Mr. Blumenschein settled the case this week, without admitting or denying the allegations.
Finra alleged that Mr. Blumenschein failed to supervise a broker who engaged in unsuitable penny stock trades, and after the affected client complained, the firm improperly agreed to guarantee the client against losses. As part of that guarantee, Finra said Freedom Investors got the customer to agree not to file a complaint with Finra.
In its settlement order, Finra said Freedom Investors “maintained an unstructured, deficient system” for supervision.
“The supervisory system was so inadequate that [Mr.] Blumenschein was unable to provide a consistent or coherent description of it during his investigative testimony,” the order said. “His testimony, under oath, was at times both evasive and contradictory, thus highlighting the system’s inadequacies.”
Finra also claims that an employee of the firm doctored records of an examination report of the broker.
In an interview, Mr. Blumenschein said it was easier to settle the case than fight it. “It was a business decision,” he said. “The firm is safe, my [brokers] are safe, and everybody’s going to work and customers are being served.”
Mr. Blumenschein said he was limited in what he could say about the case, “but suffice it to say in this age where people aren’t taking responsibility for what happens on their watch, I am.”
In a regulatory filing last September, when Finra brought the charges, Mr. Blumenschein denied the allegations.
Mr. Blumenschein remains on Finra’s board. The suspension was only for Mr. Blumenschein’s principal activity, explained Finra spokeswoman Nancy Condon, so he is still a registered person and eligible to serve.
]]>By Dan Jamieson
April 12, 2012
Finra has barred a former broker who misappropriated money from several customers, including from a trust fund set up for a child suffering from cerebral palsy.
The broker, Ralph Edward Thomas Jr. of Reisterstown, Md., who was most recently with Wells Fargo Advisors, was sentenced to four years in prison last February and ordered to pay $838,000 in restitution.
The Financial Industry Regulatory Authority Inc. announced the bar in its disciplinary disclosures for the month of March. The action against Mr.
Thomas was concluded in January.
Prosecutors from the U.S. Attorney’s Office for the District of Maryland alleged that Mr. Thomas stole the money from several customers over a number of years, including $750,000 from the child’s trust fund. The trust was funded with proceeds from a $3 million medical-malpractice settlement.
That particular fraud began in 2001, when the child’s mother visited a bank where Mr. Thomas worked at the time, according to prosecutors. The child’s mother transferred the trust account to the bank, which allowed Mr. Thomas to gain control over the funds.
Source: http://www.investmentnews.com/article/20120412/FREE/120419964
]]>Associated Press
April 12, 2012 - 3:11 PM
ATLANTA - A former businessman was accused Thursday in federal court of luring worshipers at mostly black churches into a phony scheme promising rock-solid investments, then secretly diverting their money to fund his lavish lifestyle.
Ephren Taylor swindled more than $11 million while he was chief executive of North Carolina-based City Capital Corporation, according to the complaint filed in Atlanta by the Securities and Exchange Commission.
He told the investors their money would be used to support small businesses such as juice bars and gas stations, the complaint said. But instead regulators said the funding went to publicize Taylor’s books, hire consultants and even finance his wife’s singing career.
“Ephren Taylor professed to be in the business of socially conscious investing,” said David Woodcock, who directs the SEC’s Fort Worth Regional Office. “Instead, he was in the business of promoting Ephren Taylor.”
Also targeted by the SEC complaint is City Capital, which has since relocated to California, and Wendy Connor, who was City Capital’s chief operating officer. She’s accused by the SEC of “severe recklessness” by helping Taylor’s plot.
]]>“Today is my last day at Goldman Sachs,” wrote Smith, who was the head of the firm’s U.S. equity derivatives business in Europe, the Middle East and Africa, in an Op-Ed in the New York Times on Wednesday titled “Why I am Leaving Goldman Sachs.”
“It makes me ill how callously people talk about ripping their clients off….will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.”
]]>The examination of the REITs sold by David Lerner brokers, known as Apple REITs, is included in an amended complaint of a prospective class action filed by investors this week in federal court in Newark, N.J.
The original class action was filed in June, weeks after the Financial Industry Regulatory Authority Inc. sued David Lerner Associates, a broker-dealer based in Syosset, N.Y., for misleading investors. The firm allegedly provided misleading performance figures for Apple REITs and implied that future investments could be expected to achieve similar results, according to Finra.
According to the amended class action complaint, the distribution paid to investors did not match the level of income generated from the various Apple REITs, which invested primarily in Marriott and Hilton extended-stay hotels. Brokers at David Lerner allegedly told clients that the Apple REITs were safe conservative investments that would protect their savings from the volatility of the stock market. The suit says investors were promised steady, annualized returns in the neighborhood of 7% to 8%.
According to the complaint, David Lerner represented that distributions would be made based on cash flow. Offering documents, however, stated that paying distributions from other sources could happen only in “certain circumstances” and “from time to time.” For example, Apple REIT Eight paid $238.2 million in distributions to investors from 2007 to 2010, with only $82.3 million — or 34% — coming from cash from the REIT’s operations, according to the complaint.
Likewise, Apple REIT Nine from 2008 to 2010 paid $188.5 million in distributions, with $42.2 million — or 22% — derived from cash from operations.
David Lerner Associates and other defendants “paid distributions without regard to profitability, even as they acquired properties at prices they knew could not conceivably justify the level of distributions they were paying,” the complaint alleges.
]]>Kotz is due to issue various reports this month that will tackle: allegations that regulators destroyed documents related to probes; alleged conflicts of interest concerning payments to victims of Bernard Madoff; and concerns about a “revolving door” between the SEC and Wall Street, WSJreports.
http://blogs.wsj.com/law/2011/09/08/sec-inspector-general-is-due-to-make-waves/More at WSJ.com: ]]>The SEC’s new whistleblower rule, which took effect last month, has been opposed by companies that worry it will undermine existing corporate compliance programs by coaxing employees seeking a bounty to report tips to the SEC rather than through internal channels. A new bill introduced in the U.S. House of Representatives in July is seeking to make internal reporting a prerequisite for whistleblowers to receive a bounty.
But Canellos said there are incentives in the current law to get whistleblowers to bring their concerns to employers first and that the SEC intends to pay more money to whistleblowers who first report their concerns internally.
http://blogs.wsj.com/cfo/2011/09/08/sec-plans-to-give-internal-whistleblowers-bigger-bounties/More at WSJ.com: ]]>The cases resulted from a targeted review of improper fees charged by broker-dealers in which FINRA found that the firms were routinely charging customers for handling fees that far exceeded the actual cost of the direct handling-related services the firms incurred in processing securities transactions. In some cases, firms charged a handling fee of almost $100 per transaction and earned a substantial percentage of their revenue from these fees.
FINRA sanctioned the following firms:
- Pointe Capital, Inc. (nka JHS Capital Advisors, Inc.), of Boca Raton, Florida, was fined $300,000. The firm charged customers a handling fee as high as $95 per trade in addition to a commission. (Additional violations included inadequate supervisory procedures.)
- John Thomas Financial, of New York, NY, was fined $275,000. The firm charged its customers a handling fee as high as $75 per trade in addition to a commission. (Additional violations included effecting material changes in its business operations without prior approval from FINRA, and deficiencies in complaint reporting, supervisory controls and certifications, branch office supervision and recordkeeping.)
- First Midwest Securities, Inc., of Bloomington, IL, was fined $150,000. The firm charged customers a handling fee as high as $99 per trade in addition to a commission. (Additional violations included unfair and unreasonable markups/markdowns and inadequate written supervisory procedures.)
- A&F Financial Securities, Inc., of Syosset, NY, was fined $125,000. The firm charged its customers a handling fee of $65 per trade in addition to a commission. (Additional violations included inadequate supervisory system and procedures, and failure to comply with continuing education requirement.)
- Salomon Whitney LLC, of Babylon Village, NY, was fined $60,000. The firm charged its customers a handling fee as high as $69 per trade in addition to a commission.
In settling FINRA’s actions, the firms agreed to implement corrective action to remedy the handling fee-related violations. In concluding these settlements, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
]]>WASHINGTON (August 23, 2011) – The North American Securities Administrators Association (NASAA) today released its annual list of financial products and practices that threaten to trap unwary investors, many by taking advantage of investors troubled by lingering economic uncertainty and volatile stock markets.
“Con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” said David Massey, NASAA President and North Carolina Deputy Securities Administrator.
Massey said headline-related investor complaints reaching state and provincial securities regulators include questionable claims, such as: “Realize safety and appreciation in gold;” “Wave energy: the future to power our homes;” “Synthetic fuels take the oilman out of our pockets;” and “Invest in foreclosed homes, help others and make a fortune!”
“Promoters often offer investors an opportunity to get in on the ‘ground floor’ of new technology or ideas to help others and make a great economic return,” Massey said. “Unsuspecting investors can be lured into these schemes, especially if they sound familiar. These offerings require careful research and a strong reminder that if it sounds too good to be true, it probably is not true, nor will it be profitable to anyone but the promoter.”
The following alphabetical listing of the Top 10 financial products and practices that threaten to trap unwary investors was compiled by the securities regulators in NASAA’s Enforcement Section.
- PRODUCTS: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.
- PRACTICES: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.
Massey urged investors to learn the warning signs of investment fraud and independently verify any investment opportunity as well as the background of the person and company offering the investment. State and provincial securities regulators provide detailed background information about those who sell securities or give investment advice, as well as about the products being offered.
“Investors should do business only with licensed brokers and investment advisers and should report any suspicion of investment fraud to their state or provincial securities regulator,” Massey said.
NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.
2011 NASAA Top Investor Traps and Threats
Products
Distressed Real Estate Schemes. Investment offerings involving distressed real estate have been on the rise following the collapse of the real estate bubble. While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors. Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully. Just like other securities, interests in real estate ventures also must be registered with state securities regulators.
- In February 2011, a Florida man pleaded guilty to conspiracy to commit mail and wire fraud in a scheme that solicited $2.3 million from 39 investors nationwide to purchase and refurbish distressed properties and, in turn, sell them for a profit. Investors were issued corporate promissory notes with returns of up to 12 percent. Investigators determined that the investments were used for personal gain and to make Ponzi-type distributions to other investors.
Energy Investments. Swindlers continue to attempt to trick investors by using high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs. Even genuine oil and gas investments almost always bear a high degree of risk. Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich.
- Colorado securities regulators issued a cease and desist order earlier this year against a Texas oil and gas company for allegedly violating state securities registration and licensing provisions. The case came to light after a company sales agents unwittingly “cold called” an employee of the Colorado Division of Securities and offered a joint venture interest in two Pennsylvania oil wells with next to no drilling risk.
Gold and Precious Metals. Higher precious metal prices and the promise of an ever-appreciating, “tangible” asset have lured unsuspecting investors into a variety of scams. Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. In another case, operators claimed to have special coins or nuggets that they can store or trade for investors in special markets for high profits and returns. Investors suffered heavy losses in each of these cases. And despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. In the spring of 2011, silver’s value declined by 30 percent in a single three-week period.
- In 2011, the founder of Florida-based Gold Bullion Exchange pleaded guilty to fraud charges in a scheme that collapsed on more than 1,400 investors who lost $29.5 million. Investors were solicited through a sophisticated telemarketing operation to purchase precious metal bullion using purported “leverage” financing. Investors were led to believe that they would need only to provide a fraction of the total cost of the purchased metals, with the remainder of the purchase price to be covered by margin-type financing, which would purportedly be extended to the investor by a “clearing firm.” State and federal investigators found that the clearing firm delayed or ignored requests by investors to sell their precious metals investments. Despite having paid commissions and fees of up to 18 percent for their precious metals investments, investigators determined that no bullion was purchased.
Promissory Notes. Investors seeking safety in uncertain economic conditions or those enticed by the promise of big returns through a private, informal loan arrangement may suffer deep losses investing in unregistered or fraudulent promissory notes. These notes give investors a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry some risk that the issuers may not be able to meet their obligations. Often initially pitched as personal loans or short-term business arrangements, most promissory notes and the persons who sell them must be registered with state securities regulators. Unregistered promissory notes are often covers for Ponzi schemes and other scams. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly registered.
- A former FBI agent was convicted in Alabama this year after an investigation by Alabama securities regulators revealed that he used promissory notes guaranteeing returns as high as 12 percent to lure investors into a Ponzi scheme. The funds were to be invested in real estate and medical technology ventures, but investigators determined that the former agent used most of the funds, more than $4 million, to pay Ponzi-style returns to previous investors and for his personal use.
Securitized Life Settlement Contracts. Life settlement contracts are investments in the death benefits of insurance policies that insure the lives of unrelated third parties. Legitimate investments in life settlement contracts involve a high degree of risk, and investors may be responsible for routinely paying costly premiums for policies that insure people who outlive their life expectancies. Outside the legitimate offerings, crooks are embracing new schemes to deceive even cautious investors. For example, “securitized” life settlement contracts are increasingly popular investments that combine life settlement contracts with traditional securities, such as bonds that supposedly guarantee a fixed return on a fixed date, regardless of whether the insured outlive their life expectancies. This risk-reducing structure has too often proven fraudulent and left victims with nothing but worthless paper issued by a bonding company that does not maintain sufficient assets to fulfill the guarantee, operates in an unregulated overseas territory or simply does not exist.
- In 2011, two executives of National Life Settlements LLC of Houston were indicted on charges of securities fraud and the sale of unregistered securities after an undercover investigation by Texas securities regulators determined the pair had sold $30 million in unregistered promissory notes secured by life settlement contracts. One of the executives was a three-time convicted felon with a long history of investment fraud. The promise of a safe investment with annual returns as high as 10 percent served as bait to lure investors into what a court-appointed receiver testified was a Ponzi scheme. The company sold these unregistered investments largely to retired teachers and state employees through a network of financial professions, including insurance agents and securities brokers. The criminal indictment alleges that investors’ money was spent on commissions and personal expenses, including the purchase of houses and cars.
Practices
Affinity Fraud. Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. A recent national study of Ponzi schemes over the past decade found that one in four were marketed to affinity groups to increase the scheme’s credibility and build the fraud. The most commonly exploited are the elderly or retired, religious groups, and ethnic groups. Investment decisions should always be made based on careful evaluation of the underlying merits rather than common affiliations with the promoter.
- A 73-year-old North Carolina man pleaded guilty this year to 19 felony counts of securities fraud following an investigation by North Carolina securities regulators that determined he had collected more than $18.5 million from more than 100 investors, many of whom he knew from church or other social circles. The investments for venture capital investments in various unspecified companies came with a promissory note guaranteeing annual returns of between 10 and 50 percent. Bank records revealed a Ponzi scheme using money from new investors to pay returns to previous investors.
Bogus or Exaggerated Credentials. State securities regulators have led the effort to prevent the misuse of credentials or designations intended to imply special expertise or training in advising senior citizens on financial matters. Since 2008, 29 states have adopted laws or rules preventing such misuse. Now, state regulators are noting an increase in the use of other bogus credentials or exaggerated designations. State securities regulators have encountered salesmen pitching financial services or products with nonexistent law degrees or CPA certificates and expired or nonexistent CRD numbers. Others have boasted of impressive sounding designations that prove to be meaningless. In every circumstance, investors should press for full disclosure and the meaning behind all designations, and should check with their state regulator if they have any suspicions about claimed credentials.
- Securities regulators in Utah came across a broker who listed “C.H.S.G.” after his name on his business card. When asked, the broker told regulators the initials stood for “Certified High School Graduate.”
Mirror Trading. The securities market is constantly evolving to provide investors with new products, different platforms and a variety of choices. The latest evolution is “mirror trading,” which is promoted as an automated trading platform that ensures investors will participate in real-time transactions placed or executed by a skilled and knowledgeable third party. Whenever the third party executes a trade in his or her account, the same trade is mechanically placed on behalf of the investor in the investor’s account. Investors should not be lulled into a false sense of security, and they need to continue to objectively evaluate and carefully consider all new or popular investment platforms. They should also recognize that unscrupulous traders and promoters may use trendy platforms such as mirror trading as a way to launch fraudulent schemes or manipulate markets by lying about their qualifications, misrepresenting the success of their strategies, or concealing their motivations and conflicts of interest.
Private Placements. Investors should be aware that, even in the case of legitimate issuers, private placement offerings are highly illiquid, generally lack transparency and have little regulatory oversight. In the United States, the federal exemption for private placement offerings provided under Rule 506 of Regulation D continues to be abused by criminals. Although properly used by many legitimate issuers, unscrupulous promoters use Rule 506 to cloak an otherwise fraudulent offering in legitimacy.
- In 2011, U.S. and Canadian authorities convicted three individuals of criminal fraud charges related to the sale of $33 million in oil and gas private placement offerings. The defendants claimed the securities were exempt from registration under Rule 506. In an attempt to avoid regulatory scrutiny, the defendants organized their company in the Bahamas and sold the securities from a boiler room located in Ontario, Canada, while telling investors the company was located in Kentucky. Securities regulators also have taken civil fraud actions against private placement issuers, Medical Capital Holdings, Inc. and Provident Royalties, which raised more than $500 million from investors though private offerings sold by dozens of broker-dealers. The companies are alleged to have defrauded investors by misrepresenting the use of the investment proceeds and misappropriating millions in investor funds.
Securities and Investment Advice Offered by Unlicensed Agents. State securities regulators have identified a consistent increase in investor complaints regarding salesmen unlicensed as securities brokers or investment advisers giving investment advice or effecting securities transactions. For example, insurance agents offering securities or investment advice without a securities license have not demonstrated sufficient expertise to legally recommend that an investor liquidate securities holdings in favor of insurance products. Investors are often unaware that their insurance agent may not be licensed to give investment advice, and these recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.
- In 2011, an insurance agent unlicensed to sell securities and his manager were barred from working in the Missouri securities industry for five years after Missouri securities regulators uncovered a complex scheme that saw the liquidation of more than $7 million in securities investments from 180 customer accounts. Agents had moved most of these funds into proprietary fixed or equity indexed annuities.
For more information:
Bob Webster, Director of Communication
202-737-0900
suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier. Without admitting or denying the findings, Haney consented to the described sanctions and to the entry of filings that he negligently misrepresented a 6 percent guaranteed minimum income benefit with annual reset rider to a variable annuity to an unsophisticated customer who believed she could exercise the rider for a 6 percent income stream every year without annuitization, could receive a 6 percent income stream every year and receive her entire initial principal back at the end of the variable annuity’s four-year holding period, regardless of the stock market’s performance and any withdrawals in the intervening years. The findings stated that the customer understood, based on Haney’s misrepresentations, that the annuity had a fouryear holding period similar to a certificate of deposit (CD) term. The findings also stated that the customer, based on Haney’s misrepresentations, invested $168,550.53 in the variable annuity with the rider. The findings also included that Haney’s recommendation was unsuitable because the customer was not a sophisticated investor and did not understand how a variable annuity worked; the need for liquidity within two to four years negated the rider’s primary benefit of provided guaranteed income after a minimum of 10 years. FINRA found that the investment of approximately a total of $218,000 involved an over-concentration of approximately 77 percent of the customer’s liquid net worth.
The suspension is in effect from June 6, 2011, through August 5, 2011. (FINRA Case #2009019512901)
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