Federal Court Orders Former FINRA-Registered Broker’s Assets Frozen, Places Emergency Injunction on Firm

By Nathaniel Griffin

On June 3, 2014, the Securities Exchange Commission (“SEC”) petitioned for an emergency injunction preventing Albany, NY-based Scott Valente and The ELIV Group, LLC. (“ELIV”) from engaging in fraudulent securities trading. In its complaint, the SEC alleges misappropriation of customer funds and misrepresentations of customer account performance, investment guarantees, account values under management, and broker and firm qualifications.

ELIV Group claims to be an accredited organization; however, the firm is not registered with The Financial Industry Regulatory Authority “FINRA,” nor is Valente. In 2009 Valente was barred from associating with any FINRA members. This ban came after more than twenty customer disputes and other regulatory investigations by FINRA.

ELIV solicited customers through internet advertisements and investment seminars, claiming gains of over 34% for its managed customer accounts. The SEC alleges in its complaint that the customer accounts of over 80 persons were commingled within one account totaling over $8.8 million in initial investments, and that these funds have not seen gains, but have instead suffered dramatic losses. Further, the SEC claims that Valente made monthly and annual reports falsely stating the values of customer accounts and misrepresenting significant gains to his customers.

ELIV allegedly made numerous unauthorized withdrawals from customer funds for his personal use. In the customer agreements, Valente was entitled to 1% of the assets under management as his management fee. However, the total of the allegedly unauthorized withdrawals far exceeded that amount.

The sales tactics used by Valente are not at all uncommon, including in South Florida. According to the Financial Industry Regulatory Authority, approximately half of all investment seminars examined offered literature with exaggerated, misleading, or otherwise unwarranted information and 12% of seminars appeared to involve fraud.

For more information on advertising awareness, see FINRA’s Investor Alert: “Free Lunch” Investment Seminars—Avoiding the Heartburn of a Hard Sell.

Investing in Technology IPOs: Why You Should Think Twice About Uber-Valuations

By Eli Rodrigues

On Friday, June 6, 2014, Uber Technologies Inc., a car-hailing smartphone application was valued at $18.2 billion, more than quadrupling its previous year’s valuation. Uber has secured more than $1.5 billion, with the most recent billion dollar round of funding coming from Fidelity Investments, Wellington Management and BlackRock Inc. According to Uber’s Founder and CEO Travis Kalanick, Uber is “growing faster this year than last year,” achieving an annual revenue in the hundreds of millions of dollars that is “at least” doubling every six months.

Uber has already left its mark in history by joining elite group billion-dollar startups, finding itself in second place to none other than Facebook Inc. in securing capital from private investors. With all of the publicity surrounding Uber’s latest valuation and funding, heated bidding for pre-IPO shares has begun as the company is preparing itself to go public. Now, the big question crossing many investors’ minds is: “When do I invest?” The answer: not until sufficient research has been performed and the company’s lock-up period has expired.

There is no specific answer for when an investor should add a company to their portfolio. No investment is a sure thing, especially when it comes to technology companies. Most recently, history has provided a much different picture for the technology industry, with IPOs often flopping, leaving heartbroken investors with fractions of their investments. Groupon Inc. is a one of the most recent examples that investors should learn from and hopefully subdue their excitement for Uber and other future technology IPOs.

What should an investor understand before committing any of their assets to a newly public company? As a general rule if the markets are doing well then so will IPOs. Additionally, IPOs have a much higher beta and are therefore much more volatile once they hit the market. If as an investor you are unable to tolerate price fluctuations, then this investment is not for you. Moreover, gathering reliable information about a company going public is very difficult because private companies do not disclose their financial information publicly, and numerous analysts generally evaluate the strength of their operations. It is important to note that IPOs do offer investors a prospectus, but the company, not an unbiased third party, writes that document. Under the rules governed by the Securities and Exchange Commission, insiders of any company going public are typically prohibited from selling their shares for a period of time, typically 180 days. It is very important for investors to find out if a lock-up period exists and when the period expires because the value of the stock can drastically change in anticipation of insider liquidation.

But Uber is different, some say. Its disruptive technology has dominated the transportation industry internationally and is now offered in more that 130 countries around the world. This might be true; however, technology IPOs often follow a different business plan because they are members of a sharing economy, bringing together users with service providers. Uber allows professional and nonprofessional drivers to sell their time and services to users. Uber does not own anything other than an application and its dispatch service. This business model has low barriers to entry and a potential investor should be weary of the ease in replicating the business. Many companies like Uber entered the market, offering an identical service at more competitive pricing. With driver and user loyalty driven on cost and an increasingly strict international regulatory environment, Uber has already been forced to rethink its cost structure, a fact investors should certainly be aware of the before making a decision to invest.

Barclays Capital, Goldman Sachs and Merrill Lynch Fined $1 Million by FINRA for Submitting Inaccurate Blue Sheets

by Michael Lorigas

On June 4, 2014, FINRA announced that it had censured and fined Barclays Capital, Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce Fenner & Smith, Inc. $1,000,000 each for their failure to provide complete and accurate electronic blue sheets to FINRA, the SEC, and other regulators.

Blue sheets are questionnaires requested by a regulatory authority that contain detailed information about trades performed by a firm and its clients. Some of the information includes the security’s name, the date traded, price, transaction size and the parties involved. They came to be known as blue sheets because they were originally filled out on blue paper. Due to the high volume of trades, the information is now submitted through electronic blue sheet systems (“EBS”).

This is not the first time each company has been in trouble for this violation. In January 2006, Merrill Lynch and Goldman Sachs each received a censure and fine for failure to submit accurate trading information on electronic blue sheets. Barclays was censured and fined for the same offense in October 2007.

Electronic blue sheets are important to investors because they allow the SEC and FINRA to monitor securities and transactions to determine if there has been any federal securities violations, especially insider trading and market manipulation. EBS also allows the regulatory agencies to examine why a specific security may have experienced a large level of volatility, which then allows the agency to conduct market reconstructions.

Accurate blue sheets are necessary for the agencies to enforce regulatory mandates. The information contained in electronic blue sheets allows the SEC and FINRA to ensure that the market is operating effectively and protects the integrity of investments and their investors.


FINRA Board of Governors Finds Charles Schwab & Co. Violated FINRA Rules by Attempting to Prevent Customers from Participating in Class Action Lawsuits

By Wayne Grossman

On April 24th, the Financial Industry Regulatory Authority’s (FINRA) Board of Governors issued a decision that found Charles Schwab & Co. (Schwab) violated FINRA rules by sending certain amendments to its customer account agreements to 6.8 million of its customers. These amendments prohibit customers from participating in class action lawsuits against the firm, and also require customers to agree that FINRA arbitrators have no authority to consolidate claims made against the firm. This decision, in part, reversed the findings of a FINRA Hearing Panel which had held that, although the amendments did violate FINRA rules, these rules were unenforceable because they were in conflict with the Federal Arbitration Act (FAA).

When a customer opens a brokerage account at a FINRA member firm, the customer contractually agrees to resolve disputes with the firm through arbitration. Dispute resolution is then governed by the contractual terms of a pre-dispute arbitration agreement. Section 2 of the FAA provides that such agreements are “valid, irrevocable, and enforceable….” In general, member firms enjoy a significant degree of latitude in drafting pre-dispute arbitration agreements, subject to certain limitations under FINRA rules.

On February 1, 2012 FINRA filed a complaint alleging Schwab violated FINRA rules that allow customers to participate in class actions and FINRA arbitrators to consolidate similar cases. Schwab argued that it had the right to require customers waive their rights to participate in class actions. The original Hearing Panel held that Schwab did violate these rules, but that these rules were unenforceable because they were inconsistent with Section 2 of the FAA which affords primacy to the terms and conditions of an arbitration agreement over FINRA rules. Because FINRA rules explicitly allow arbitrators to consolidate claims, the Hearing Panel found against Schwab on this matter and fined the company $500,000.

Upon independent review, the FINRA’s Board of Governors (the Board) reversed the Hearing Panel’s findings. Based upon the language and intent behind the FINRA rules, the Board found that the rules were intended to “preserve investor access to the courts to bring or participate in judicial class actions…and that Schwab violated FINRA rules.” However, the Board also found that Congress validly delegated authority to the Securities and Exchange Commission to approve FINRA’s rules on arbitration agreements, and that this authority overrides Section 2 of the FAA. The Board stated that FINRA rules have the force and effect of federal law. Stated differently, the Board ruled that Schwab’s amendments to its customer agreements violate enforceable FINRA rules, and referred the case back to the Hearing Panel to determine appropriate sanctions.

This ruling suggests that although member firms of FINRA have a significant degree of discretion in designing pre-dispute arbitration agreements, investors and their advocates should be aware that there are limits under FINRA rules. Additionally, FINRA rules have the force and effect of federal law and can affect investor rights. In this case, FINRA rules have been interpreted to recognize and protect investor rights to participate in class action suits.

Risks and Benefits of Foreign Investments

by Raymond Nicholas

On May 6th, 2014, Alibaba, a Chinese E-commerce goliath filed its IPO with the United States Securities and Exchange Commission (“SEC”), in what many economists predict could be the largest or one of the largest initial public offerings in United States history. Alibaba currently controls eighty percent of China’s E-commerce market and is worth more than 100 billion dollars.

The Alibaba IPO presents numerous risks investors should consider before investing in foreign equities. According to a report by William Alden of the New York Times, notable risks of foreign equities include: 1) corporate structure; 2) U.S. Securities laws being less stringent on foreign companies; and 3) increased market volatility. Alibaba is also subject to economic downturn in the Chinese market, which would adversely affect its success in the US market. The SEC, U.S. News, and Financial Industry Regulatory Authority (“FINRA”), all warn investors of volatility in foreign markets directly related to political instability.

China has a developed economy; however, the Chinese Government heavily regulates the economy and Internet infrastructure, presenting another risk to investors considering investing in foreign companies. Government regulation varies by country, making it difficult to accurately gauge the success of a foreign company in a U.S. Market. Finally, foreign companies are subject to fewer causes of action in U.S. courts due to complicated jurisdictional issues.

Contrary to the risks of international investment, there are advantages to investing in foreign companies. A report from T. Rowe Price that some international companies are growing faster than their U.S. counterparts. Alibaba appears to be one of them. Many economists, including Rick Ferri of Forbes, state international investments are key to a well-diversified portfolio, and recommend a 70% to 30% ratio of U.S. stocks to foreign stocks. The advantages and disadvantages listed here are by no means all inclusive. Investing in foreign companies requires consideration of factors not relevant in domestic companies. Alibaba’s IPO illustrates the benefits and disadvantages of investing in foreign companies. Most importantly, the Alibaba IPO reaffirms the importance of due diligence and thorough research. It is crucial to sift through the hype surrounding an investment to ensure safe, well thought out investing.