The Law Planet Blog

The Financial Industry Regulatory Authority (FINRA) has permanently barred Michael J. DiMare, of Ponte Vedra Beach, Fla., from the securities industry for “misappropriating over $1.9 million in client funds.” In its news release on the settlement, FINRA stated that Dimare, formerly a registered representative, hid his financial scheme by making false statements and submitting falsified account statements to his customers.

DiMare worked for John Hancock Mutual Life Insurance Company (John Hancock) as a sales manager between 2001 and 2006, and as a registered representative/insurance agent with ING Financial Partners, Inc. (ING) from late 2006 to mid 2008. According to FINRA, DiMare persuaded his clients from at least 2001 to 2008 to invest in fictitious CDs and bonds, including what he described to be “tax free” corporate bonds.

FINRA’s investigation revealed that between 2001 and 2008, DiMare instructed some 14 of his clients to write checks payable to John Hancock – even after he no longer worked there – which he deposited directly into his bank account for eventual personal use. DiMare concealed his scheme by submitting false account statements to his clients who thought they were making legitimate financial investments.

In response to the situation, James S. Shorris, Executive Vice President and Executive Director of Enforcement for FINRA, made this statement:

"FINRA will continue to bar individuals who engage in deceit and theft with no regard for the high standards of ethical conduct that govern the industry. By deceiving customers into believing they were making legitimate investments when, in reality, he was simply enriching himself, DiMare epitomized the darkest side of the securities industry."

DiMare never admitted guilt nor denied FINRA’s charges, but the now barred schemer did consent to the entry of the agency’s findings in the settlement. John Hancock and ING reimbursed the customers defrauded by DiMare’s scheme.

Florida Broker Barred for Selling Phony Financial Products, Taking More Than $1.9 Million From Clients – FINRA’s News Release

Florida Broker Took More Than $1.9Mln From Clients –Finra – Wall Street Journal

Tips from FINRA to help Investors Avoid Financial Fraud

U.S. District Judge Richard Kyle sentenced Minnesota businessman Tom Petters to 50 years in prison for orchestrating a Ponzi scheme estimated at $3.7 billion. Counted among the victims of his scheme were missionaries, pastors and retirees. The sentence comes after a jury found Petters guilty on 20 counts of money laundering, wire fraud, conspiracy and mail fraud in December.

The Ponzi scheme involved the fake purchase of electronics by Petters Company Inc., which would then “resell” the supposed merchandise to discount retailers for a profit. Petters and his associates used bogus bank records and fake purchase orders to swindle investors out of $3.7 billion.

Judge Kyle stated to a packed courtroom that included Petters' relatives as well as some victims, "Mr. Petters was captain of the ship." The Judge did not believe that Petters, a former owner of Polaroid and Sun Country Airlines, was unaware of the fraud at Petters Group Worldwide.

At his sentencing hearing, Petters said, “Every day, I’m filled with pain and anguish for all the lives that have been destroyed and touched by this episode.” Petters, a successful entrepreneur and former owner of Sun County Airlines and Polaroid, apologized to his family, friends and others hurt by his actions, but never admitted guilt.

At 52 years old, Petters will likely spend the remainder of his life behind bars.

50-Year Term for Minnesota Man in $3.7 Billion Ponzi Fraud – NY Times Article

Minn.'s Petters Gets 50 Years in $3.7B Fraud Case – ABC News/Money Article

Wall Street look out... Change is in the air...The Senate Banking Committee passed a sweeping financial regulation bill on March 22. The bill now moves to the Senate for a full vote.

President Obama and his senior advisers are now planning to focus more on issues such as financial regulation reform. The administration is “seeking to tap into the anger among many voters over Wall Street excesses” that are at the root of the current economic crisis.

The financial regulation bill ultimate goal is to increase investor protections. If signed into law, the financial reform bill that passed the Senate panel would create a bureau within the Federal Reserve that provides investors with a greater level of security. The bill would also establish a regulatory council to “survey threats to the financial system.”

According to U.S. Senator Richard Shelby (R-Ala) major points of disagreements in the bill incude the following areas: the powers of a Consumer Financial Protection Bureau that would be created within the Federal Reserve, regulation of the sprawling market in over-the-counter derivatives and provisions that would give corporate shareholders a greater say over executive pay and boards of directors.

President Obama stated:

"We are now one step closer to passing real financial reform that will bring oversight and accountability to our financial system and help ensure that the American taxpayer never again pays the price for the irresponsibility of our largest banks and financial institutions."

Click on the following links to read more about the Financial Regulation Bill.

Senate panel passes sweeping financial-regulation bill - Washington Post
Panel Sends Financial Overhaul Bill To Full Senate - AP - NPR
Bank Panel Clears Bill on Overhaul - NYT

The Financial Industry Regulatory Authority (FINRA) released a 16-page letter announcing that it is issuing its 2010 annual examination priorities, on March 1st. The letter includes information on both new and existing areas of importance to FINRA’s yearly examination program. The letter discusses priority topics from FINRA’s Market Regulation and Member Regulation Departments, and the organization’s Enforcement Department.

The financial decline of 2009 exposed investment frauds “perpetrated by registered and unregistered parties”. As a result, the agency plans to heighten its focus, and to execute regulatory programs that are both rigorous and thorough. The idea is to provide investors with the best possible protection from investment fraud.

Some of the organization’s new developments include:

• The establishment of the Office of Fraud Detection and Market Intelligence in order to provide such services as a heightened review of serious fraud allegations;

• An expansion of BrokerCheck and other disclosure expansions to make it easier for investors to find information about brokers;

• A rule consolidation process designed to create a new consolidated rulebook; and

• The eFOCUS Filing Platform that will allow firms to submit certain reports to FINRA electronically.

FINRA encourages investment providers and investors to use the information in the letter to “gain valuable insights into key FINRA examination and regulatory topics.”

Click on the following link to read the 2010 FINRA Annual Examination Letter.

If you are a Mcfee, Inc., investor, we have good news for you. The Securities and Exchange Commission has announced distribution of approximately $67 million to over 16,000 investors in connection with McAfee, Inc. financial fraud settlements.

The Fair Fund was created after McAfee (formerly Network Associates, Inc.), agreed to pay approximately $50 million in penalties and disgorgement to settle SEC charges in 2006 that it defrauded investors by overstating its revenues and earnings.

Investor questions regarding the distribution can be answered by calling 1-800-893-4359. Information regarding the distribution also can be obtained at McAfeeSECsettlement.com.

As an investor, do you fully understand the power and meaning of your proxy in corporate elections? The Securities and Exchange Commission is taking steps to educate investors on proxy voting and support greater investor participation in corporate elections.

The series of measures include amending the SEC’s e-proxy rules, issuing an Investor Alert, and creating new Internet resources that explain the proxy voting process in plain language.

The Securities Exchange Commission has created a new subsection on the SEC website Spotlight on Proxy Matters.

This new area on the SEC website provides investors educational information on such things as:
New Shareholder Voting Rules, Corporate Elections FAQ, Voting Procedures FAQ, "E-Proxy" or "Notice and Access" and Receiving Proxy Materials FAQ.

According to SEC Chairman Mary L. Schapiro:
"Investor participation in elections at companies they own is critical to effective corporate governance.”

Investors should be aware that last year, the SEC approved a change to the NYSE rule that previously allowed brokers the discretion to vote shares held in customer accounts in an uncontested election of directors without receiving voting instructions from those customers. The new SEC rule only allows brokers to vote those shares in elections at companies if they are instructed by their customers. However, the change does not apply to mutual funds or certain closed end funds.

We encourage investors to make use of the new educational site Proxy Matters and other helpful consumer information provided by the Securities Exchange Commission.

David Brooks, a founder and ex-chief executive officer of DHB Industries (DHB), a contracting company for the U.S. military and other agencies, is accused of looting the company of $185 million. According to a federal prosecutor, Mr. Brooks allegedly used the looted money to fund “lavish” personal expenditures.

Along with Sandra Hatfield, DHB’s former chief operating officer, Mr. Brooks is accused of securities fraud, insider trading, manipulating financial records, and a bevy of additional charges. Brooks and Hatfield reportedly used deceitful techniques to increase the company’s reported earnings and profits substantially.

According to federal prosecutors, Brooks and Hatfield reportedly inflated the value of DHB’s stock by lying about the inventory of supposedly shipped combat vests to the U.S. military. As a result, the duo defrauded the company for a combined $190,000 million, reportedly $185 million for Brooks, and $5 million for Hatfield. Both have pleaded not guilty to the charges
.
“This is a case about the naked greed of two people, Sandra Hatfield and David Brooks, and the lies and the fraud that they used to satisfy that greed,” Richard Lunger, Assistant U.S. Attorney told jurors in his opening statement. “In the end they lied in order to push up the price of the company’s stock, then [they] sold their stock for $190 million.”

In July 2006, shares of DHB stock were removed from American Stock Exchange listings. Although still headquartered in Pompano Beach, Florida, DHB has since been renamed Point Blank Solutions, Inc. According to the company’s Web site, Point Blank is an industry leader in ballistic technologies, including its Point Blank Body Armor and other protective apparel, for the military and other authorities.

For more information about the case, click on the following Bloomberg Business Week article on the DHB Fraud of Ex-CEO

To learn more about this and other financial fraud cases, visit the U.S. Securities and Exchange Commission’s Web site www.SEC.GOV

The case is U.S. v. David Brooks, 06-CR-550, U.S. District Court, Eastern District of New York (Central Islip).

In an effort to educate industry professionals on how to fight financial fraud, The Financial Services Division of LaBovick & LaBovick, P.A. is holding a Financial Fraud Seminar in conjunction with the Daily Business Review on the very relevant subject:

Investing in a Post Madoff Environment: Financial Fraud: How it's accomplished, how to detect it, and how to recover from it.

The Seminar will be held on November 19, 2009 - 8am at Phillips Point Club in West Palm Beach.

Featured Speakers for the Financial Fraud Seminar: Investing in a Post Madoff Environment include:

William Nortman, Esq., Akerman Senterfitt

Richard A. White, Turris Consulting, LLC

Moderator: Jeffrey S. Grubman, Esq, Jeffrey S. Grubman, P.A.

This seminar is approved by the Florida Bar for 4.0 CLE Credits and 3 CPE Credits for Accounting and Financial Professionals.

Seminar Description:
Just over one year after Lehman Brothers disappeared, how does a professional help clients navigate the ever-changing financial industry landscape? Is the "great deal" your client brought to you the next Microsoft or the next Madoff? This Financial Fraud Seminar will feature speakers with an average of 20 years of securities industry and regulatory experience. They will discuss investment fraud techniques, discovery, prevention and what to do if you have a client who is a victim.

Earlier this week, Seattle Federal District Court Judge Marsha Pechman, ruled that the case against several former Washington Mutual executives and Deloitte & Touche could move forward. She dismissed some of the claims, however, denied defense requests to dismiss any defendants.

In May 2009, Judge Pechman, dismissed the initial 388 page plaintiff complaint as “verbose” and “disorganized”. In her earlier decision, she wrote the following: “The Court remains mystified at counsel’s failure to allege cohesive claims, submit helpful briefing, or prepare a response to the court's inquiry in advance of oral argument. Plaintiffs' counsel cannot expect the court to engage in the necessary analysis when counsel is not prepared to do so."

In the revised 267 page complaint, submitted by the plaintiff’s counsel, Judge Pechman, finds that it is cogent and concise”. The heart of the case involves Washington Mutual’s residential lending practices and alleges that greed to raise the bank’s stock price is a major factor in why proper standards were ignored to meet consumer demand.

This case is on behalf of individuals who purchased securities issued by Wamu or its subsidiaries from October 19, 2005 to July 23, 2008 (the “Class Period”).

After reading the complaint, one can see that there are several issues on who should be held accountable for protecting Wamu investors from fraud. Many lawyers are involved in this legal battle that can last for several years.

Fraudsters Beware: Investors will hold you accountable for your actions and justice will be served.

6 years ago, I handled a case against Securities America (Now Ameriprise) where the broker used a stolen identity. In fact, he used two stolen identities. The second one was a law school classmate of his, who then spent years straightening out the mess.

Fast forward to today. A broker, using the name Joseph Bonnano, in Ohio entered a guilty plea related to the falsehoods one must tell in order to propagate a stolen identity, in this case Timothy Hyde. In the prior case that I handled, much money was missing and lost. Investment News reports - that, at least for now, no money was lost.

When I handled the Securities America case, they tried to say that the broker, even though he used a phony name, was properly registered. He wasn’t of course, since he did not use his real name.

The Ohio broker’s clients may have the right to rescission – to pick the trades they don’t like and ask for their money back. So if you’re a client of Joseph Bonnano, also known as Timothy Hyde, you may be able to get second chance.

The one interesting thing we learned from the earlier case is that FINRA collects fingerprints but does not run each set of prints through a database like you see on CSI (even though there’s poetic license there as well). Instead, they just compare names and social security numbers to see if anything pops up on the national criminal database. That’s how an identity thief gets registered as a stockbroker.

Barry Kaye, who allegedly made his fortune in the life settlement market is facing more bad news. First, he was forced to reduce his contribution to Florida Atlantic University to $5,000,000 from his planned $16,000,000. Now Investment News is reporting, that the Ohio Department of Insurance is investigating his life settlement sales in that state. The article reports that he has been sued by an 81 year-old life settlement investor for a failed transaction.

A life settlement begins with the purchase of a high value life insurance policy by an investor. The investor can either pay with their own cash or borrow the cash from a willing borrower, usually a financial institution. So, either using their own, or someone else’s, cash the investor pays the premiums for two years, to avoid the contestability period. At that point, the policy becomes a free asset and can be sold. It was commonly believed that policies had higher values in the resale market than their cash value.

The problem, not surprisingly, is that the entire transaction was based on the availability of willing buyers. Like many great ideas of 2001-2007, these ideas don’t look so good in 2008 and 2009. The new owner of the policy has to pay the premiums, a significant sum in many cases. So the original investor ends up with no buyer, a policy they didn’t need but were convinced that they did, and possibly a significant loan that they don’t want, can’t afford and expected to be able to repay upon sale of the insurance policy. Oops.

No free lunches people. This was too good to be true and it was a sham to begin with. But the sellers of these schemes should have known better and made better disclosures.

As prior readers of The Law Planet Blog know, I have a strong dislike for Equity Index Annuities. I think they are lousy products and, to the extent they are sold, should be sold by someone who has proven at least a modicum of securities knowledge. Insurance salesman, without a Series 6 or 7 license, have not proven this knowledge. Yet they were allowed to sell complicated, market-based products.

I cheered last year when the SEC announced Rule 151A which would bring these products under their purview. It would also require licensing of salespeople and registration with a broker-dealer. All of these are good things. The Insurance and Annuity industry did not agree with me. It was nothing personal, I’m sure.

The industry took their case to court, in the case American Equity Investment Life Insurance Company v. Securities and Exchange Commission (July 21, 2009-6) on Petitions to argue that the Rule should not be enforced. The industry won, and lost.

There should be no joy in Mudville here. The District of Columbia Court of Appeals has told the SEC what it did wrong and what it needs to do right. On the other hand, the Court told the insurance industry that these products can be regulated as securities. For me, that’s the important part.

The court wrote “In this case, the SEC has adopted an interpretation that is based in reason. By their nature, FIAs ‘appeal to the purchaser not on the usual insurance basis of stability and security but on the prospect of ‘growth’ through sound investment management.’” This is what I’ve been saying all along. This is a market-based product. It is a security. It should be sold by qualified securities salespeople. Now it’s up to the SEC to make the requisite findings regarding its rulemaking and give it another try.

Stay tuned…

The top Accounting Officer at Beazer Homes USA, Michael Rand, has been charged with fraud and misleading company auditors by the Securities and Exchange Commission.

An SEC complaint filed in federal court, alleges that Michael T. Rand, Accounting Officer for Beazer Homes, deceived investors by fraudulently recorded improper accounting reserves during 2000 and 2005. This little creative accounting decreased Beazer's reported net income considerably.

According to Robert Khuzami, Director of the SEC's Division of Enforcement:

"Michael Rand orchestrated an old-fashioned 'cookie jar' earnings management scheme where he hid from view over $60 million in so-called reserves. Then when Beazer's business declined, he fraudulently reversed those secret reserves and appeased financial analysts, enticed new investors, and most importantly earned himself an undeserved lucrative bonus."

The SEC complaint against the Beazer Chief Accounting Officer, Michael Rand explicitly gives details on how he masterminded this Accounting scheme and profited personally. He personally sold stocks valued at $3 million and earned $1.7 million in bonuses. Was it worth it, to lose everything and risk going to jail? I guess only Mr. Rand can answer this question. I am certain that the Beazer investors are not happy about being duped by these false earnings statements. Time will tell if there were others involved in this scheme.

As part of FINRA’s ongoing effort to consolidate and reconcile the former NASD and NYSE manuals, changes are in the works. FINRA recently filed a proposed rule change that is going to make changes to FINRA suitability rules, as we have known them, noticeably different.

FINRA’s proposed rules governing Suitability and Know Your Customer Obligations will expand the obligations of registered representatives when recommending securities or investment strategies­ to customers. This is interesting because it looks like FINRA is moving towards codifying a fiduciary standard, or at least a modified fiduciary standard.

In the past, a fiduciary duty in a non-discretionary account related to only the execution of trades and custody of assets. Now, if an investment strategy encompasses assets away from the firm, that strategy falls within the proposed rule. For instance, the recommendation to retain stocks in an account at another brokerage firm may be considered recommending an investment strategy as may the recommendation to hold, and not sell, a particular stock.

This represents a significant change in the relationship a broker has with his/her client and will broaden the areas of responsibility when making suitability determinations.

It's a new dawn. It's a new day and investors in Florida should be feeling good. Florida Governor Charlie Crist signed House Bill 483 into law on Monday, which adds protections for Securities investors today, designed to protect securities investors from Bernie Madoff type ponzi schemes.

The Bill's sponsor, State Representative Tom Grady (R- Naples) is quoted as saying the following in a recent interview:

“Our economy will grow stronger if investors have confidence in our financial markets. By increasing the tools available to the state to prosecute violators of our securities laws, we protect investors and foster needed trust in the system."

House Bill 483 gives additional power to the Office of Financial Regulation for prosecution of violations of the Florida Securities and Investor Protection Act. Whistleblowers will also be compensated with rewards for orginal information regarding money laundering investigations.

Governor Crist issued the following statement on House Bill 483 :

“Investors play a critical role in the success of Florida’s economy, and this legislation helps ensure their hard-earned money is protected. I am committed to maintaining the integrity of our markets. Enhancing protection measures and oversight is the best way to crack down on fraudulent activity and increase consumer confidence.”

HB 483 - Investor Protections received overwhelming support from legislators. This Bill provides the following Investor Protections according to the House of Representatives site:

Expands jurisdiction of Office of Statewide Prosecution to investigate & prosecute specified additional offenses; revises various provisions of law relating to viatical settlements; exempts specified transactions in viatical settlement investments from specified registration requirements; revises registration requirements; excludes post judgment interest from payments from fund; expands class of persons related to or associated with applicant or registrant for which specified violations may result in adverse actions taken against registrations; requires Financial Services Commission to adopt rules relating to disciplinary guidelines & temporary disqualification; authorizes OFR to apply to court for specified orders; specifies additional investigation & enforcement authority of AG; authorizes AG to recover costs & attorney fees; authorizes OFR use of such information in prosecution actions; increases amount of specified administrative fines; authorizes OFR to bar specified persons from submitting applications or notifications for license or registration under specified circumstances; revises criteria for prohibited practices relating to commodities; authorizes FDLE to enter into agreements to pay rewards for specified information; expands subject matter jurisdiction of statewide grand jury to include specified additional offenses.

If you have original information regarding Investor fraud you may want to contact an attorney to discuss your rights. If you want to learn more on Securities litigation and your rights as a whistleblower, visit the following pages on Securities Litigation and Stockbroker fraud.

Today, I came across an interesting article from Bloomberg News on the Arbitration debate over financial investments. It was a Commentary written by Bloomberg News Columnist Susan Antilla entitled "Obama Fails to End Kangaroo Courts for Investors".

In the article, Susan highlights the following statement from President Obama:

The Securities and Exchange Commission “should study the use of mandatory arbitration clauses in investor contracts,” and then pursue legislation if appropriate,

At the end of the Commentary, she adds:

That argument is more bogus today than ever, because cases increasingly involve the mass-marketing of financial products by multiple brokerage firms.

“The concern is that the industry arbitrator could be on a panel telling others that ‘everybody does it,’” says Brian Smiley, the president of Piaba.

And in a closed justice system where nobody can come to court and watch, who would ever know?

The Arbitration Commentary gives food for thought and highlights the key issues, but it is hard to argue over, which side Susan is on in the Arbitration argument. She makes her point very clear on the issue.

It is safe to say that after losing a loved one, a widow has a lot on their plate, However, this loss does not mean that Financial Advisors can ignore them or mismanage their account. A recent study by Allianz Life found that

About 44% of widows are inclined to obtain financial advice in new ways, and that 70% of those using financial advisers considered firing their advisers in the first three years after their husbands' deaths.

This tragic loss does not give Financial Advisors the right to prey upon Widows with risky financial investments, mismanagement of funds or simply ignoring the widow alltogether.

Five simple steps that a widow can use for Financial Guidance and respect from Financial Advisors include:

Step one: Deal with your emotional needs first after the death of your spouse. Having a clear mind and perspective is key before making major decisions,

Step two: Organize your finances and make a budget. Looking at your entire financial picture allows you to see what you need financially to live on.

Step three: Calculate your net worth. Take a look at all of your assets, investments, stocks, home, bank accounts, bonds, and everything that is of value. Ask your Financial Advisor to give you a report of what your portfolio is worth, present value and a comparison of what it was worth when your husband was alive. Give them a specific timeframe of when you expect this data.

Step four: Identify a few key Financial Advisors and Interview them for your business. Compare the Financial Advisor that was working with your spouse to the new ones that are recommended by reliable sources. Make a checklist of things that are important to you in an advisor. Rate each Advisor with a score for each of your checklist items and come up with a ranking system for comparison. Try to be objective and compare each advisor on the same benchmarks.

Step five: Sit down with your Chosen Financial Advisor and develop a long-term financial plan for your investments. Share with the selected Financial Advisor that they were selected after a careful screening process. This will allow them to see that you are serious about service and expect excellent Customer Service. Set aside a specific timeframe for a review, that you are comfortable with, i.e., monthly, bi-monthly, quarterly, semi annually. Make sure that the Financial Advisor agrees to this timeframe to go over your portfolio and hold them to it. If they fail to service your account properly, go back to your list and replace them with someone that will treat you the way that you expect to be treated.

Read the book, On Your Own: A Widow's Passage to Emotional & Financial Well-being,by Alexandra Armstrong and Mary R. Donahue for more information on how a Widow can take charge of their life and finances without being taken advantage of by a Financial Advisor. The book retails for under $20 on Amazon and other online retailers.

If you are a Widow, please note that you are not alone, According to an article on the subject from Investment News, nearly 800,000 women become widows each year. There is much comfort in numbers. Join a support group for women that are recent widows. You may find that sharing your experiences present, past and future can help you cope with your loss.

To learn more on other ways for Widows to protect themselves against Investor fraud, view some of the following Financial Services pages on Stockbroker fraud, Securities Issues, or dispute resolutions.

Allen Stanford, Chairman of Stanford Group holdings, surrendered to authorities yesterday, will be officially charged by SEC today in Court. He is accused of stealing over $8 billion from investors.

According to Bloomberg News and The Washington Post,

The SEC lawsuit indicates in its compmplaint that Stanford International Bank misled investors by touting "improbable, if not impossible" returns for investments.

The SEC alleges that the Stanford Group Co. sold $8 billion of certificates of deposit in Stanford International Bank. The financial advisors of the company misled clients to believe that their money would be placed primarily in easily sold financial instruments monitored by over 20 analysts and closely audited by Antiguan regulators.

Instead Stanford and the company's chief financial officer managed most of the portfolio and invested a substantial amount of it in real estate and private equity.

The SEC announced today that it, along with Alabama Securities Commission has charged Aura Financial Services with “rampant” churning of customer accounts, “widespread” supervisory failures and other securities violations. This is stunning. It is rare that an entire firm is charged with churning. Usually it is an individual broker or office. For a firm to be charged must be pretty bad.

What do you do if you’re a client of Aura and can’t figure out what happened to your account? Contact a qualified securities arbitration attorney to look at your account statements and determine the best route to follow.

This gets back to the basics of investing. If you don’t understand what’s going on, don’t do it. If your Broker is doing things you don’t like, get another Broker. When you think you’ve been mistreated, ask a professional for a second opinion.

To learn more on this Aurora Financial Fraud case, read the SEC Press Release and Investment News article "SEC charges Birmingham B-D with churning"

The truth will always come out. This is a hard lesson that Fund Manager, Matthew D. Weitzman, just recently learned. He has been charged with investment adviser fraud, securities fraud, and wire fraud. If convicted he faces up to a maximum of 15 years imprisonment and over $5 million in fines.

Mr. Weitzman was co-founder of AFW, financial planning and investment management firm. AFW managed more than $190 million in assets at the end of 2008. According to reports in the North Country Gazette,, Mr. Weitzman converted investor money for his own use.

The Golden Goose is no more for Mr. Weitzman. His misdeeds caught up with him and now he must face the music for his crimes. Hopefully, the Investors in AFW will seek legal counsel to discuss how they can get their stolen funds back.

Countrywide executives must face the music for deception and fraud as the Securities and Exchange Commission (SEC) has brought charges against the former Chief Executive Officer (CEO) Angelo Mozilo and two executives for allegedly hiding financial difficulties which led to the company's collapse from the subprime mortgage crisis. In 2007, Countrywide Financial was the United States' largest mortgage lender. When it collapsed in 2008, the Bank of America acquired Countrywide for more than $4 billion. This case is important as the public attempts to assign blame for the subprime mortgage collapse.

Many corporate executives use a common defense against financial malfeasance, that their subordinate employees hid important information. The SEC has collected top Countrywide executive e-mails (sent while the housing market was starting to decline) that portray a rosy public picture, with negative private ruminations concerning an impending collapse. These executives described the mortgage loans as "toxic" in private conversations. Ex-CEO Mozilo used terms like "flying blind" to describe his inability to assess the viability of these subprime loans.

Actions, such as ex-CEO Mozilo's sale of $260 million worth of stock, have led to insider trading charges that these executives failed to disclose important information publicly. Evidence is growing that ex-CEO Mozilo was quite engaged in all of the intricate details of homeowner loans. The Bloomberg News Service has reported extensively on these SEC lawsuits.

Still, ex-CEO Mozilo and his co-defendants are adamant in defending themselves, denying the SEC's claims that they deceived investors. These defendants argue that "no one could have predicted the severity and force of the housing market downturn." The Countrywide executives claim that regulators "cherry-picked" quotes which have been taken out-of-context.

Continue reading "Countrywide Executives must face the music for deception and fraud " »

As we speak to Clients and give Seminars we are constantly asked "How can an investor preotect themselves against Stock Fraud?" Here are a few points that anyone can remember. Please feel free to share them with loved ones that are consistent investors. Enjoy...

1. Read your mail. Account statements are confirmations are sent for a reason. If the value of your account dropped or grew more than expected, read the prior month’s statement and try to figure it out. Ask your broker for help. If the broker won’t help, get a new broker

2. Diversify your investments. No matter how much your broker says “This is great” don’t put all your money in one place. No competent money manager does this. A private investor shouldn’t either.

3. Be proactive in dealing with your investment professional. A broker is supposed to make recommendations that are appropriate for your situation. If you’re uncomfortable and want to stay with that firm, talk to the branch manager. If you want to leave the firm, do it.

4. Remember that an investment that sounds too good to be true, isn’t true. All of the Ponzi schemes that fell apart over the last year were all succeeding because people thought they were in on a “secret” program that was always doing better than the market. It turns out there was no valid investment program. Experienced investors thought they had found the magic bullet. They should have known better. They forgot this basic principle.

Should brokers be able to keep profits from the alleged $8billion investment Ponzi scheme ran by Texan billionaire Sir Allen Stanford?

If the Court appointed Receiver, Ralph Janvey, has anything to do with it, this will not be the case. Janvey is seeking the return of the large commissions, bonuses, and other compensation paid by Sir Allen’s company for the sell of certificates of deposit, to 66 Financial advisers.

According to a lawsuit filed by Janvey, the unsuspecting customers that purchased CDs from the Brokers should be entitled to compensation. The Brokers involved, should not be entitled to compensation from the "elaborate and sophisticated” incentive program, since the services they were being compensated for, were not legitimate.

If Janvey prevails in this lawsuit, this will be a huge step in the right direction for investors involved in Stanford ponzi scheme and others around the country.

Read more on the Stanford Ponzi Scheme, by clicking on the following link to the article in the Financial Times, "Official seeks return of Stanford paid commissions" by Joanna Chung.

"Glaring Red Flags and Returns to good to be true", should have alerted Mr. J. Ezra Merkin to the Madoff Ponzi scheme according to New York Attorney General Andrew Cuomo. He is bringing the suit against Merkin because of his actions and reckless disregard regarding unsuspecting investors losing $2.4 billion. Although his clients lost money, Merkin personally gained $470 million for his careles actions. Merkin is the general partner of Ascot and Gabriel, domestic hedge funds and has been involved with running investment funds since 1989. One would think that with all his experience and credentials, he should have known better.

In a 54-page complaint filed earlier this week, New York Attorney General Cuomo accuses Merkin of duping his customers into believing he was investing their money. He touted himself as an "investing guru" when "in reality" he was only "a master marketeer."

On a positive note, Merkin is not accused of knowing about Madoff's fraud. However, because of his experience and track record, he should have known better. In the complaint, Cuomo is stating that Merkin is guilty of "deceit, recklessness, and breaches of fiduciary duty."

Click here to read more from the Law Journal Article on N.Y. Attorney General Sues Financier Over Madoff Losses

All eyes are on this New York case, because of the implications for other Brokers. Time will tell if Merkin and others will face consequences for client losses in the Madoff Ponzi scheme.

Let's hope that Justice Prevails and that Attorney General Andrew Cuomo has sucess with his suits against Merkin.

By now anyone who has any interest in investing knows about Bernie Madoff. Mr. Madoff has admitted his guilt in a Ponzi scheme of gargantuan proportions. But I think this is just the beginning.

Mr. Madoff has stated, through others, that no other person knew about his fraud. I find that impossible, not just difficult, to believe. I think he is pleading guilty to protect others.

What can a Madoff investor do? I have spoken with some of them and the stories are heartbreaking. People's lives have been ruined and will never be fixed. Securities arbitration and litigation is one recourse. But the Madoff entities are in receivership. So the feeder funds and moneyraisers are the next targets. But those cases will not be easy. A lawyer familiar with securities arbitration and litigation should have an opinion on this.

In my opinion, the investigation is not over. The SEC, which has been raked over the coals recently, will likely dig deeper. They will find out who else knew about the fraud, or ignored it, and when they found out. They will look at the feeder funds and the moneyraisers. And others will suffer consequences.

It's a shame that the public trust was violated in such a manner. This remains a black eye for the investment industry. It will take a long time to restore this confidence.

That's the view from The Law Planet - Jupiter, Florida.

I have mentioned in the past that my distaste for Equity Indexed Annuities runs deep. I wondered aloud how a market-based product could be sold by someone with a securities registration. I would like to think that the SEC cares what I think, but I would be wrong. However, SEC Rule 151a went into effect in December and the Index Annuity folks are hopping mad.

They have a website, SEC151a.com, to plead their case. But what struck me most when reading their materials is the first page, which encourages its members to not get registered with either a Series 6 or Series 7. The authors of this site are discouraging people from the additional oversight that having a supervising broker/dealer would bring. Of course, that would likely mean another layer of overrides and reduction in income.

In my view, it would also lead to fewer inappropriate EIA sales. When I last blogged on this topic, I received an email from an annuity marketer taking me to task for blasting this "wonderful" product. It was all I could do to prevent myself from laughing (actually I did laugh). It's real simple in my mind. If you're selling something that relies on the stock market's performance to determine the performance of the underlying investment, you should be registered to sell securities.

Start sharpening your pencils, folks, and please bubble inside the circle only.

That's the view from The Law Planet, Jupiter, Florida.

So Citigroup is the latest institution deemed "too big to fail." Here's the part I don't understand. The New York Times is reporting that Citigroup is going to get $306 billion in guarantees and an infusion of $20 billion.

Isn't this the same Citigroup that was whining that it should have been permitted to purchase ailing Wachovia? Isn't this the same Citigroup that has sued Wachovia and Wells Fargo becuase it ended up the loser in that deal? Did the Feds tell Citigroup to stop stupid litigation while they were at it?

There shouldn't be anything that is deemed "too big to fail." What happened to "Joe the plumber?" Has he now been forgotten? Have all the small and large businesses that are struggling to make a profit and pay taxes been forgotten? I'm disgusted by this.

When a financial giant like Citigroup makes bad decisions, the government bails them out. When small businesses make bad decisions, the government is nowhere to be found. Make up your minds, folks.

That's the ticked-off view from The Law Planet - Jupiter, Florida

Here's the deal. Equity Index Annuities look and smell like a security but for reasons that escape me they are regulated as fixed insurance. I have written about this before. An insurance agent, with no securities training, could sell a product whose performance is dependent upon the movements of the stock market. And that's the good part.

The bad part is that most buyers don't understand what they're buying and their agents are making it less than clear as to what they're selling. I have handled some of these cases. I have a sense of what's going on.

And while an equity index annuity touts its "value," the fact is that the value is usually paid out over a fixed term. It is not a surrender or liquidation value. In a recent article in Investment News, the general counsel of an EIA issuer actually used the same BS line that insurance salesman use when they don't understand the product. She said a variable annuity would have decreased in value over the last year while an EIA would still be worth the same amount.

Unless her company's EIAs are different than the others I've seen, that's a load of crap! It shows that the lack of understanding of this product goes to the highest level. If the client actually wants the full amount available in the EIA, he/she loses a big chunk to penalties and fees. I repeat, this is a roach motel for your money. Stay away. This is why the securities regulators are stepping in. Someone with some market savvy needs to examine this garbage.

That's the view from The Law Planet - Jupiter, Florida.

There has been a huge shift in the United States from defined benefit retirement plans, where an employee is guaranteed a fixed payment upon retirement, to defined contribution plans, where the employee makes the contribution and maybe the employer makes a matching payment. Defined contribution plans are considered cheaper for the employer.

The best known defined contribution plan is the 401(k). In a 401(k), the employee contributes to the plan and chooses the investment strategy. A plan administrator offers a variety of investment vehicles, usually associated with mutual fund-type investments, and the employer may offer to match a percentage of the employee's contribution. The employer is called the plan sponsor.

There was some discussion in legal circles as to whether or not an employee, the "plan participant," could bring an action against the plan administrator regarding administration of the plan. ERISA lawyers, who are apparently immune to boredom, batted this around at some length for a while. The Supreme Court brought an end to this discussion and made a logical decision in my view.

In Larue v. DeWolff, the Supreme Court held that an administrator can be held liable to an individual participant, not just the plan, if the administrator screws up. Now how hard was that? Logic would tell you that if it's the participant's money, and the administrator is responsible for dealing directly with the participant, then the administrator has a problem if they/he/she don't listen to the participant's instructions, which was the case in LaRue.

This is what's wrong with the law. Logic gets suspended while egghead lawyers sit around and argue about the placement of a comma in a sentence or the meaning or a single word in a paragraph. Why couldn't someone just say "duh" (not "doh!")? I, for one, am glad to see that our Supreme Court got it right this time. Now, if we could only get Congress to worry about something other than flawed arbitration studies....

That's the view from The Law Planet - Jupiter, Florida.

It has been 20 years since the stock market crash of 1987. Many were predicting that this was the end of the world as we know it (Insert REM music here). Others saw the crash as a buying opportunity. It turns out that the buyers were probably right.

If we look at a chart of the major market indices such as the Dow Jones Industrial Average, the Standard and Poors 500 and the Russell 1000 have done quite nicely over the last 20 years. In fact, the "crash" shows barely a blip on a historical chart.

The 1987 crash brought an onslaught of arbitration claims. It wiped out billions of dollars of net worth and pointed out weaknesses in various systems. Daily trading volume on the NYSE was over 600 million shares during the crash period -- and the system was strained. Now, daily trading volume regularly tops 1 billion shares without a hitch.

This year marks the 215th anniversary of the execution of the Buttonwood Agreement, which marked the formation of the NYSE. Much has changed, including the fact that the exchange is now publicly held instead of owned just by its members. But the basics remain the same. Buy good stocks and remember the reason they were purchased during market downturns.

That's the view from The Law Planet - Jupiter, Florida.

Senator Russell Feingold (D-Wis.) has sponsored a bill in the Senate to eliminate consumer arbitration, including securities arbitration. This knee-jerk reaction to some "Chicken Littles" claiming that big chunks of sky have landed on their heads is misguided. Consumer arbitration, including securities arbitration, has deep roots in American commerce. I am disappointed that, once again, our government is sticking its nose where it need not do so.

Here is why arbitration is good. It is fast. It is less expensive (not cheap, by any means). And a resolution is generally final. The persons hearing the case want to be there and are generally somewhat familiar with the issues presented. They may not be geniuses, but they have some knowledge, at a minimum. In securities arbitration, there is at least one member of a three member panel who is classified as being a "non-public" arbitrator because of securities industry ties. I am classified as a "non-public" arbitrator because my firm represents brokerage firms like A.G. Edwards & Sons, Stifel, Nicolaus & Co. and Legend Equities Corporation for more than 20% of its revenues.

Here is why arbitration is bad. The panel's knowledge and prejudices are the luck of the draw. Sometimes you get a well-educated panel with no biases. Other times, you get a panel that "hates" whichever side you happen to be representing that day. And it's very difficult to overcome the biases. Further, the rights of appeal are very limited. This is usually a good thing, but sometimes an arbitration panel just blows it. They focus on the wrong points, misinterpret some facts, and come up with the wrong result. It happens. And when it does, the appeal rights are virtually non-existent.

In court there are depositions. These cost, just for the court reporter, over $1,000 per day. In court, the days tend to be shorter so less is done. There is motion practice, which means more attorneys running to court to cool their heels to argue some esoteric point of law that is part of the judicial procedural jousting. There is jury selection. And then there are the appeals. They cost money, delay the result and possibly change the result. And the expenses attendant to keeping the matter open, through appeal, would be astonishing.

Here's an example of a case we have in our office. Our client has sued a Registered Investment Advisor. The lawsuit was filed in February of this year -- almost 6 months ago. We have now been through two motions to dismiss and have served our second amended complaint. We haven't even seen an Answer from the defendant yet.

In arbitration, we would already have a hearing date and discovery would be underway. Our client is elderly and we tried to get her trial expedited. The court denied the motion. Is this the result that Senator Feingold wants? Doubtful. Be careful what you wish for, folks.

That's the view from The Law Planet - Jupiter, Florida.

A recent article in the Sarasota Herald-Tribune described a FINRA (formerly NASD) arbitration award to a retiree in Venice, Florida. I'm not particularly upset about the award, I don't know enough of the facts based upon the article.

From what I can tell, there were at least two registered representatives and one unregistered person who were somehow involved in the sale of an unapproved product to the retiree. This is a violation of FINRA rules and I am certain that it violated Sterne Agee's internal procedures. Frankly, if this occurred as described, the brokers should have known better.

What troubled me most was the mention of the "hedge fund" promoter at the end of the article. Guy Della Penna is a former stockbroker who was found by an arbitration panel to have violated State and Federal Securities laws in 2002. He fought the award and, ultimately, the Fifth District Court of Appeals confirmed it. I have not kept up on the case, but last I heard the award was still outstanding. With this information, who in their right mind would give this guy parking meter change let alone over $100,000?

This information was, and is, publicly available and should have been disclosed by either the selling brokers, registered or not, and Della Penna himself. I don't know if this was done. This is the problem with the world of unregistered investment vehicles. The disclosures are weak, if any. The oversight is lax and the only time an investor finds out something is wrong is when the investment vehicle itself is pushing up daisies. It wouldn't have been easy, but the successful arbitration litigant in this case should have been able to find out about Mr. Della Penna and taken his money elsewhere.

Remember, your mother was right. If it sounds too good to be true, it is. And there is no such thing as a secure investment that pays higher than CD returns but is as safe as a CD. IT DOES NOT EXIST! If it did, would I be writing this blog?

That's the view from The Law Planet - Jupiter, Florida.

OK, I try to limit the posts to once a week, so I can actually do some billable work, but I read an article about this video on YouTube and I couldn't resist.

Enjoy.

That's the twisted view from The Law Planet - Jupiter, Florida

Bear Stearns announced bankruptcy petitions for two of its hedge funds. The term "hedge fund" has been used to describe a variety of investment vehicles. Generally, these funds are designed for high net worth investors with significant investable assets. The investors in these funds have virtually no say in how the funds are invested and, generally, they pay significant management fees to the fund manager. They are usually organized as partnerships.

According to this article in Forbes magazine, these funds invested heavily in subprime mortgage instruments. This is the domestic equivalent of Third World debt. These are instruments backed by loans made to borrowers with low quality credit.

To make matters worse, at least one of these funds appears to have been using leverage to purchase these instruments. Leverage is a buzzword for borrowing money. So the leveraged fund is borrowing money to buy investments that loaned money to people with bad credit. When it is explained this way, instead of buried in some dense disclosure document, would anyone place any significant amount of money in this investment?

Subprime lending survived because of the real estate boom in most parts of the country. Now that the gloss is off of the real estate market, the subprime market has come crashing down, taking those that were profiting from the higher interest rates of subprime loans with it. Bear Stearns, as manager of the funds, had no monetary risk unless it had some of its own money in the funds, which I doubt.

The hedge fund "industry" is an area that desperately needs regulation. I'm guessing that some of the "high net worth" investors in these funds are going to be people who had no business being in the investment. Only time will tell -- and the sob stories on 60 Minutes

That's the view from The Law Planet, Jupiter, Florida.

The NASD has levied fines against four brokerage firms for mutual fund violations related to B shares. See the NASD press release here. There is a certain amount of hypocrisy involved in these fines.

I remember when B shares were first released. They were marketed as a means to eliminate the broker's self-interest in the mutual fund transaction. This was done with the full knowledge of the SEC and NASD. A broker is supposed to "know the customer." A broker violates that rule when a recommendation is made because a broker would receive a higher or lower commission depending upon the selection of mutual fund family.

B shares, which charge a declining redemption fee based upon years held, charged no upfront fee. A customer was encouraged to buy B shares because "all your money goes to work immediately." That was the sales pitch. In exchange, the brokerage firm received a commission which was financed by the mutual fund sponsor and amortized over the redemption period. This was viewed as a good thing.

But then, one day, someone woke up and said "we're paying these higher fees over the life of the investment, not just during the redemption period." This resulted in a change where B share purchases became A shares, which were eligible for lower ongoing expenses and whose purchasers paid a sales charge upon initial investment. In my experience, the crossover period, where it is a better investment to be an A share purchaser instead of a B share purchaser, is about 7 years.

The regulators have been examining this situation for a number of years. One thing they are looking for is large purchases in a fund family (a group of mutual funds administered by the same company) that would be eligible for a breakpoint (a commission discount). Some funds have breakpoints as low as $100,000. Most funds allow an investment without commission at $1,000,000.

If you are an investor in mutual funds, ask your broker for the most cost-effective way to buy the funds, including using purchases among your household accounts. If you are a broker, it is your job to get the client the best deal.

That's the view from The Law Planet, Jupiter, Florida.

Wachovia Securities, which recently announced its merger with one of our clients, A.G. Edwards & Sons, agreed to pay a $3 million fine for allowing buy-and-hold customers to sit in wrap fee accounts. A wrap fee account is one where the client pays a flat fee for either no commissions or reduced commissions. Some brokers throw in extra services in exchange for the wrap fee.

Wrap fees have been around for a long time. In the "old days" (i.e. when I first started defending brokerage firms), a broker accused of churning would throw up his/her hands and say "That's it, I'm going to managed money" meaning a wrap fee account. The broker saw this as a way of not being accused of churning the client's account. Of course, a wrap fee is not a cure for all ills.

Wachovia, like other firms before it like Raymond James and UBS, was accused of letting its wrap fee clients just sit there racking up fees but getting nothing for the fee. Further, it appears that "A" share mutual funds, for which a client already paid a sales load (commission), were also being used in a wrap fee account, a definite no-no.

This tension between commission business and wrap fee business creates the issue of "which is cheaper." Sometimes a broker won't know how much activity the client is going to do, so a wrap fee would be inappropriate. Other instances may call for a wrap fee, such as a client investing significant new money, but the long term costs can be high if the strategy is to buy and hold.

Ultimately, the decision comes down to the basic premise of what is best for the customer. That is and has always been the mantra of securities business. Sometimes, for a myriad of reasons both honest and not-so-honest, the securities industry loses sight of the goal - the best interest of the client. In this case, the wrap fee was seen as placing the client and the broker on the same side of the table, with no transaction-based incentive. Most brokers that I know feel this way. Unfortunately, the decision to recommend a wrap as opposed to a transaction-based account is not a simple one. And the regulators don't provide any real guidance on the front end but are more than willing to extract a fine or two when the plan doesn't work out.

That's the view from the The Law Planet, Jupiter, Florida.

The National Association of Securities Dealers ("NASD") has issued warnings to investors regarding the sales of Equity Index Annuities. NASD Investor Information This is interesting because an Equity Index Annuity is treated as a fixed insurance product in Florida and not subject to securities regulation. This allows the unscrupulous insurance salesperson plenty of room for abuse.

Here's the problem with one of the most popular brands of Equity Index Annuities - the annuity values on the account statements are misleading. The only way to get the statement value out of the annuity is to annuitize it over ten years. I have a client who thinks that when she dies, her beneficiaries are going to get the "value" listed on her account statement. In fact, they will only get the value if they take 10 equal payments over 10 years. Hence, the Roach Motel analogy. Your money checks in but doesn't check out.

An Equity Index Annuity is a securities-based product that only requires an insurance license to sell. The performance of the annuity is tied to a market index or blend of market indices. Usually, the annuity's link to the index is capped and/or participates in only a percentage of the index's performance. Further, if the market declines, there usually is no limit on the decline. But there will be a limit if the performance rebounds.

I can barely understand this and I do this for a living. I can only imagine what the inexperienced investor must think. Actually, I know because we have spoken with people who have purchased these hybrid products. They didn't understand them when they purchased the annuity and they could not explain them to me when I asked for a description.

The unfortunate part is that the senior citizens who purchase these products can least afford having their money tied up in this manner. Worse yet, from my view, is that the aggrieved purchaser may have to go to court rather than go to arbitration. And since they are not securities, the attorneys' fee provision of the Florida Blue Sky Law would not apply.

Our advice - if you don't understand it, don't buy it. If you think you've been wronged, do something about it. Don't suffer in silence.

That's the view from The Law Planet, Jupiter, Florida.