POGO’s letter points out that securities industry Self Regulatory Organizations, in general, and FINRA in particular, have an “incestuous” relationship with the brokerage industry which is fraught with conflicts of interest, that FINRA has failed to prevent all the major brokerage scandals back to the 1980s, that FINRA has failed to regulate member firms at the heart of the financial crisis (Lehman, Bear Stearns, Merrill Lynch), and that FINRA has failed to detect or act upon Ponzi Schemes such as Madoff and Stanford.
With its cozy relationship with its member firms, which finance FINRA, and its “abysmal” track record, Congress should not trust FINRA to protect the investing public, POGO says. “Effective, independent, and efficient government regulation is the only proper way to safely oversee our markets,” POGO added in the letter, echoing the position of the National Association of State Securities Administrators. And that would mean the end of FINRA.
]]>They work like this: In exchange for higher interest payments, the investor gives the issuer the right to repay principal in the form of a set amount of the underlying asset, rather than cash, if the price of the underlying asset dips below a predetermined price. The investor (whether he knows it or not) is betting that the value of the underlying asset will remain stable or go up, while the issuer is betting that the price will fall. If the value of the underlying asset stays even or rises, the investor receives a high coupon for the life of the investment and the return of his full principal in cash. But, if the value of the underlying asset drops below its “knock-in” level, the issuer can pay back the investor with the depreciated asset—which means the investor loses some or all of his principal (offset only partially by the monthly or quarterly interest payments).
According to the article, a higher coupon yield signals a greater likelihood of the linked asset dropping below its knock-in level. This is because the coupon payment, currently averaging around 12%, is based on the linked asset’s most recent option price volatility.
It’s no different than rolling the dice. Why would brokers put their clients in a casino game? Perhaps because sales of such securities generate commissions or 2% or more – a sure thing for the broker.
The Financial Industry Regulatory Authority (FINRA) recently issued its first enforcement action involving the sale of reverse convertibles, in which it reminded the brokerage industry of its suitability obligations. FINRA fined H&R Block Financial Advisors Inc. $200,000 for inadequate supervision of reverse convertible sales and also ordered the firm to pay $75,000 in restitution to a retired couple who had their portfolio 40% allocated to reverse convertibles, according to the article.
The representative was reportedly fined $10,000, ordered to disgorge $2,023 in commissions and suspended from working with any FINRA-associated firm for 15 days.
FINRA also published an alert to investors that reverse convertibles “often involve terms, features and risk that can be difficult for individual investors and investment professionals alike to evaluate.”
FINRA also said that firms selling structured products that have a prominent option component should consider restricting sales to clients who are eligible to trade options. Firms should only “consider” not selling these speculative products to conservative investors? What a polite, friendly regulator.
Reverse convertible notes are speculative, high-risk investments that are totally inappropriate and unsuitable for most income-oriented investors. Conservative investors who have suffered significant losses in such products may have compelling claims to recover those losses.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. For further information, please contact us.
]]>Experts agree. The problem is "an inherent flaw in non-Treasury bond ETFs," said Matt Hougan, managing director of ETF analytics for Index Publications. "The corporate-bond market is notoriously illiquid." And given ETFs' need for liquidity, he said, "it's a square peg in a round hole."
The growing popularity of bond exchange traded funds have created demand that pushed shares to premiums. If interest rates start to rise, however, many investors who bought bond exchange traded funds at a premium could end up selling them at a loss.
In his article, Mr. Mamudi points to SPDR Barclays Capital High Yield Bond ETF (trading symbol: JNK) as an example of how bond ETF share prices can move differently to their value. As of Friday, Feb. 19, the SPDR shares traded at almost a 1% premium to net asset value. By Tuesday afternoon, the fund's shares traded at a slight discount to NAV. Moreover, by mid-afternoon on Tuesday, the fund's share price had fallen about 1% from the open while its NAV, the measure of the value of its assets, was up 0.6%. Several days later, the shares were back at a premium, closing at $38.79 compared with their NAV of $38.34.
In the fourth quarter of last year another high-yield bond exchange traded fund, (HYG), posted both premiums and discounts to its share value. On Dec. 14, the premium peaked at 2.15%, while on Oct. 1 it was trading at a discount of 0.9%. In one quarter, the exchange traded funds saw only five of sixty-four trading days when the share price was within 0.5% of its net asset value.
The swings were even wider in the first quarter of 2009. The iShares fund had several days during that period when premiums were more than 6% higher than the net asset value and also days when discounts were greater than 3%. In the same quarter, SPDR Barclays Capital High Yield Bond ETF swung from premium of more 12% on Jan. 5, 2009, to a discount of 4.9% on March 2.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in exchange traded fund cases. For further information, please contact us.
Citi was one of several investment banks and brokerage firms to have entered into settlements with the SEC and various state regulators, but such settlements have primarily benefited individual retail investors. The SEC settlement required Citi to purchase illiquid securities from retail investors at par value, and established a claims procedure for those investors to make additional claims for consequential damages above and beyond their lost investment. Unfortunately for institutional and corporate investors, the SEC settlement only required Citi to use its best efforts to restore liquidity to their securities. Two years after the auctions froze, many investors are still waiting to liquidate, and a large number have filed lawsuits to force liquidation or recover damages. Others have been able to sell their securities on a limited secondary market, usually at a steep discount.
According to SecondMarket, Inc., a New York brokerage that specializes in finding buyers for illiquid securities like auction rate securities, regulatory settlements have restored about $94 billion to investors, but businesses continue to hold about $25 billion in securities that they have been unable to liquidate. Those numbers may be low, however, considering that investors of all stripes were holding a total of $330 billion worth of auction rate securities when the markets froze in February, 2008. While many of those securities have since been redeemed, there are still many individual investors who have not yet been able to liquidate—either because the firms they bought them from were not involved in regulatory settlements, which have primarily targeted the biggest market players in the states where regulators are most active, or because their holdings were above the monetary limits that would qualify them as retail investors under the settlements.
“Clearly the regulatory settlements have put a big dent in the problem,” says Craig T. Jones of Page Perry LLC who represents investors in securities arbitrations and lawsuits. “But there are still a lot of people and institutions with a lot of money tied up in these things, and I am getting calls from potential new clients every day.“
Jones points out that liquidity is the biggest problem, but it is not the only problem with auction rate securities. When the auctions failed, many securities that were paying 4 to 5% interest were reset to a fail rate of less than 1% due to provisions in the offering documents that tied the rate to LIBOR or some other benchmark in the event that auctions were not successful. “To an investor with tens or hundreds of millions of dollars tied up in long-term bonds, that rate spread adds up to a lot of money.”
Jones’ law firm, Page Perry LLC, is based in Atlanta but handles securities fraud and broker malpractice cases all over the country. “The thing people have to worry about now is that the statute of limitations, which is different in every state, will eventually prevent you from taking legal action to get your money back,” says Jones. “Depending on where you are and what type of claim you have, there may be special rules that extend the statute of limitation where facts have been fraudulently concealed from you, but you cannot afford to take any chances. If you are still waiting for your money at this point, you need to discuss your options with a lawyer now, before it is too late.”
]]>UBS was just one of many investment banks and broker-dealers that represented auction rate securities as being safe, liquid cash equivalents. When market developments in the second half of 2007 exponentially increased the risk of auction rate securities, broker-dealers and investment advisers had a duty to warn their clients of those increased risks. “The failure to warn of such risks, either in connection with the sale of securities or in advising investors to continue holding them, is fraud,” says Craig T. Jones, an attorney with the Atlanta law firm of Page Perry LLC who is representing several investors in auction rate securities cases. UBS was not unusual in this regard, because representations about auction rate securities were so pervasive during that time frame. But what is unusual is that a market insider was prosecuted for getting himself out of the market while leaving unsuspecting Investors stranded. While there have been a number of regulatory settlements with banks and large brokerage firms, this may be the first settlement between a regulator and an individual involved in the auction rate securities market.
According to attorney Jones, “I am handling several cases where banks and brokerage firms sold auction rate securities from their own inventories to their own customers—without letting the customers know there was a problem. If you are an auction rate securities investor and think that may have happened to you,” says Jones, “take a look at the trade confirmations from when you bought the securities. They will tell you if the bank or broker acted as an agent (selling for someone else) or a principal (selling for themselves) in the transaction. But either way, you probably have a valid legal claim if your auction rate securities positions are still illiquid.”
Most of Jones’ auction rate securities clients are filing arbitration claims due to mandatory arbitration clauses in brokerage contracts, which generally take less time to resolve than lawsuits filed in court. “Some of the cases we have filed have already settled,” says Jones, “while I know other investors who have not pursued claims that are still waiting for something to happen. You know what they say about the squeaky wheel getting the grease.” Jones also points out that the statutes of limitations in some states are now beginning to bar auction rate securities claims. “If you think you may have an ARS claim, it is important to get a lawyer now, before it is too late to force anyone to liquidate.”
Jones’ firm, Page Perry, is based in Atlanta but represents investors in securities fraud cases all over the country.
This month alone, Morgan Keegan lost separate claims with awards of a $2.5 million and $1.1 million, according to the article.
Last summer, both the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. issued Wells notices to Morgan Keegan, a step signaling that enforcement actions against Morgan Keegan have been recommended in connection with the bond funds. The SEC also filed a Wells notice over Morgan Keegan’s sale of auction-rate securities.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in Morgan Keegan cases. For further information, please contact us.
The Tennessee court reached its decision despite the fact that FINRA arbitrators are more like judges than jurors, despite the fact that FINRA rules, by which Morgan Keegan agreed to abide, allow FINRA to decide whether or not an arbitrator should be disqualified, despite the absence of any new evidence to consider, and despite legal authority stating that even repeated rulings against one party will not establish bias absent some evidence of improper motivation.
This court decision may have far reaching ramifications. It implies that no arbitrator that has ruled for or against Morgan Keegan in a Morgan Keegan bond fund case can sit on any future panels involving those funds. This could result in a flood of motions being filed in countless FINRA arbitrations to remove sitting arbitrators who have previously ruled one way or the other, as well as further post-award motions and vacaturs of awards.
The investor, who won his arbitration case, is expected to appeal the Chancery court ruling that took it away from him.
Too much resistance could make it hard for Ms. Schapiro to follow through on her announced strategy for revamping the SEC following the financial crisis and Bernard Madoff fraud. That strategy includes persuading Congress to give the SEC additional funding and wider authority.
One important issue before the SEC is whether to let shareholders nominate director candidates using the ballots that companies mail to shareholders instead of having to conduct expensive proxy fights, which rarely happen. Unions and some institutional investors support such shareholders rights. The SEC voted 3-2 last year to issue the proposal for public comment, with the two Republican commissioners dissenting.
According to a quote in a recent Investment News article, Janice J. Sackley of Fiduciary Foresight , LLC stated when discussing private placements, “There are many in the industry who are selective about disclosure.”
The concern about disclosure in Reg D offerings is echoed by Pratt H. Davis of Page Perry, LLC, “Medical Capital’s implosion has brought the lack of disclosure in many Reg D investments to the forefront.” On July 16, the SEC charged Medical Capital Holdings Inc. with fraud related to the sale of private securities in the form of notes. In wake of the collapse, the Commonwealth of Massachusetts Securities Division filed a Complaint against broker/dealer Securities America related to its sales of Medical Capital Notes. The complaint contains allegations that Securities America failed to disclosed certain material risks to it customers. The collapse of the Medical Capital investments has left investors nationwide in the hole to the tune of about $1 billion. According to Mr. Davis, “thousands of investors in the Medical Capital offerings do not appear to have received the requisite disclosure of the risks involved.” Many observers, including Mr. Davis, believe that the hammer will fall on other Reg D offerings in the near future.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.
While laws differ from state to state, there are a variety of legal theories under which bilked investors may be able to bring claims. Fraud, suitability, breach of fiduciary duty, negligent misrepresentation, breach of fiduciary duty, and violations of securities laws are commonly raised, but each type of claim has a different statute of limitations, depending upon what state’s law is applicable. Typically those statutes of limitations range from two to four years, but they can be as short as one year or as long as ten. In short, time is of the essence, and any institution or individual who believes that their losses may have been due to something more sinister than a “bad market” needs to act quickly to explore their legal options.
Jones’ firm is located in Atlanta but handles cases all over the country. “Most of our cases are handled in arbitration,” he says, “which is quicker, less expensive, and less public than going to court. If you think that you or your organization may have a case, we would be happy to meet with you discretely and confidentially to assess your options.”
]]>The largest seeks rescission of $719 million in securities bought between March 2006 and September 2007 from former Bear Stearns Cos., which was bought by J. P. Morgan Chase Co. in 2008. Morgan Stanley, Goldman Sachs Group Inc., and Countrywide Financial Corp., now a part of Bank of America, are also defendants in other similar suits.
Earlier, the Federal Home Loan Bank of Pittsburgh sued various banks and ratings agencies for misrepresenting the value of securities that carried a triple-A rating.
Brokerage firms and investment banks often argue that institutional and corporate investors do not deserve to be compensated because their officers were financially sophisticated and should have known better. However, this defense is simply not justified, because sophisticated people can’t bring their sophistication to bear when they are lied to – as Merrill Lynch apparently recognized recently when it paid the Ohio State Teachers Retirement System $550 million.
The bedrock principle of the securities laws is the duty of complete and truthful disclosure. Once a broker undertakes to disclose any information about a security to an investor or potential investor, the disclosure must be complete and truthful in all material respects. This is an absolute requirement. It applies to every broker and brokerage firm (whether discount or full service), every security, and every person who receives any information about a security (rich or poor, financially sophisticated or not, whether or not that person has an account with the broker). If a broker fails to provide complete and truthful disclosure, and the undisclosed information would have been important in deciding whether or not to invest, the investor has a legal right of action against the broker and the firm to recover resulting losses and damages.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in subprime securities cases. For further information, please contact us.
It sounds good in principle, but target date funds have been found to vary wildly in their allocations of stocks and bonds. The percentage of stocks in funds called Target 2010, which are aimed at people hoping to retire in the year 2010, ranged from a relatively conservative 21% to a much higher-risk 79%, according SEC Chairman Mary Shapiro. See Leslie Wayne’s June 25, 2009 article in the New York Times entitled “Target-Date Mutual Funds May Miss Their Mark.” The average 2010 fund had more than 45% of its holdings in stocks in 2008.
The Fidelity Freedom 2010 Fund contained 50% stocks and lost 25% of its value, and the AllianceBernstein 2010 fund had 57% stocks and lost 33% of its value, according to the article. Some of target-date funds fared even worse - losing 40% to 50% of their value – more than the S&P 500 (100% stock) index, which fell 38.5%.
“Funds with the same target date in their names can be structured, and thus perform, very differently,” says Ms. Shapiro.
In 2006, Congress passed legislation that enabled employers to route employees who did not specify their investments into target-date funds. Consequently, money flowed into such funds in unprecedented amounts. Before that, the default choice was generally a money market or “stable value” fund.
Last June, the SEC was reportedly considering whether putting a date in a fund’s name should be prohibited, as well as whether the risks have been adequately disclosed and whether the funds were properly structured.
Representative Rob Andrews, Democrat from New Jersey, expressed concern that mutual fund companies are not making adequate disclosures or offering other choices to 401(k) plans, such as low-cost index funds. Mutual fund companies often create target-date funds by bundling existing funds. This practice enables the fund companies to collect more fees than investors understand they are paying. “I’m not saying that pensions are being pillaged by greedy mutual fund companies,” said Representative Andrews, “but I am saying that that people should know how much they are paying and that investment advice should be in the best interest of the investor, not the advisor.”
If the SEC does not act, Congress says, it will. Senator Herb Kohl, Democrat from Wisconsin and Chairman of the Special Committee on Aging, has criticized aspects of target-date retirement funds. “At the end of the day, consumers need to know what they’re getting into,” Senator Kohl said. “We’d like to see regulation, whether it’s a standardization of target-date composition, or increased clarification of information made available about the plans.”
So, now the SEC says it will act – sometime this year. Ms. Johnson’s article did not indicate that anything would be done to standardize target date fund composition. "In the year ahead, we are going to confront the issue of the potential for target date fund names to confuse investors, or lull them into a false sense of security," Ms. Shapiro said. "I have asked the staff to prepare a rule proposal to provide additional information to investors when a fund includes a date in its name," she added.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling individual investors regarding their mutual fund problems. For further information, please contact us.
]]>They are taking advantage of an unfortunate quirk of human nature, which leads investors to chase last year’s hot sector in an effort to replicate eye-popping returns. This phenomenon is so well-known that it even has a name: "recency," the tendency to assume the near future will look a lot like the recent past. Unfortunately, recency often leads investors to climb into hot sectors just as they're cooling, according to the article.
]]> Emerging markets returned 80% last year, leading almost every investor to wish he'd had greater exposure. It's easy to get such exposure these days by purchasing one of the ten emerging markets exchange traded funds, or the eight that invest in single emerging countries, that were launched last year.If this scenario sounds familiar, consider that in 2000 the market was flooded with 71 mutual funds specializing in tech stocks, just in time to carry investors over a cliff. The tech-heavy Nasdaq is down 50% in the past decade.
Instead recommending last year’s hot sector, investment advisers should act in their clients’ best interest by recommending a diverse, low-cost portfolio of assets. Exchange traded funds that are limited to broad-based market indexes, such as the SPDR S&P 500, can play a role in creating such a portfolio. SPDR S&P 500 is still the industry Goliath with $73 billion in assets. Its annual fees are 9 basis points (0.09% of assets).
Last year, however, Wall Street created 139 new exchange traded funds, only a dozen of which were broad market trackers, according to Morningstar. Eight of those index funds were offered by Charles Schwab. Vanguard Group also offers index exchange traded funds.
The other newly created exchange traded funds were concentrated in, among other things, real estate, Brazilian stocks, commodities ranging from platinum to natural gas (capitalizing on the recent jump in commodities prices), and – surprise – emerging markets offerings, like the GlobalShares FTSE Emerging Markets Fund and Market Vectors Poland ETF.
“When the ducks quack, Wall Street feeds them,” quipped Randall. Wall Street is not satisfying a legitimate need, however. It’s all about transferring investors’ money to the House (Wall Street), which always wins in the end. High startup costs mean that an ETF must quickly attract $50 million to be viable. Pulling that off in a crowded market of 1,000 ETFs means offering either what the public wants (gold, Brazil) or what it can be persuaded to want (a short bet on Treasuries).
As the industry strays ever further from index funds, the risks for investors multiply. Illiquidity is one such risk. The Global X FTSE Nordic 30 has attracted only $4 million, and trading volume is so thin that it was quoted recently with a 1.85% spread between the bid and ask prices, according to the article. By contrast, the SPDR S&P 500 trades at a spread of a penny, or 0.01%.
Investors who have lost money in exchange traded funds may have compelling claims to recover their losses and should have their accounts evaluated by an attorney who specializes in securities arbitration.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in exchange traded fund cases. For further information, please contact us.
Since the market collapse, there have been several regulatory settlements with broker-dealers that have allowed many investors to redeem their auction rate securities at par, but many of those investors have made claims for consequential damages caused by the loss of liquidity—for example, lost business opportunities that they were unable to take advantage of. Many more investors have still not achieved liquidity, however, because the broker-dealers who sold them their auction rate securities were not party to the regulatory settlements or because the investors were not eligible under the terms of the settlements, which primarily benefited individual “retail” investors. Many of these investors have continued holding the securities, which have long-term maturities but are locked into paying short-term interest rates—in some cases less than one percent for periods of more than thirty years.
According to the Cellular South lawsuit, JP Morgan placed support bids in virtually every auction in which it was the designated auction leader, dealer, or co-lead dealer. This enabled JP Morgan to not only misrepresent the safety and liquidity of the particular securities purchased by Cellular South, but to underwrite billions of dollars of auction rate securities and to sell them at par value when it fact they were worth much less—allowing JP Morgan to rake in hundreds of millions of dollars in underwriting and auction dealer fees.
Craig T. Jones, an attorney with Page Perry LLC in Atlanta, a firm who represents a number of investors who are still holding illiquid auction rate securities recently observed “Now that the regulatory settlements have been concluded, many investors have learned that they are ineligible for those settlements, either because of the size of their investment or the date when their securities were purchased.” Furthermore, says Jones, “there are several large broker-dealers who were either not targeted by regulators or have not yet been party to the settlements. “ Now that it has been two years since the collapse of the market, investors who are still holding these securities need to be concerned about the statute of limitations. “If you still do not have liquidity at this point,” says Jones, “you may never get it unless you take legal action. Under the laws of some states, the time for doing that is about to expire, and it will eventually run out in other states as well. If you are thinking about consulting a lawyer, you need to do it now before it is too late.”
While the Cellular case was brought in federal court, the vast majority of investors are contractually obligated to bring their claims in arbitration. According to Jones, “many investors find arbitration to be a more relaxed forum that moves faster and costs less money than taking someone to court.” Page Perry LLC is based in Atlanta but handles securities arbitrations—as well as court cases--all over the country.
Schwab says it sees this trend continuing notwithstanding Wall Street’s contention that the pace has slowed. "There's a tremendous amount of inquiry," Bernie Clark, head of the Schwab Adviser Services unit, told Reuters. "The movement, if anything, is increasing."
Schwab also noted that advisers are leaving firms of all sizes, not just the biggest brokerage houses. "The moves are distributed more now than it's ever been before," Clark said.
Brokers who are thinking of leaving their firms should consult with an attorney with experience in representing registered representatives in employment matters. Brokers often need assistance in becoming registered as investment advisers, setting up investment advisory firms, and drafting contracts, among other things. In addition, there are usually a number of other legal issues that need to be addressed, including compensation issues and questions about the enforceability of restrictive covenants in employment agreements.
Page Perry, LLC is an Atlanta-based law firm with years of collective experience representing individuals in employment disputes with brokerage firms. The firm is also active in setting up registered investment advisors, establishing hedge funds and dealing with regulatory matters. For further information, please contact www.pageperry.com.