Through their knowledge of the circumstances and individuals involved, whistleblowers can help the commission identify possible fraud and other violations much earlier than might otherwise have been possible," SEC officials say. "That allows the commission to minimize the harm to investors, better preserve the integrity of the United States’ capital markets, and more swiftly hold accountable those responsible for unlawful conduct.”

Published on: August 4, 2011

JANNEY SETTLES SEC CHARGES FOR $850,000

by InvestorLawyers

Janney Montgomery Scott, a broker-dealer from Philadelphia, and his firm, Janney Montgomery Scott LLC, will pay $850,000 in his settlement with the Securities and Exchange Commission for not taking proper precautions to prevent insider trading. According to securities regulators, Janney didn’t establish proper policies and, in some cases, didn’t enforce what policies were in place, to prevent potential insider trading.

Janney Settles SEC Charges for $850,000

The firm’s lax policies and lack of adherence to them continued for more than four years, from January 2005 until July 2009. The policies in question affected the firm’s Equity Capital Markets division. This division included trading, equity sales and research departments. Problems with policies included a lack of enforcement and failure to follow policies as written. This misconduct made it possible for nonpublic information to be used in insider trading — a clear violation of the law that states a firm should seek to prevent this possible misuse of material.

In addition, Janney did not require pre-clearance for personal trades of its investment bankers or approval for its employees to have brokerage accounts at other firms. The firm also failed to maintain a proper firewall between the email of investment banking staff and research staff. These measures are necessary to properly supervise and maintain accountability that would prevent insider trading. Insider trading creates an unfair advantage in the market and, therefore, unbalances it, perhaps causing major repercussions.

Published on: July 31, 2011

JENNIFER KIM SETTLES SEC CLAIM

by InvestorLawyers

Jennifer Kim, an ex-Morgan Stanley trader, will pay $25,000 and is barred from broker-dealer association for three years in her settlement with the SEC regarding its claim that she concealed trades and falsified books. The firm’s risk limits were exceeded by the proprietary trades she concealed, intending to cancel the swap orders almost immediately. This action “tricked” the firm’s monitoring systems, allowing the swaps to go through. At this time, Kim was acting as the risk manager for both her trading account and her supervisor’s proprietary account.

Jennifer Kim Settles SEC Claim

In late September 2009, Larry Feinblum, Jennifer Kim’s immediate supervisor at the Swaps Desk, was told by his supervisor that their net risk position in the Wipro account was too high at $20 million, and should not be increased. Regardless, by October 6 Winpro’s net aggregate risk had reached $50 million. Kim and Feinblum brought the risk position down again, but by November, it had increased once more to $30 million and the two devised a scheme in which they booked swaps that would reduce the net risk position, falsely verified them, and then canceled the swaps, returning the risk to its higher position. In this way, they were able to fool the firm’s risk assessment program into believing the account was within acceptable risk limitations.

On December 16, 2009, the misconduct of Kim and Feinblum was exposed when Feinblum admitted to his supervisor that in only one day he had lost $7 million. Furthermore, on December 17, he admitted that he, along with Kim, had hidden exceeded risk limits. As a result of this confession, Feinblum and Kim were subsequently terminated on January 4, 2010. Feinblum settled for $150,000 on May 31 for related claims.

Published on: July 24, 2011

VICTIMS OF NOEL AND KLOSEK INVESTMENT FRAUD FINALLY RECEIVING PARTIAL RESTITUTION

by InvestorLawyers

$1 million is being distributed to victims of an investment scam by federal authorities. Bryan Keith Noel and Alexander Klosek of North Carolina were charged in 2009 with multiple crimes, including conspiracy to commit wire fraud and conspiracy to commit mail fraud. All crimes were connected to Noel’s fraudulent investment business. In March 2010, Noel was found guilty and ordered to pay $11 million in restitution plus serve 25 years in prison. Klosek entered a guilty plea and was ultimately sentenced to pay $10.5 million in restitution and to serve 87 months in prison.

Victims of Noel and Klosek Investment Fraud Finally Receiving Partial Restitution

Official court documents stated that Noel and Klosek’s fraud took place from about January 2003 to around July 2006 and involved over 100 clients, the majority of which were local NC retirees. In this atrocious broker fraud, clients were persuaded to invest large sums with Noel’s business, which were then diverted to another company belonging to Noel, significantly decreasing clients’ investment values. The diversion occurred without his clients’ knowledge or approval. The decrease in investment value was then hidden from clients with falsified quarterly statements and in July 2006, investors were told that their investment had actually grown. Victims of Noel and Klosek’s fraud now believed their assets to be around $16 million when, in fact, they had dwindled to only around $1 million.

According to the NC Securities Division Newsletter, Acting Special Agent in Charge of the Charlotte Division of the FBI, Joseph S. Campbell, said this of the case: “Retirees are often victims of fraud, and to steal their financial security is unconscionable. These men stole millions of dollars from people who don’t have the opportunity to restore the savings they’ve spent their lives building.” Though the $1 million that is now being distributed is only a small portion of the total restitution ordered by the court, it is a start.