Financial Counsel by Eccleston Law

FINRA Denies Lehman Brothers’ $500,000 Promissory Note Collection Case Against Former Employee

From 1998 until August 2008, the broker-dealer subsidiary of Lehman Brothers Holding, Inc. (LBHI) gave 113 of its employees approximately $80 million in loans.  Before LBHI filed for Chapter 11 bankruptcy on September 15, 2008, those 113 employees managed to receive $700,000 each.  This led LBHI to enter into a stipulation with its debtors in December 2009.  As a part of the Securities Investors Protection Act (SIPA) liquidation of Lehman Brothers, Inc. (LBI), the 113 notes were deemed to be LBHI’s to collect, which happened to have a net balance due of about $51 million.  Many professionals in the industry are following these LBI’s employee forgivable loan (“EFL”) cases. 

In May 2011, LBI filed a claim in FINRA against its former employee seeking to recover by the close of the hearing $357,142.86 in outstanding principal; $79,244.88 accrued interest; and $53,571.43 in collection costs.  LBI alleged causes of action on a promissory note, breach of contract, and unjust enrichment.  Respondent former employee generally denied the allegations and asserted various affirmative defenses.  The sole FINRA arbitrator denied LBI’s claims.

Eccleston Law Offices counsels, represents and defends financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators. We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition successfully from firm to firm and negotiate the best possible agreements with their new firm, and provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.

FINRA Orders David Lerner Associates to Pay Customers Approximately $12 Million in Restitution; “Poppy” Suspended for One Year

FINRA announced that it ordered David Lerner Associates, Inc. (DLA) to pay approximately $12 million in restitution to affected customers who purchased shares in Apple REIT Ten.  This disciplinary decision lends credence to allegations relating to Apple REIT Seven, Eight and Nine, which have been lodged in scores of arbitration complaints filed by investors.

In particular, Apple REIT Ten is a non-traded $2 billion REIT that DLA sold to customers.  A FINRA disciplinary decision finds that DLA, as sole distributor of the Apple REITs, solicited thousands of customers, targeting unsophisticated investors and the elderly and sold to them the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors.  Also, to sell Apple REIT Ten, FINRA finds that DLA used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners.

Furthermore, FINRA also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30 month period, and for related supervisory violations. 

The leaderships of the firm now may be in doubt, as FINRA also fined DLA’s founder, President and CEO, David Lerner, $250,000 and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal.  FINRA founds that David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the apple REITs at numerous DLA investment seminars and in letters to customers. He characterized the Apple REITs as, for example, a “fabulous cash cow” or a “gold mine,” and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a “windfall” to investors.

FINRA also required DLA to retain independent consultants to review and propose changes to its supervisory systems and training on both sales of non-traded REITs and pricing of CMOs and municipal bonds.  Also, DLA agreed to revise its advertising procedures and is required for one year to pre-file all advertisements and sales literature with FINRA at least 10 days prior to use.

If you are an investor that has suffered losses investing with DLA, please contact one of our attorneys at 312-332-0000 to discuss your recovery options.

Eccleston Law Offices represents individual and institutional investors to recover their investment losses caused by unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct.  We have extensive experience representing investors in arbitration and litigation disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors. Our work with advisers sets us apart from our competition as we have gained insight and knowledge of the financial services industry and the respect of lawyers nationwide on "both sides of the aisle."

 

Newly Registered Managers Subject to SEC’s Compliance Exams

Investment advisers need to be aware of a new “presence exam” campaign that was introduced by the SEC.  Thanks to the changes enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, this campaign also targets hedge fund and private equity firms, which no longer are exempt from registering with the agency.  Target areas for the exams will be portfolio
management, conflicts of interest, safety of client funds and asset valuation. 

This campaign calls for risk-based examinations of private fund investment advisers over the next two years.  There are three phases total and the first is called “engagement.”  In this first stage, there are outreach efforts to inform advisers of their overall obligations, the new presence exams, and OCIE’s practice of engaging directly with firms’ senior management.  Further, SEC officials will conduct meetings and seminars with the money management firms’ chief compliance officers.

Eccleston Law Offices counsels, represents and defends financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators.  We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition successfully from firm to firm and negotiate the best possible agreements with their new firm, and
provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.

James Eccleston Named AV Preeminent Lawyer

Martindale-Hubbell has bestowed upon Attorney James Eccleston the coveted AV® Peer Review Rating (which is the highest possible rating for both integrity and ethics).

FINRA Fines and Suspends Stockbroker for Exercise of Discretion on Customer Account

On August 24, 1998, Enrique Vila entered the securities industry as a General Securities Representative of Merrill Lynch, Pierce, Fenner & Smith.  Since March 15, 2012, Vila has been registered with another firm.  For the purpose of proposing a settlement of alleged FINRA rule violations, without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Vila submitted a Letter of Acceptance, Waiver and Consent (AWC), which FINRA accepted.

The AWC maintains that Vila had not previously been subject to a formal disciplinary action by any regulatory body.  From January 8, 2009 through on or about November 29, 2011, the AWC alleged that Vila exercised discretion involving numerous trades in a customer’s account.  The AWC also alleges that Vila failed to obtain the customer’s required written authorization and did not obtain the brokerage firm’s acceptance of the use of discretion in the subject customer account.  During this time period, Vila executed numerous trades in the customer’s account.  In the AWC, FINRA imposed against Vila a $5,000 fine and a 15-business-day suspension from association with any member in all capacities. 

Eccleston Law Offices counsels, represents and defends financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators. We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition successfully from firm to firm and negotiate the best possible agreements with their new firm, and
provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.

Oklahoma Court Orders JPMorgan to Pay $18 Million to Heiress

JPMorgan Chase & Co. was ordered by an Oklahoma court to pay $18.1 million to a 75-year-old oil heiress’ trust fund for selling her derivatives that she claimed she didn’t understand.  Further, JPMorgan must also pay punitive damages to the trust fund, which benefits the granddaughter of Oklahoma oilman William G. Skelly.  The judge found that the evidence overwhelmingly demonstrated gross negligence and reckless administration of the granddaughter’s trust. 

The granddaughter’s trust lost a “substantial” amount of money on contracts called variable prepaid
forwards.  According to the ruling, in 2000, these were sold to Ann Fletcher by bankers at Bank One trust Co.  as a way to generate more income.  In 2004 Bank One Corp. merged with JPMorgan and the bank managed the trust for two more years after that.

It was alleged that the bank developed a strategy to utilize the funds in the trust to purchase investment products from their own equity division.  It was further alleged that the bank breached its fiduciary duty when it sold the derivatives and that the bankers were given incentives to push the variable prepaid forwards, which generated as much as $2 million in fees.

With regards to the variable prepaid forwards, the trust used Exxon Mobile shares as collateral for loans then invested the proceeds in municipal bond funds.  In addition, the contracts also involved buying and selling put and call options on the stock, giving up gains beyond a certain level.  Fletcher was a cognitively impaired widow at the time these recommendations were made to her.  She argued that she trusted and relied on the bankers’ advice when she agreed to buy the derivatives a year later.

Eccleston Law Offices represents individual and institutional investors to recover their investment losses caused by unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct.  We have extensive experience representing investors in arbitration and litigation disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors. Our work with advisers sets us apart from our competition as we have gained insight and knowledge of the financial services industry and the respect of lawyers nationwide on "both sides of the aisle."

Stockbroker Fined and Suspended by FINRA for Outside Business Activity in Research Reports

Richelle A. Elberg was registered as a General Securities Representative from September 8, 2003 to February 2008 then from November 21, 2009 to January 6, 2012, with JSI Transaction Advisors, LLC.  For the purposes of proposing settlement of rule violations alleged by FINRA, without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Elberg submitted a Letter of Acceptance, Waiver and Consent (AWC), which FINRA accepted.

From August 2010 to March 2011, Elberg received about $15,000 compensation for her preparation of research reports for a company.  That company specializes in providing research reports on technology companies.  Allegedly, in the AWC Elberg’s activity constituted outside business activities (OBA), and, also Elberg prepared the research reports without her having provided to her firm any written notice of the business activity, in violation of NASD Conduct Rule 3030 (for conduct before December 15, 2010) and FINRA Rules 3270 (for conduct after December 14, 2010) and Rule 2010.  FINRA impose upon Elberg a $5,000 fine and a 20-business-day suspension from association with any
FINRA member in any capacity. 

Eccleston Law Offices counsels, represents and defends financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators. We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition successfully from firm to firm and negotiate the best possible agreements with their new firm, and
provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.

SEC Charges GEI Financial and its Owners for Fraud

On October 3, 2012 the SEC charged Chicago-based registered investment adviser, GEI Financial Services, Inc. (GEI Financial), and its owners, Norman Goldstein and Laurie Gatherum, for defrauding their advisory clients by taking at least $147,000 in excessive fees and capital withdrawals from the GEI Health Care Fund 2001, L.P. (Health Care Fund) since 2009. 

In particular, the SEC’s complaint alleges that Goldstein and Gatherum failed to disclose to investors in the Health Care Fund that their investment adviser removed performance hurdles, like a bench mark and high water marks, in order to draw additional fees.

Moreover, the complaint further alleges that GEI Financial, Goldstein, and Gatherum never told their advisory clients that Goldstein was stripped of his securities registration in 2011 by the State of Illinois.  This barred him from providing investment advisory services in Illinois.  However, Goldstein still continued to make all the investment decisions for GEI Financial’s clients and for clients of GEI Management, LLC, which is an affiliate unregistered investment adviser owned by Goldstein and Gatherum.

Lastly, the complaint alleges that Goldstein and Gatherum caused GEI Financial to violate numerous compliance rules and other requirements of the Investment Advisers Act of 1940 (Advisers Act).  The
SEC examiners alerted GEI Financial and its owners in 2008 that the firm did not have adequate written compliance policies and procedures or a written code of ethics but the firm never implemented any of these.  Also, since 2008, GEI Financial has not updated is Form ADV, which is a form required by all SEC-registered investment advisers.  In addition, GEI Financial never prepared or distributed a required brochure, Form ADV Part 2, to its clients.

SEC’s complaint alleges that GEI Financial, Goldstein, and Gatherum directly and indirectly violated Sections 204, 204A, 206(1), 206(2), and 206(4) of the Advisers Act and Rules 204-1, 204A-1, 204-2, 204-3, 206(4)-7, and 206(4)-8(a)(1) thereunder.  The SEC seeks permanent injunctions, disgorgement including prejudgment interest, and civil penalties from GEI Financial, Goldstein, and Gatherum.

If you are an investor that has suffered losses investing with GEI Financial, please contact one of our attorneys at 312-332-0000 to discuss your recovery options.

Eccleston Law Offices represents individual and institutional investors to recover their investment losses caused by unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct.  We have extensive experience representing investors in arbitration and litigation disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors. Our work with advisers sets us apart from our competition as we have gained insight and knowledge of the financial services industry and the respect of lawyers nationwide on "both sides of the aisle."

Panel Puts Repo Twist on Promissory Note Award to Lehman Brothers Holdings Inc.

In September 2010, Lehman Brothers Holdings Inc. (LBHI) filed a promissory note cancellation claim in FINRA against Strickler for alleged breach of contract and unjust enrichment seeking $457,142 in damages plus $63,000 in attorneys’ fees. 

Strickler generally denied the allegations and asserted various defenses.  In Strickler’s Counterclaim against LBHI, he asserted misrepresentations, omissions, and other wrongful conduct seeking at least $480,000 in fees and costs. 

The Panel found Strickler liable and ordered him to pay LBHI $457,142 in note principle and denied Strickler’s Counterclaim for restricted stock units because they were not yet deliverable at the time of his termination.  Further, the Panel denied Strickler’s Counterclaim for loss of LBI stock and travel expenses. 

On the other hand, the Panel found LBHI liable and ordered it to pay Strickler $187,269 stemming from the following: (1) $100,000 in pro-rated note forgiveness for Strickler’s 10.5/12ths of a year employment immediately before termination; (2) $2,269 in unpaid commissions; (3) $10,000 in pro-rated assets under management fees for a period preceding September 19, 2008; and (4) $75,000 in damages to reputation and for loss of clients.

As for the reputation damages, the Panel stated the damage was caused by LBHI’s fraud in inducing Strickler to stay on with LBI while the firm engaged in infamous Repo 105 practice.  LBI removed from its books the liabilities to repurchase assets that had been pledge to obtain cash.  The Panel also concluded that Strickler could also assert this claim against LBHI in equity.  However, Strickler’s damages were substantially cut due to the generous loan and subsequent forgiveness he received from his next employer.

Ultimately, the Panel ordered Strickler to pay LBHI $269,873 ($457,142 - $187,269) and $53,974 in interest (5% annum) from September 19, 2008 to September 19, 2012.  In addition, Strickler was ordered to pay $37,170 in attorneys fees, which was 59% of the amount requested in conformity with the same percentage as the amount of the note claim awarded to LBHI.  Lastly, Strickler was ordered to pay 10% per annum legal interest on the net award of $361,017 ($269,873 + $53,974 + $31,170) until paid in full.

Eccleston Law Offices counsels, represents and defends financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators. We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition
successfully from firm to firm and negotiate the best possible agreements with their new firm, and provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.

REIT Dividends Subject to Potential Class Action

According to industry experts, the risks for non-traded REITs may be higher than what financial advisers expected.  Dividends from these non-traded REITs are at the center of a potential class action filed last month in U.S. District Court for the Northern District of Texas by an investor in a large non-traded REIT that has suffered a steep drop in value.

According to the complaint, the Behringer Harvard REIT I paid $569 million in distributions but only generated $172 million in funds from operations from 2003 to 2011.  The lawsuit alleges that the Behringer Harvard REIT tries to hide its poor performance by paying investors back with their own money and is draining millions of dollars from the company for the benefit of Behringer Harvard and its executives.  Further, the complaint alleges negligence and a breach of fiduciary duty by the trust, its executives and members of its board.

Experts say that distributions from borrowed money are problematic because it degenerates the value of the REIT significantly.  According to InvestmentNews data, Behringer Harvard REIT I has $4.4 billion in assets, ranking it the fourth-largest among such REITs that are no longer raising money.  The $83.4 million in distributions was reinvested in the REIT, which are not covered by cash flows from operations and the shortfalls are covered by borrowings instead.

If you are an investor that has suffered losses investing with Behringer Harvard, please contact one of our attorneys at 312-332-0000 to discuss your recovery options, including pursuing arbitration instead of class action litigation to better protect your rights.

Eccleston Law Offices represents ndividual and institutional investors to recover their investment losses caused by unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct.  We have extensive experience representing investors in arbitration and litigation
disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors. Our work with advisers sets us apart from our competition as we have gained insight and knowledge of the financial services industry and the respect of lawyers nationwide on "both sides of the aisle."

MSSB Ex-Employee Blows Whistle, Claiming Some Reps Were Churning Client Accounts

Clifford Jagodzinski, an ex-employee of Morgan Stanley Smith Barney LLC (MSSB), claims that at least one highly successful broker for the firm was churning preferred securities in 2011.  Churning in this
case would violate state law and Dodd-Frank Act.  The accused broker is wealth manager Harvey Kadden.  Kadden is said to have been recruited from Bank of America/Merrill Lynch, where he worked 30 successful years and often appeared in Barron’s list of the Top 100 Financial Advisors. 

Allegedly, Kadden was making tens of thousands of dollars in commissions despite supposedly taking actions which created minimal advances or even losses for his clients.  Jagodzinski alleges that he was
told by higher-ups within Morgan Stanley to stop investigating Kadden.  It was reported that Kadden ran a team of four brokers who had brought $14 million in profits to the company within the last 12 months, while managing a total of over $1 billion in customer portfolios. 

Jagodzinski’s complaint also cites Kadden’s supervising managers David Turetzky and Ben Firestein as disingenuously appreciate to Jagodzinski for having made these allegations about Kadden.  Turetsky
allegedly discouraged Jagodzinski from bringing legal action against a different broker (within Morgan Stanley but separate from Kadden) who claimed to have made as many as eighty unauthorized trades when Jagodzinski informed the broker that he had found one such instance in his research into company fraud.

Jagodzinski was fired back in April 2012 allegedly after having reported several breaches of the law to Turetzky since December 2011.  Jagodzinski is said to have been fired just ten days after initially
suggesting to Turetzky that the offenses in question be reported.

Eccleston Law Offices counsels, represents and defends financial advisers nationwide in whistleblower, regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators. We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition successfully from firm to firm and negotiate the best possible
agreements with their new firm, and provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.