Robinhood Restricts GameStop, AMC, Other Securities – Do Investors Have Claims?

Can investors bring a claim against Robinhood and other self-directed platforms for the recent purchase restrictions on GameStop, AMC, and other securities? The internet is buzzing with talk of class action lawsuits.  Our office is fielding inquiries.  But – from a claimants’ attorney perspective – there are high hurdles to overcome.

The securities trading platform Robinhood is under fire – again.  In December 2020, the trading platform agreed to a cease-and-desist order from the SEC, based on allegations of misleading customers regarding order execution quality and the hidden higher costs to its users compared to other broker’s prices.  Robinhood agreed to pay a $65 million civil penalty as part of that agreement.

Now, retail investors are slamming Robinhood, TD Ameritrade, and other platforms for restricting purchases of GameStop, AMC, Nokia, Blackberry, and other securities.  A significant portion of the news reporting this week has addressed various brokerage firms’ refusal to accept orders on those securities, and whether there’s any sort of recoverable loss associated with the refusals.  Legislators are posting on Twitter and demanding explanations in support of angry investors, and the SEC is “monitoring” the situation.

There’s a lot going on, and no single answer to the question.

Share values have zoomed upwards over the past few days.  Notably, this isn’t a total restriction on all trading of these shares.  The platforms still allow sales.   Given that the trading price surge is apparently due to retail investors rallying to snub institutional investors (like hedge funds) who have been shorting these companies, and thus profit off of falling stock value, this limited trading restriction appears to benefit the Goliaths over the Davids.   The prohibition of buy orders, and allowance of sell orders, has naturally driven the stock prices down, thereby protecting those who shorted the stocks.

Isn’t this “market manipulation” by the platforms, for the benefit of the institutional Goliaths?

The restrictions have an effect on the market – but whether or not it was unlawful “manipulation” with recoverable damages will likely be played out in the courts.  Here are five hurdles off the bat for retail investors wanting to sue these platforms:

First, the stock exchanges are also restricting trading activity.  For example, the New York Stock Exchange instituted a number of temporary trading halts on GameStop and AMC.  The halt is imposed, orders build, and when trading opens, the execution of the pent-up orders serves to move the stock price to a degree that triggers yet another market-based trading halt.  The NYSE is allowed to impose halts under a number of different regulatory rules.  There’s likely no wrongdoing there.

Second, some of the refusals are coming at the hands not of the brokers, but their clearing firms.  The president of WeBull has gone on record as saying that his clearing firm shut down the trading in those securities.  And to bolster the argument, the user agreement you signed when you opened your account probably had you expressly acknowledge and agree that the platform isn’t liable if a third-party clearing firm is causing the problem.

Third, for Robinhood, the very nature of their structure makes it difficult to fill orders on highly volatile stocks.  Your user agreement probably has language that says the firm will not actually accept traditional market orders.  Rather, every “market” order is really a limit order, to be filled at a price up to 5% higher than the last traded price.  Thus, if the stock price is moving upward quickly, it’s possible if not outright likely that the price will never be within that 5% band, and the order will therefore never fill.

Fourth, if you’re trading on margin, the brokerage firms can and have tightened margin restrictions on highly volatile stocks. Where you might have to maintain a 50% cushion for some securities, the restriction for these securities is now far higher.   It makes sense.  Firms aren’t willing to loan money to buy super volatile securities.  You would be hard-pressed to win a claim that the decision to not extend margin in these circumstances is an unreasonable decision.  By tightening margin requirements, the firms can shut down trading without actually shutting it down.

Fifth, these account contracts generally allow the brokerage firm to use its discretion to decline trades.  A quick look at Robinhood’s user agreement finds language “I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.”   Contractual terms may be challenged for various reasons, and the SEC can prohibit regulated firms from certain exculpatory and other types of language.   But broadly speaking – this kind of authorization to refuse trade instructions tends to hold up.

Online brokerage firms are also required to make commercially reasonable decisions and potentially reject trade instructions that don’t line up with an account’s trading objectives.  Meaning, if you have marked a “moderate” risk tolerance for your account, the firm should theoretically reject a trade in AMC or GameStop since those trades under current conditions are beyond speculative.

What are the damages?

Finally – even if there are potential private causes of action for retail investors to sue the platforms for restricting purchases, there may be a high hurdle to cross regarding determining what damages may be recoverable.

Assuming that share prices keep going up, even if the firm should not have rejected your trade instruction, could you recover damages?  The problem there is that the damages calculation is very speculative.  Your complaint is that you couldn’t buy the stock at “X” price.  Unless you have strong documentary evidence that you had the intent and ability to buy “Y” number of shares, your word alone may not be enough to carry your burden of proof.  Equally problematic is the issue of when you would have sold the securities.  It is highly unlikely that a court, jury, or arbitration panel is going to believe that you would have magically sold at the high point before the stock inevitably crashed to the appropriate valuation.  Once again, you’d have to prove the date, price, and amount of shares you otherwise would have sold.

How about an argument, once the share value starts dropping, that the platforms’ trading restrictions caused a market drop?  A drop in share value is a likely effect of the restriction. But does that mean the platform should be responsible for investment losses?  Even assuming it was a violation of law for the platforms to put the purchase restriction in place, and that the restriction was proved to be the cause of losses, damages calculations are still a speculative moving target.  If you can still sell your shares, the defense becomes that you failed to mitigate your losses by not selling when you could.

These problems inherent in calculating damages could be strong arguments to defeat an attempted class action case.

What now?

There are, of course, other harms caused by wild market volatility and trading platform restrictions.  Public confidence in our securities industry erodes when it looks like the rules and regulations meant to protect the Davids out there are doing more harm than good.   However, as should be clear now, securities regulation is incredibly complicated and can’t respond on a dime.

Based on current publicly available information, it is difficult to see a path forwards for recoverable claims by retail investors against self-directed platforms relating to the purchase trading restrictions of these securities.  That situation may change as more information becomes available.  More likely is that we’ll see regulation that addresses these issues and tries to ensure that pricing anomalies like these don’t happen again.

However, if a FINRA-registered broker-dealer recommended and sold you the stock, depending on the circumstances of the sale, your investment objectives and risk tolerance, and other factors, you may have a claim against the broker-dealer for your investment losses.  If you have questions about your investments feel free to call us or use our online inquiry tool.  We’ll be happy to speak with you and and see if we can offer assistance.

Darlene Pasieczny, AttorneyDarlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP.  She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, securities litigation, and appellate cases.  She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct.  Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.

 

SEC Takes Action: False & Misleading Conduct Related to COVID-19

SEC Fraud Investment

The SEC is taking action against numerous companies for their false and misleading conduct related to COVID-19

Since February 2020, the U.S. Securities and Exchange Commission (SEC) has temporarily suspended trading in over 30 stocks and filed several enforcement actions against individuals and microcap securities issuers based on fraudulent COVID-19-related claims.

The enforcement actions have a common theme – fraudulent misrepresentations made in press releases and online forums about the company providing COVID-19 tests or protective equipment, in an attempt to unlawfully drive up the share price of the company’s stock.

These emergency enforcement actions seek to protect the public by freezing defendants’ assets, getting permanent injunctions to bar the wrongdoers from further violations of the securities laws, officer-and-director bars against individual participants, disgorgement of ill-gotten gains, civil money penalties, and penny stock trading bars.

SEC v. Nelson Gomes et al. (filed 06/09/20)

The SEC took emergency action against this group of individuals and offshore entities based on allegations of a fraudulent scheme to profit from the COVID-19 pandemic. The allegations include that the defendants generated more than $25 million from illegal microcap stock sales, using promotional campaigns that falsely asserted that the multiple companies involved could produce medical grade facemasks and automated retail kiosks. Company insiders dumped large amounts of the shares, hiding the activity so investors were unaware of the “pump and dump” scheme. The SEC warns that investors should generally be on the alert for fraud involving microcap stocks, as they may be more prone to manipulative schemes by fraudsters.

SEC v. Jason C. Nielsen (filed 06/09/20)

The SEC brought charges against a penny stock trader based in Santa Cruz, California, who allegedly engaged in a “pump-and-dump” scheme. The SEC claims that the trader made numerous false statements in an online investment forum about a biotechnology company, Arrayit Corporation, to artificially drive demand up, so the trader could sell his shares for a profit.  The trader falsely asserted that the company had developed an approved COVID-19 blood test. The SEC also claims that the trader scheduled and subsequently cancelled several large purchases of the company’s stock as another way to create an apparent high demand for the stock. Investors should be attentive to signs of stock manipulation, especially those regarding products or services related to COVID-19.

SEC v. Applied BioSciences Corp. (filed 05/14/20)

The SEC filed a complaint against microcap company Applied BioSciences Corp. based on the company’s misleading press releases in March 2020, intended to exploit the coronavirus pandemic for profit. The company’s press releases claimed to offer shipment of at-home COVID-19 tests that could be used by individuals and institutions. The SEC complaint alleges that the tests were not approved for at-home use, had not been approved by the FDA, and, as of the press release, the company had not yet shipped any of the tests. The false and misleading press releases caused the company’s stock price and trading volume to soar.

SEC v. Turbo Global Partners, Inc. and Robert W. Singerman (filed 05/14/20)

The SEC filed a complaint against Turbo Global Partners, Inc. and its CEO and chairman, Robert W. Singerman, based on a “pump and dump” scheme to artificially increase stock value by issuing two false press releases in late March and early April 2020. The press releases announced the company’s involvement in a “multi-national-public-private-partnership” to distribute and sell non-contact fever-detecting equipment with facial recognition technology, which would soon be available in each state. The SEC alleges the releases were materially false and misleading in numerous ways, including that no such partnership existed, the equipment did not have such technology, and that the company’s CEO knew his statements to be false. The false and misleading press releases caused the company’s stock price and trading volume to all-time highs.

SEC v. Praxsyn Corporation and Frank J. Brady (filed 04/28/20)

In late April, the SEC charged Praxsyn Corporation and its CEO, Frank J. Brady, with issuing false statements regarding the company’s ability to source and distribute N95 masks. In a press release, Praxsyn claimed that it had established a supply chain that would allow the company to sell millions of masks.  Subsequently, Praxsyn announced that it already had a large stock of masks. The SEC’s complaint alleges that Praxsyn neither had any masks on hand nor a single contract with a manufacturer or supplier. After being pressed by regulatory inquires, the company admitted in a third press release that it never had N95 masks on hand, and its artificially inflated share price and trading volume dropped to about what it had been prior to the false press releases.

The SEC Temporarily Suspended Trading in the Securities of the Following Companies for Violations Related to COVID-19

Using its authority under Section 12(k) of the Securities and Exchange Act of 1934, the SEC temporarily suspended trading due to concerns about the accuracy and adequacy of publicly available information and public statements made by these issuers:

  • Blackhawk Growth Corp. (6/22/2020)
  • Micron Waste Technologies Inc. (5/26/2020)
  • WOD Retail Solutions Inc. (5/20/2020)
  • Custom Protection Services, Inc. (5/5/2020)
  • CNS Pharmaceuticals Inc. (5/1/2020)
  • Moleculin Biotech, Inc. (5/1//2020)
  • WPD Pharmaceuticals, Inc. (5/1/2020)
  • Nano Magic Inc. (4/30/2020)
  • Kleangas Energy Technologies, Inc. (4/27/2020)
  • Decision Diagnostics Corp. (4/23/2020)
  • Predictive Technology Group, Inc. (4/21/2020)
  • SpectrumDNA, Inc. (4/21/2020)
  • SCWorx Corp. (4/21/2020)
  • PreCheck Health Services, Inc. (4/16/2020)
  • Bravatek Solutions, Inc. (4/15/2020)
  • BioXyTran, Inc. (4/15/2020)
  • Signpath Pharma, Inc. (4/15/2020)
  • Applied BioSciences Corp. (4/13/2020)
  • Arrayit Corporation (4/13/2020)
  • Solei Systems, Inc. (4/10/2020)
  • Roadman Investments Corp. (4/10/2020)
  • Parallax Health Sciences, Inc. (4/10/2020)
  • Turbo Global Partners, Inc. (4/9/2020)
  • BioELife Corp. f/k/a U.S. Lithium Corp. (4/9/2020)
  • Key Capital Corporation (4/7/2020)
  • Prestige Capital Corp. (4/7/2020)
  • Wellness Matrix Group, Inc. (4/7/2020)
  • Sandy Steele Unlimited, Inc. (4/3/2020)
  • No Borders, Inc. (4/3/2020)
  • Praxsyn Corporation (3/25/2020)
  • Zoom Technologies, Inc. (3/25/2020)
  • Eastgate Biotech (2/24/2020)
  • Aethlon Medical, Inc. (2/27/2020)

Investing in Stock that was Previously Suspended by the SEC May Be Additionally Risky

The SEC suspends trading in a stock when it believes that suspension is required to protect investors and the public interest. Section 12(k) of the Securities and Exchange Act of 1934 allows the SEC suspend trading in any security (other than an exempted security) for a period not exceeding 10 business days. Even if trading resumes after the 10-day period, the SEC may continue to investigate a company to determine if it has defrauded investors. Importantly, the SEC is not required to alert the public of a pending investigation until an enforcement action is publicly filed, like the ones described above.

Stocks that trade on a national exchange automatically resume trading after the suspension period ends. However, securities traded on the OTC Markets, which typically are where many “penny stocks” or microcap stocks trade, do not automatically resume trading after the suspension period ends. Before trading can resume, certain requirements under SEC and FINRA rules must be fulfilled. This means that there is a risk the OTC stock never resumes trading. With no market to trade in, the stock may be worthless.

What Should You Do If You Discover a Trading Suspension?

The SEC recommends contacting the broker-dealer who sold you the stock, or who quoted the stock before the suspension. Ask if they intend to resume publishing a quote in the company’s stock. If trading resumes, expect a decline in the price of the security as investors may rush to sell of their holdings.

If a FINRA-registered broker-dealer recommended and sold you the stock, depending on the circumstances of the sale, your investment objectives and risk tolerance, and other factors, you may have a claim against the broker-dealer for your investment losses.

Investors should generally proceed carefully if trading in low-value microcap or “penny stocks.” Be wary of online forums or press releases that purport to announce a company’s COVID-19-related products or services.

Darlene Pasieczny, AttorneyDarlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP.  She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, and securities litigation. She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct.  Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.

Investor Alert – Fraudsters Target CARES Act Retirement Savings Relief

If you are considering using provisions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to withdraw and reinvest money from your retirement savings, be aware that fraudsters may be targeting you. Be wary when someone encourages you to use your retirement savings to make new investments. When considering new investments, do your own research and consider contacting an unbiased investment professional or an attorney.

CARES Act Retirement Savings Benefits

The CARES Act includes provisions designed to provide relief for individuals who are financially impacted by the COVID-19 pandemic. Among these provisions are relief efforts that allow individuals to pay back amounts withdrawn from qualified retirement plans without paying income tax on the withdrawal. The CARES Act also allows individuals to take out larger retirement plan loans with limited income tax consequences. For those suffering financial hardship, the CARES Act benefits can provide much-needed liquidity. Unfortunately, fraudsters and dishonest promoters are using this crisis to encourage investors to make high risk or high fee investments that may not be in the investor’s best interest.

How Fraudsters Are Targeting Retirement Savings

Promoters or investment professionals may contact you with a recommendation that you take advantage of the CARES Act benefits to withdraw money from your retirement savings and invest that money. If you have been contacted with such a recommendation, be very wary. The individual who contacted you may be part of a predatory scheme to profit off your retirement savings. Always be sure to verify that the person you are speaking with is licensed to give advice or sell investments. Contact your state securities regulator or use these free tools from the SEC and FINRA to verify the license and history of an investment professional.

Important Considerations for Using Your Retirement Accounts to Make New Investments

There are several important drawbacks you should consider before you use retirement funds to make new investments. The promoter may charge you high fees. Inquire how much of your money will be invested for you and how much will go to the person managing the investment. Liquidity – whether you can easily cash out of the investment – can be very important in today’s uncertain environment. Make sure to ask whether there are any fees for early withdrawal or sale. Consider the current value of your retirement investments. If the market is down when you withdraw retirement savings, you may not recover those losses when the market rebounds. If you invest the money that you take out as a loan from your retirement savings, you may have difficulty repaying the loan if the investment performs poorly.

Darlene Pasieczny, AttorneyDarlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP.  She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, and securities litigation. She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct.  Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.

Featured image courtesy of SYK paralegal Torrie Timbrook.

Victims of COVID-19 Scams & Cybercrime Need to Act Fast

Victims of COVID-19 Scams and Cybercrime Need to Act Fast – FBI’s Financial Fraud Kill Chain May Recover Fraudulent Wire Transfers

Cybercrime is becoming ever more pervasive, and with so many more people working at home during the COVID-19 coronavirus pandemic, the risk of a fraudulent wire transfer and other financially motivated crimes is higher than ever.

Fraudsters use crisis events to target good-hearted investors.

The SEC and other federal and state regulatory agencies are paying close attention to COVID-19-related financial fraud, such as fraudulent stock promotions and unregistered offerings, charitable investment scams, and community-based financial frauds. Since February 2020, the SEC has suspended stock trading in connection with COVID-19 for at least 23 companies, and has initiated at least five emergency enforcement actions against companies seeking to exploit investors with false and misleading promises. These investment scams include fraudulent claims of N95 mask production, and manufacturing COVID-19 blood tests and thermal scanners for fever detection.

The FBI’s Financial Fraud Kill Chain:  A Resource for Recovering Stolen Funds

Unfortunately, while regulatory agencies work hard to shut down fraudulent scams, it can be difficult to impossible to recover money from the fraudsters.  Especially if the investor funds or cybercrime victim’s bank account funds have been transferred overseas. The Financial Fraud Kill Chain (FFKC), a program administered by the FBI, is a critically important tool that can cut off large international wire transfers. But victims need to act fast, within 72 hours of the wire transfer.

How does the Kill Chain work?

Financial fraud scams are often international, with unsuspecting investor money transferred from the United States to overseas financial institutions via international wire transfers through the SWIFT system. Cybercriminals hacking email accounts may use personal information to prey on individuals (“I’m traveling overseas and need money for a plane ticket home”). Businesses are also targets of cybercriminals. For example, corporate account takeovers and business e-mail compromise scams may be used to redirect legitimate wire transfers to fraudulent overseas accounts.

The Kill Chain utilizes the FBI’s international relationships to help U.S. financial institutions recover large international wire transfers. If the Kill Chain is activated, the FBI can prevent the withdrawal of stolen funds by cutting off the SWIFT transfer.

What kind of transfer qualifies to initiate the Kill Chain?

The FFKC can only be activated if:

  • The wire transfer is $50,000 or more;
  • The wire transfer is international;
  • A SWIFT recall notice has been initiated; and
  • The wire transfer occurred within the last 72 hours.

To initiate the FFKC process, you should immediately contact your local FBI field office and also notify your financial institution that originated the transfer. Because time is of the essence, call your local FBI office and fill out an on-line complaint through the FBI’s Internet Crime Complaint Center (IC3).

Providing the FBI with more information will allow the agency to respond more effectively, but all complaints should include the following:

  • Victim business name and address,
  • Transaction type, amount, and date,
  • Originating bank name and address,
  • Beneficiary bank name and address,
  • Beneficiary account number,
  • Beneficiary bank location (if known), and
  • Intermediary bank name (if known).

If you or your business has been the victim of wire transfer fraud, consider still reporting it to the FBI even if the fraud does not meet the above criteria to initiate the Kill Chain.

And as we all work to protect ourselves and each other during the coronavirus pandemic, COVID-19-related investments scams should be reported to the SEC and your state’s securities regulator

Darlene Pasieczny, AttorneyDarlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP.  She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, and securities litigation. She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct.  Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.

FINRA Issues Warning: Pandemic Volatility Highlights Oil-Linked ETPs Unsuitable for Some Investors

FINRA, the Financial Industry Regulatory Authority, issued an eye-catching warning in Regulatory Notice 20-14 about a particularly complex and risky type of security: Oil and Gas Exchange Traded Products, or ETPs. High concentrations in the oil and gas sector, especially with complex, risky, and volatile products like ETPs, may become a frequent subject for investor litigation in the upcoming year and fallout of the Coronavirus pandemic. To quote FINRA, “the performance of such products may be linked to unfamiliar indices or reference benchmarks, making them difficult for the average investor to comprehend.”

Oil and Gas-linked ETPs

These products are engineered to be complicated, risky, and volatile. While potentially paying out well above conservative fixed income investments, they carry the risk of massive and sudden drops in valuation. ETPs may be indexed to futures contracts or other market benchmarks, so their “value” is a few steps away from the actual daily value of the underlying commodity. More exotic offerings include leveraged and inverse commodities-linked ETPs, which seek to deliver multiples or the opposite of the return of an oil linked index.

This particular underlying commodity – oil – comes with its own set of risks. The benchmark price of oil was already under severe downward pressure at the end of 2019, before the jolting drop in demand from the impact of COVID-19. The combination has meant that one ETP shed 41% of its value in one week in April. Others have been forced to liquidate, or reconfigure their investment objectives.

It’s all there in FINRA’s authoritative detail in RN 20-14, should you want a refresher on the oil market’s conditions of “contango” (future prospects dim), or “backwardation” (with good investment opportunities) or “super-contango” (where we were in April).

Suitability

Scratching your head over “contango”? The term itself is a good warning sign. The average retail investor looking to put their retirement savings in a safe, moderate or conservative portfolio, should not be making decisions that require a technical dictionary for every other word. And if a financial professional cannot adequately analyze and explain the function and risks of betting on the futures market with an ETP, or why that is an appropriate risk compared to other investments, the recommendation may fail FINRA’s suitability standard.

FINRA has been clear in interpreting its own Rule 2111 regarding suitability: if a broker does not sufficiently understand the product, then a recommendation to purchase that product is not suitable for ANY investor:

A member’s or associated person’s reasonable diligence must provide the member or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy. The lack of such an understanding when recommending a security or strategy violates the suitability rule.

I noted in a prior post that it is wise to review investment statements during market volatility. When the market is acting like a roller coaster, it can reveal otherwise hidden problem areas. That might include over-concentration in a certain sector, or investments in complex products such as commodity-linked ETPs. Unsuitable investment recommendations may lead to claims against an advisor or firm for recoverable losses.

And if you are a financial advisor taking on a new client with a portfolio that has been inappropriately allocated, consider suggesting to your client a confidential review with a securities attorney. You may be able to help your client recover some of the damage caused by a prior advisor’s poor investment recommendations.

Darlene Pasieczny, AttorneyDarlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP.  She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, and securities litigation. She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct.  Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.

Reviewing Investment Account Statements During Market Volatility – Five Red Flags

Seeing that account balance number can hurt. And not all investment losses are potentially recoverable or due to inappropriate recommendations by a financial advisor. But in times of market volatility, reviewing investment account statements might reveal claims for losses that are actionable and recoverable – if prompt action is taken.

Warren Buffet’s much repeated quote, “only when the tide goes out do you discover who’s been swimming naked,” rings true once again today in the sawtooth market volatility of the coronavirus global pandemic. The Dow Jones Industrial average hit a record high of 29,551 in mid-February. Today it stands about 20% lower than that, having seen the price of crude oil slipping into negative territory and other wild news. Some market sectors have been hit disproportionately, and there is no end in sight to the turmoil. Investors are waking to unexpected margin calls while struggling to maintain liquid assets.

Not reviewing investment account statements can hurt more in the long run.

Rising markets tend to conceal all kinds of potential misconduct or inappropriate investments. When markets drop, investors take notice and start asking questions. Why is my account allocation 80% in single stock equities? Why is there margin trading in my account? Why are there multiple variable annuities in my IRA account? Why is there frequent buying and selling of investments that I don’t recognize? Why can’t I easily sell the investments in my account? Why is my account concentrated in a certain sector like oil and gas investments? At its worst – where did my money go? 

Here are five red flags to consider when reviewing investment account statements: 

  1. First of all, did you get a statement? Are they arriving on time? If your account statements stop arriving, or your broker is hard to reach, that needs your immediate attention. Call the custodian or clearing firm customer service line that should be printed on your last received statement to get copies of statements and trade confirmations.
  2. You have investments that do not appear on the brokerage company’s account statements that you receive. Or the statements otherwise look irregular, unprofessional, or show frequent transactions that you don’t understand, or literally don’t add up. Or the dates or balances don’t match up to the last period. Or your advisor says you shouldn’t discuss your investments with anyone else at the brokerage company.
  3. In normal times any reported swing in portfolio value of more than 10% up or down, when you’re a conservative or moderate investor, is a red flag that the portfolio allocation is exposed to significant risk. These are not normal times in the midst of the coronavirus pandemic. But, the performance of your investment should always be fully reported, plausible, well-explained, and roughly comparable to similar investments. Any indication that your investment is riskier than you bargained for is a red flag. Your portfolio value may lose money during market swings, but if it was appropriately allocated for your investment objectives and risk tolerance, then it may not have lost as much. This is especially important for senior investors who do not have as long of an investment time horizon to recover from significant market losses.
  4. Liquidity is a concern in uncertain markets. If you’re suddenly informed that you can’t sell your investments, or you encounter unexpectedly high penalties or surrender charges for selling, that’s reason to dig deeper. Nontraded REITs, LP or LLC interests, annuities, structured products with exotic names, may be appropriate for some investors or for a small part of a portfolio. But these products tend to pay selling brokers high commissions and are frequently oversold. Generally, any sense of rush, pressure, or surprise in the context of making investment decisions is cause for concern.
  5. You are a conservative or moderate investor, and discover that your broker has you in risky leveraged ETFs or has been trading on margin in your account. Many investors are discovering the risks of margin accounts with demands for payment of new money into accounts to meet margin calls. Failure to add required funds can allow the brokerage firm to liquidate holdings as well as charge commissions, fees, and margin interest. Margin trading is inherently risky – and ripe for abuse by unscrupulous brokers.

If you have seen any of these five red flags when reviewing investment account statements do not ignore your suspicions. Call us for a free initial consultation. We’ll discuss your concerns and whether we can help. Your call is confidential.

And if you have lost trust and confidence in your financial advisor, it may be time for a change. Consider whether a registered investment advisor and fee-based (rather than commission-based) account may be more appropriate for your needs. A good advisor can assist your transition and help a securities attorney review a prior advisor’s recommendations for potentially actionable claims.

Darlene Pasieczny, Attorney

Darlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP.  She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, and securities litigation. She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct.  Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.

Attorney Pasieczny at 40th Annual NWSI in Seattle

Darlene Pasieczny moderates panel at the 40th Annual Northwest Securities Institute (March 2020)

As current chair-elect of the Oregon State Bar’s Securities Regulation Section, attorney Darlene Pasieczny (pictured here moderating a panel via webcast) assisted with the program planning for the 40th Annual Northwest Securities Institute (NWSI) program in Seattle, Washington.  As part of this panel presentation, attorney Dan Keppler and SEC trial counsel Brent Smyth spoke on SEC receiverships, and attorneys Heidi Brooks Bradley and Diana Breaux spoke on the FHLB v. Credit Suisse litigation and the Securities Act of Washington.  The remaining program saw excellent presentations by SEC and state regulators (including Dorothy Bean from the Oregon Division of Financial Regulation) and securities attorneys from Oregon, Washington, and Canada, on a wide range of topics.   

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, as well as fiduciary litigation in trust and estate disputes, and elder financial abuse.

 

 

FINRA Expungement Proceedings

SYK attorney Darlene Pasieczny Presents on FINRA Expungement Proceedings at PIABA’s Mid-Year Meeting.

On April 4, 2019, I joined co-panelist Kate McGrail and moderator Robert J. Girard II in Washington D.C. Together, we presented on FINRA expungement proceedings to an audience of securities attorneys, law professors, and state securities regulators attending PIABA’s Mid-Year Meeting.

Our main topics included:

  • The process for brokers to request expungement of customer dispute information from a broker’s CRD record.
  • The process for customer claimants to object to the request.
  • Proposed rule changes being considered by FINRA.

Current FINRA Rule 2080 of the Code of Arbitration Procedure for Customer Disputes provides the narrow grounds for expungement requests. FINRA Regulatory Notice 17-42 describes the potential changes including:

  • Limiting the time in which brokers may request expungement.
  • Creation of an Expungement Arbitrator Roster, with enhanced arbitrator qualification requirements, to hear expungement requests.
  • Requiring an additional finding that the customer dispute information has no investor protection or regulatory value.

The CRD is the Central Registration Depository, an online licensing and registration system for brokers and securities firms. Pursuant to FINRA rules, certain disclosure information must be reported for inclusion in the CRD record. This includes customer disputes – customer complaints, arbitrations and court actions.

Expungement of customer dispute information from a broker’s CRD record also means that the information is no longer publicly available through FINRA’s free online BrokerCheck. Because FINRA is clear that expungement is an “extraordinary remedy.”

That is in part because BrokerCheck is considered a major tool for investors to research the background of a financial professional. Wouldn’t you want to know if the person you are going to trust with your savings has a record of multiple customer complaints? Brokerage firms and state and federal securities regulatory agencies also use the CRD record when making hiring and licensing decisions, as well as in enforcement actions.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, as well as fiduciary litigation in trust and estate disputes, and elder financial abuse.

Securities Attorney Darlene Pasieczny to Speak on FINRA Expungement Issues in Washington DC

Securities attorney Darlene Pasieczny will speak about FINRA expungement issues at the PIABA Mid-Year Meeting: Current Issues in Securities Arbitration. The panel presentation will be on April 4, 2019, in Washington DC.

Presentation topics to include:

Expungement of customer dispute information from a broker’s or brokerage firm’s CRD and Bro­kerCheck disclosure reports continues to be a heated topic for securities professionals. Expungement requests are routinely made in customer cases, sometimes years after settlement. Despite FINRA’s position that expungement of customer infor­mation should be an “extraordinary remedy,” panels routinely grant expungement requests in FINRA arbitration. This panel will discuss current trends in expungement requests and litigation tactics by attorneys and non-attorney firms, as well as re­cent FINRA expanded guidance to arbitrators and proposed amendments to applicable FINRA rules.  We will also discuss ethical considerations for lawyers regarding expungement.

Registration for the PIABA Mid-Year meeting can be done through PIABA’s website.

Why is FINRA expungement an important topic?

When an investor considers hiring a new financial advisor, they might look for publicly available information about the advisor’s background and customer complaints. FINRA’s BrokerCheck database is available online for exactly that kind of investor research. By current FINRA rules, a broker or brokerage firm must disclose certain customer dispute information on their CRD record. If FINRA grants expungement of that information, the disclosure is effectively wiped clean. That may be appropriate in some circumstances. But expungement can harm the investing public, who might otherwise think twice about hiring a broker with a negative track record.

Darlene Pasieczny’sSecurities Attorney Darlene Pasieczny practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, elder financial abuse, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.

 

Were you a client of broker Daniel Noah Winger?

The securities attorneys at the Investor Defenders practice group of Samuels Yoelin Kantor LLP are investigating potential claims against this broker.

Public records from the Financial Industry Regulatory Authority (FINRA) show that in August 2018, Daniel Noah Winger (CRD# 1542674) entered into an Acceptance, Waiver and Consent (“AWC”) agreement in which Winger was barred from associating with any FINRA member in all capacities.

Daniel Noah Winger was most recently registered with PFS Investments Inc. in Federal Way, Washington.

The Facts and Violative Conduct alleged in the AWC include that, between April 2015 and April 2018, Daniel Noah Winger converted the funds of an elderly customer in violation of FINRA rules 2150(a) and 2010.  The elderly customer gave checks to Winger totaling approximately $100,000.  The AWC alleges that Winger used the customer’s funds for his own personal use.

Brokers are licensed and regulated by FINRA and state regulatory agencies.  FINRA rules, state securities laws and state common law offer protections for investors from unlawful broker conduct such as:  negligent portfolio mismanagement, selling away, overconcentration, unsuitable investment recommendations, excessive trading (“churning”), failure to supervise, misrepresentations about investments, or outright conversion and theft.

Common Red Flags of broker misconduct include lack of communication from your broker, discovering that you cannot liquidate investments that you thought you could sell, or discovering that large portions of your portfolio are used to purchase “alternative investments” like interests in Limited Partnerships, Limited Liability Companies, or promissory note investments.   The Investor Defenders have compiled a list of Ten Red Flags for Investors, which you can see by clicking on this link.

If you were a client of Daniel Noah Winger, and suspect that financial losses in your brokerage account may have been caused by broker misconduct, call the Investor Defenders.  We represent investors in the United States with securities claims against brokers and brokerage firms for financial losses caused by unlawful conduct.

Darlene PasiecznyDarlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, elder financial abuse, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.