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Articles Tagged with broker fraud

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Money in WastebasketAs recently reported, the Massachusetts Securities Division (the “Division”) has commenced an investigation into the sales practices of some 63 independent broker-dealers who offered private placements sponsored by alternative asset manager GPB Capital Holdings, LLC (“GPB”).  Specifically, the Division has intimated that it began an investigation into GPB following a recent tip concerning the firm’s sales practices which allegedly occurred not long after GPB announced that it was temporarily halting any new capital raising efforts, as well as suspending any redemptions.

According to the Division’s head, Mr. William Galvin, the investigation is in its “very nascent stages.”  At this time, Massachusetts securities regulators have requested information about GPB from more than 60 broker-dealers, including HighTower Securities, Advisor Group’s four independent broker-dealers, as well as Ladenburg Thalmann’s Triad Advisors.

In August 2018, GPB – the sponsor of certain limited partnership offerings including GPB Automotive Portfolio and GPB Holdings II – announced that it was not accepting any new capital.  According to filings with the SEC, sales of the two aforementioned GPB private placements allegedly netted the broker-dealers marketing these investment products some $100 million in commissions, at a rate of about 8%, since 2013.

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stock market chartInvestors in speculative microcap and nanocap securities may have arbitration claims to be pursued before FINRA, in the event that the recommendation to invest lacked a reasonable basis, or if the nature of the investment, including its risk components, was misrepresented to the investor.  Both FINRA and the SEC have issued ample guidance with regard to the numerous risks associated with investing in speculative microcap (or “penny”) stocks, including the potential for fraudulent schemes and market manipulation due to the lack of public information concerning the companies’ underlying business and management, as well as verifiable financials.

In certain instances, broker-dealers who transact business in the penny stock arena may expose themselves to regulatory scrutiny and related liability.  For example, Aegis Capital Corp. (“Aegis”) (CRD# 15007) has come under considerable regulatory scrutiny by both the SEC and FINRA with respect to its activities concerning low-priced securities transactions.  Formed in 1984 and headquartered in New York, New York, Aegis is a mid-sized, full service retail and institutional broker-dealer.  As of March 2017, Aegis employed approximately 415 brokers in its sixteen branches, with the bulk of its workforce centered in New York City and Melville, NY.

According to FINRA BrokerCheck, Aegis’ regulatory history includes a total of thirty (30) disclosure events, a number of which involve penny stocks.  For instance, in August 2015, Aegis entered into a settlement with FINRA, pursuant to which the broker-dealer agreed to pay $950,000 in sanctions over allegations of improper sales of unregistered shares of penny stocks, as well as certain AML violations.  In connection with that regulatory event, two of Aegis’ compliance officers were suspended for 30 and 60 days, and ordered to pay fines of $5,000 and $10,000, respectively.  On March 28, 2018, the SEC imposed a cease-and-desist order (“Order”) against Aegis for its alleged supervisory failures concerning penny stocks.  Further, the SEC penalized Aegis $750,000 after the brokerage firm admitted that it failed to file required suspicious activity reports (“SAR’s”) on numerous penny stock transactions from “at least late 2012 through early 2014.”

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Money MazeAs recently reported, former broker Kyusun Kim (a/k/a Kyu Sun Kim, a/k/a Kenny Kim) (CRD# 2864085) has consented to a “sanction and to the entry of findings [by FINRA] that he made unsuitable recommendations to numerous senior customers, who were retiring or had retired that they concentrate their retirement assets and liquid net worth in speculative and illiquid securities.”  Pursuant to a Letter of Acceptance, Waiver & Consent (AWC) accepted by FINRA on June 26, 2018 — and under which Mr. Kim neither admitted nor denied FINRA’s findings — the former financial advisor voluntarily consented to a “bar from association with any FINRA member in any and all capacities.”

Publicly available information via FINRA BrokerCheck indicates that Mr. Kim first entered the securities industry in 1997, and most recently was affiliated with Independent Financial Group, LLC (CRD# 7717) from 2006 – 2016 and, thereafter, Sandlapper Securities, LLC (CRD# 137906) from March 2016 – April 2017.  Furthermore, BrokerCheck indicates that Mr. Kim has been the subject of or otherwise involved in 23 customer disputes.  With regard to these customer disputes, 13 of these complaints resulted in settlements, while 9 complaints remain pending (1 complaint was denied in October 2010).  As to the pending customer complaints, the allegations raised center on Mr. Kim’s purported “… breach of fiduciary duty, breach of oral and written contract, violation of state and federal securities laws, violation of FINRA rules of fair practice … [and] unsuitable investments.”

As encapsulated within the June 26, 2018 AWC, it has been alleged that Mr. Kim “falsely inflated the net worth figures of several customers on their new account forms and other documents so that they appeared eligible to purchase certain speculative investments, in violation of NASD Rules 3110 and 2110 and FINRA Rules 4511 and 2010.”  Moreover, as set forth in the AWC, Mr. Kim allegedly made unsuitable investment recommendations to senior customers in violation of NASD Rules 2310 and 2110, as well as FINRA Rules 2111 and 2010.

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broker misappropriating client moneySyosset, NY-based stockbroker Matthew Eckstein was recently charged with three counts of second-degree grand larceny, third degree grand larceny, and two counts of first-degree scheme to defraud by the Nassau County District Attorney.  These charges stem from Mr. Eckstein’s business as a financial advisor in Garden City, NY, and more specifically, allegations that he “betrayed his clients’ trust when he stole their money in a multi-million dollar Ponzi scheme and even pilfered hundred of thousands from the estates of deceased clients” according to Madeline Singas, the Nassau County District Attorney.

FINRA BrokerCheck indicates that Matthew Evan Eckstein’s (CRD# 2997245) career in the securities industry dates back to 1998, when he first began working as a registered representative for Gould, Ambroson & Associates Ltd. (“Gould”) (CRD# 17412) in Garden City, NY.  Since September 16, 2015, Mr. Eckstein has been registered at his own broker-dealer, Sisk Investment Services, Inc. (“Sisk”) (CRD# 19406), where he is chief executive and chief compliance officer.  On April 27, 2018, FINRA Enforcement filed a Complaint naming Mr. Eckstein as Respondent.  As alleged by FINRA, from December 2014 until December 2015, Mr. Eckstein purportedly sold over $1.3 million in supposedly safe private investments akin to CDs to numerous clients.

Publicly available information suggests Mr. Eckstein’s alleged victims are from Massapequa, Seaford, Smithtown, Melville, Staten Island, Brooklyn, Manhattan, Norwalk, CT, Jupiter, FL, and Redlands, CA.  In January 2015, Mr. Eckstein allegedly convinced one customer to invest approximately $385,000 into a company, Conmac Funding (“Conmac”), that was touted as a safe, no-risk investment.  Further, Mr. Eckstein purportedly assured the client that the investment principal would be returned in two years, with an additional four-percent interest, much like a certificate of deposit.  However, as recently reported, when the client requested his money back two years later, he only received $26,699.

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Piggy Bank in a CageInvestors who suffered losses due to the alleged misconduct of Rockland County financial advisor Hector A. May (CRD# 323779) may be able to recover their losses in arbitration before FINRA.  A resident of Orangeburg, NY, Mr. May was most recently affiliated with the independent broker-dealer Securities America, Inc. (CRD# 10205) from 1998 until March 2018.  As recently reported, on June 6, 2018, the United States Attorney for the Southern District of New York implemented an asset freeze pursuant to a Restraining Order against Mr. May and his wife, Sonia May, with their consent.  According to publicly available information through FINRA, the Justice Department is “conducting an official criminal investigation of a suspected felony.”

Among the assets frozen under the terms of the government’s Restraining Order are those assets held by Executive Compensation Planners Inc. (“ECP Inc.”), the Registered Investment Advisory (“RIA”) firm owned and controlled by Hector May.  In addition to freezing ECP Inc. assets, the government is also restraining numerous bank and brokerage accounts owned by the Mays, as well as monthly proceeds payable to Hector May through an Equitable Life Pension payment and social security.  Finally, the government has frozen Mays’ real assets, including a house in Orangeburg, NY, a condominium in Vernon Township, NJ, as well as “all jewelry, fur products, antiques, and silver owned by Hector May or Sonia May.”

According to FINRA BrokerCheck, Mr. May was discharged from his employment with Securities America due to his alleged “misappropriation of client assets.”  Acting through his RIA, Mr. May’s business as a financial advisor was supposedly predicated on selling certain wrap fee advisory programs through Securities America.

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Piggy Bank in a CageInvestors in Phillips Edison Grocery Center REIT II (“Phillips Edison II”) were recently solicited by third-party real estate investment management firm MacKenzie Realty Capital, Inc. (“MacKenzie”) in relation to a mini tender offer to purchase Phillips Edison II shares at $14.89 per share.  Investors who purchased Phillips Edison II shares through the initial offering acquired their shares at $25 per share (and at $23.75 per share for shares subsequently acquired through the dividend reinvestment program).  Accordingly, investors seeking immediate liquidity who elect to participate in the MacKenzie tender offer will incur substantial losses of approximately 40% on their initial investment (excluding commissions and fees, as well any dividend income received to date).

Phillips Edison II was incorporated in June 2013 and is a publicly registered, non-traded REIT.  As set forth in its prospectus, Phillips Edison II was “formed to leverage the expertise of our sponsors… and capitalize on the market opportunity to acquire and manage grocery-anchored neighborhood and community shopping centers located in strong demographic markets throughout the United States.”  As a publicly registered non-traded REIT, Phillips Edison II was permitted to sell securities to the investing public at large, and as such, the non-traded REIT was marketed nationwide to numerous unsophisticated retail investors.  In certain instances, some investors were not fully informed by their financial advisor as to the complex nature and risks associated with non-traded REITs.

Non-traded REITs pose many risks that are often not readily apparent to retail investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments.  To begin, one significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%; in the case of Phillips Edison II, its prospectus indicates that investors were charged a “selling commission” of 7%.  In addition to high commissions, non-traded REITs like Phillips Edison II generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%; as set forth in its prospectus, Phillips Edison II charged investors a 3% dealer manager fee of up to 3% of gross offering proceeds.  Such high commission and fees act as an immediate “drag” on an investment.

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Building DemolishedInvestors in Griffin Capital Essential Asset REIT, Inc. (“Griffin Essential”), may have substantial losses based on a tender offer to purchase shares for $6.89 a share — or $3.11 a share less than the offering price of $10 a share.  As recently reported, on December 1, 2017, third-party real estate investment firm MacKenzie Capital Management (“MacKenzie”) made an unsolicited tender offer for shares of Griffin Essential at $6.89 per share, in cash.  The Board of Directors of Griffin Essential has recommended that its shareholders reject the offer.  However, the Board also advised that, as of September 30, 2017, its share redemption program (“SRP”) for 2017 was fully subscribed, thus leaving investors seeking liquidity via redemption with little recourse.

Griffin Essential is a Maryland REIT incorporated in August 2008 for purposes of acquiring a portfolio of geographically diverse single tenant properties across a wide range of industries.  From 2009 – 2014, Griffin Essential conducted a series of offerings in connection with its capital raise.  In aggregate, the non-traded REIT issued 126,592,885 shares of common stock for gross proceeds of approximately $1.3 billion.  As a publicly registered non-traded REIT, Griffin Essential was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the IPO upon the recommendation of a broker or money manager.

Investors who purchased shares of Griffin Essential through the offering acquired their shares for approximately $10 per share.  Therefore, it would appear that investors who participated in the MacKenzie tender offer incurred substantial losses on their initial investment in excess of 30% (exclusive of commissions and distributions).

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Money MazeInvestors who suffered losses due to misconduct by financial advisor Ralph Savoie (CRD# 411660) may be able to recover their losses in arbitration before the Financial Industry Regulatory Authority (“FINRA”).  On March 26, 2018, Mr. Savoie plead guilty in Louisiana federal court to stealing up to $1.5 million from clients, using their monies for personal expenses including jewelry, hotels, and credit card bills, as well as to pay off previous clients in Ponzi-fashion in connection with prior purported investment opportunities.  Mr. Savoie allegedly guaranteed his clients high rates of returns on various investments in securities and insurance products, describing the investments as a “sure thing.”  In actuality, however, Mr. Savoie allegedly engaged in misconduct by using these funds on personal expenses, to pay prior clients and to funnel money into a “risky real estate venture.”

According to public records, Mr. Savoie of Mandeville, LA, was formerly associated with Cambridge Investment Research Advisors, Inc. (CRD# 134139) (“Cambridge”) in their Metairie, LA, branch office, until on or about August 11, 2015, at which time Mr. Savoie was discharged from his employment with Cambridge as a registered representative.  Mr. Savoie’s career in the securities industry is lengthy and dates back to the early 1970’s, including his most recent stint at Cambridge from 2013 until August 2015.

According to publicly available information through FINRA, Mr. Savoie was discharged from his employment with Cambridge due to his alleged failure to “[d]isclose and receive approval for an outside business activity.”  Further, FINRA reports that Mr. Savoie has been subject to six customer disputes, including three that remain pending and three that have resulted in settlement.  A number of these disputes center on allegations concerning Mr. Savoie’s purported sales of “unsuitable, illiquid, expensive, private placements.”

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financial charts and stockbrokerOn February 16, 2018, the Financial Industry Regulatory Authority (“FINRA”) signed off on a Letter of Acceptance, Waiver, and Consent (“AWC”), pursuant to which financial advisor Darrell Walter Rideaux (CRD# 5211032), without admitting or denying any wrongdoing, voluntarily consented to a bar from working in the securities industry in any capacity.  Based on publicly available information, Mr. Rideaux first became associated with a FINRA member firm in 2007 as a registered representative.  Most recently, Mr. Rideaux was affiliated with Morgan Stanley (CRD# 149777) from 2013-2015, and thereafter, NMS Capital Advisors, LLC (“NMS Capital”) (CRD# 140356) from 2016-2017.

According to FINRA’s findings of fact as enumerated in the AWC, “On February 25, 2015, Rideaux voluntarily terminated his employment with Morgan Stanley…”  Thereafter, in August 2016, Mr. Rideaux became registered as a general securities representative with NMS Capital.  Based on information set forth in the AWC, as well as Mr. Rideaux’s BrokerCheck report, his departure from Morgan Stanley is allegedly due to his “potential participation in securities activity away from Morgan Stanley….”

In light of Mr. Rideaux’s voluntary departure from Morgan Stanley, and FINRA Enforcement’s follow-up investigation in February 2018 concerning alleged activity away from his then employer, it appears that Mr. Rideaux may have engaged in an impermissible activity known as “selling away.”  Selling away occurs when a broker or financial advisor sells an investment to a client that is not included in the client’s account or among the investment products offered by the firm.  Selling away is often associated with a broker’s other (“outside”) business activities.  Such private securities typically include investments in private placements, closely-held private companies, limited partnerships, certain real estate investments, as well as promissory notes.  If the broker fails to notify the firm, in the first instance, or proceeds with an unauthorized transaction in derogation of the firm’s order, then selling away has occurred, in direct violation of FINRA Rule 3280 and NASD Rule 3040.

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broker misappropriating client moneyOn December 18, 2017, LPL Financial LLC (“LPL”) lost a FINRA arbitration concerning customer claims related to former LPL broker Charles Fackrell.  The three-member FINRA panel issued a $462,000 aggregate award to six of Mr. Fackrell’s former clients, an amount which must be satisfied by LPL within 30 days.  As we discussed in a previous blog post, Mr. Fackrell (CRD# 5369665) pled guilty last year to one count of securities fraud for operating a $1.4 million Ponzi scheme.  According to prosecutors handling the investigation, beginning around May 2012, Mr. Fackrell first engaged in the fraudulent scheme by misappropriating investor funds solicited from at least 20 victims, many from Wilkes County, North Carolina.

In addition to asserting claims of negligence and violations of the North Carolina Securities Act, Mr. Fackrell’s former clients brought claims against LPL for breach of contract, failure to supervise, principal/agent liability, and negligent retention of an agent.

As detailed in publicly available court documents, Mr. Fackrell abused his position of trust with his clients, steering them away from legitimate investments to purported investments with “Robin Hood, LLC,” “Robinhood LLC,” Robin Hood Holdings, LLC,” and “Robinhood Holdings, LLC,” as well as related entities (collectively, “Robin Hood”).  These entities were controlled by Mr. Fackrell and provided him with a conduit through which to cover his own personal expenses, including hotel expenses, groceries, purchases at various retail shops, and to make large cash withdrawals.

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