A Florida couple, Robert and Michele Billings of Naples, Florida, were recently awarded $1.34 million due to Merrill Lynch’s misrepresentation about the risks associated with Fannie Mae preferred shares. The Billings were sold Fannie Mae preferred shares after being told by their broker, Miles Pure (CRD# 2475647), that Fannie Mae preferred shares were safe and backed by the U.S. government, neither of which were true at the time of the sale. Further, as the value of the shares continued to decline after the 2008 housing market collapse the broker continued to recommend holding onto the shares. The whole story can be viewed here. This is a classic case of civil fraud and negligent supervision. If you have a case similar to this, please consider contacting the clinic to see if you meet the clinic’s requirements for representation.
Chapter 825 of the Florida Statutes provides extra protection for elderly investors in Florida. When filing claims against their brokers before FINRA, elderly persons in Florida may seek treble damages for financial exploitation under Florida Statutes § 825.103. This section imposes liability for exploitation of an elderly person or disabled adult, which is defined in part as
Knowingly, by deception or intimidation, obtaining or using, or endeavoring to obtain or use, an elderly person’s or disabled adult’s funds, assets, or property with the intent to temporarily or permanently deprive the elderly person or disabled adult of the use, benefit, or possession of the funds, assets, or property, or to benefit someone other than the elderly person or disabled adult, by a person who:
1. Stands in a position of trust and confidence with the elderly person or disabled adult; or
2. Has a business relationship with the elderly person or disabled adult. . .
Under Florida Statutes § 772.11, treble damages may be imposed for violations of § 825.103(1). Punitive damage awards in FINRA cases are rare, perhaps in part due to the requirement that arbitrators produce a reasoned opinion for the award. By awarding treble damages under Florida law, a FINRA arbitrator is able to impose particularly steep penalties for broker misconduct while bypassing the reasoned opinion requirement.
Such an award in the amount of $800,000 was imposed this month against Raymond James Financial Services and two of its brokers, Jodi Isidith and Mitchell Holeve. The award related to Isidith’s alleged conversion of an elderly claimant’s funds, however, no explanation was given for the award. For a copy of the award, see in the Matter of the Arbitration Between Wechsler v. Isideth, Holeve, and Raymond James Financial Services.
If you are an elderly investor in Florida and think you may have been exploited by your broker, please contact the Investor Rights Clinic.
FINRA yesterday released Regulatory Notice 12-55 to provide guidance to broker-dealers on the implementation of FINRA Rule 2111 (Suitability). Rule 2111 became effective on July 9, 2012. In Regulatory Notice 12-25, released in May 2012, FINRA addressed the scope of the terms “customer” and “investment strategy” as used in Rule 2111. Regulatory Notice 12-55 supersedes the guidance of Regulatory Notice 12-25 on the scope of those terms.
Among the most salient points raised by Regulatory Notice 12-55:
- Regulatory Notice 12-55 suggests that a broker-dealer may not be liable for violations of the suitability rule by one of its brokers who is “selling away.”
- FINRA affirmatively states that a broker-dealer or broker generally does not have an ongoing duty to monitor after making a recommendation to hold securities, to maintain an investment strategy, or to implement a new investment strategy in place of another.
Rule 2111(a) provides:
A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. (Emphasis added.)
In Regulatory Notice 12-55, FINRA defines a “customer” for purposes of Rule 2111 as “a person who is not a broker or dealer who opens a brokerage account at a broker-dealer or purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation … .” Notably, under this definition, the term “customer” would not appear to include a person who purchases a security recommended by a broker when the broker’s employer does not receive compensation in connection with the transaction. In other words, broker-dealers may not be liable for unsuitable recommendations made by its broker when the broker is “selling away” (i.e., when the broker recommends an investment that is not offered through the broker-dealer), even when the individual broker receives compensation.
Another significant piece of guidance provided in Regulatory Notice 12-55 deals with whether a broker has an ongoing duty to monitor after making a recommendation to hold a security or to maintain an investment strategy. In this regard, Regulatory Notice 12-55 provides:
It is important to emphasize, moreover, that the [suitability] rule’s focus is on whether the recommendation was suitable when it was made. (Emphasis added.)
Thus, a recommendation to hold a security, to maintain an investment strategy, or to implement an investment strategy – as with a recommendation to buy or sell securities – “normally would not create an ongoing duty to monitor and make subsequent recommendations.” The modifier “normally” arguably leaves room for application of the ongoing duty to monitor in certain circumstances, such as in fee-based accounts (i.e., where the broker receives a quarterly or annual fee for managing an account, instead of receiving commissions for each transaction) or where the broker affirmatively undertakes the duty to monitor a customer’s account. However, FINRA’s guidance unequivocally establishes that, under normal circumstances, a broker has no obligation to monitor the suitability of a security or an investment strategy after the purchase is made or the investment strategy is implemented, regardless of changes in the market or economic environment.
With respect to the term “investment strategy,” FINRA states that a recommendation to invest generally in “equity” or “fixed income” would not constitute an investment strategy, while a recommendation to invest in specific types of securities or a market sector would constitute an investment strategy, thus triggering the suitability obligation. Recommendations to customers to use a bond ladder, day trading, or margin trading also constitute the recommendation of an investment strategy.
When an investment strategy involves both a security and non-security investment (e.g., using a home equity loan to purchase securities), suitability obligations apply to a broker-dealer’s or broker’s recommendation. The trickier question is whether suitability obligations apply when the customer, independent of any broker or broker-dealer recommendation, decides either side of the security and non-security “investment strategy.” FINRA states that the suitability obligations do not not apply where, for example, a broker recommends a non-security investment (e.g., real estate) and the customer separately decides to liquidate securities to fund the purchase of non-security investment. Conversely, where the customer independently decides to purchase a non-security investment and then asks the broker what securities to sell to fund the non-security investment, the suitability rule would apply to the broker’s recommendation as to which securities to sell but would not apply to the decision to purchase the non-security investment.
In terms of supervision, when a broker recommends an investment strategy involving both a security and a non-security, the broker-dealer’s suitability obligations apply to the security component of the recommended investment strategy, but its suitability analysis also “must be informed by a general understanding of the business activity based on the information and considerations required by FINRA Rule 3270 [(Outside Business Activities of Registered Persons)].”
Did you know that national surveys have found that 15 percent of the adult population will be a victim of financial fraud during his or her lifetime? In a white paper released last week, the Financial Fraud Research Center — a joint initiative of the Standford Center on Longevity and the FINRA Foundation — compiled a summary of research on consumer financial fraud titled “Scams, Schemes, and Swindles: A Review of Consumer Financial Fraud Research.” Some of the collected data shows that fraud complaints increased to almost one million in 2011 and that Americans lose $40 to $50 billion every year to fraud. However, given the reluctance of some victims to report fraud, the actual cost of fraud may dwarf that estimate. In addition, the impact of fraud is far greater than its direct financial costs; significant amounts of time and money are spent each year to avoid and redress fraud, and victims of fraud often experience non-financial costs, including psychological consequences. The Financial Fraud Research Center reviewed data collected through various surveys and studies to analyze the prevalence of reported incidents of fraud, variables in the profile of fraud victims, the characteristics of fraudsters, and the methods commonly used to commit fraud. To read the full report, click here.
Broker Thomas Casper recently consented to the entry of findings and violations and the imposition of sanctions for his misconduct relating to loans from customers. In January of 2012, FINRA launched disciplinary proceeding No. 2010025125101 against the broker. Casper had borrowed money from customers, including three elderly widows, without the approval of his firm Stifel Nicolaus, Inc. Casper’s actions demonstrate a violation of numerous FINRA and NASD rules. As a result, on August 29, 2012, FINRA barred Casper from associating with any FINRA member firm in any capacity.
For FINRA’s Order Accepting Offer of Settlement, click here.
Did you know that the Financial Industry Regulatory Authority provides investors with a multitude of resources to educate and protect themselves? Free investor publications can be downloaded from FINRA’s website and cover a wide range of topics including job loss, smart investing, investor alerts and research.
To browse and download these publications, click here.
Now in its second semester, the Investor Rights Clinic welcomed attorney Scott Eichhorn as Practitioner in Residence and Supervising Attorney in August. Professor Eichhorn will work with IRC Director Teresa Verges to teach and supervise the clinic’s student interns. Professor Eichhorn has over seven years experience in securities litigation and arbitration and will be a great resource to the clinic. With the addition of Professor Eichhorn, the IRC is able to staff more student interns, thereby helping more underserved investors in the community.
For more coverage on Professor Eichhorn, click here.