Securities Fraud Attorney Blog

UBS YES Strategy Lawsuits

September 26, 2019 | By Ross B. Intelisano

Rich, Intelisano & Katz, LLP (RIK) continues its investigation into UBS’ sale of its Yield Enhancement Strategy or the “YES” options program. Many investors around the country have filed arbitrations against UBS alleging that UBS misrepresented the risks of the options program, failed to implement appropriate risk controls, and failed to supervise the YES options program.

The Yield Enhancement Strategy is run by two UBS registered representatives, Matthew Buchsbaum and Scott Rosenberg. UBS recruited both gentlemen from Credit Suisse in 2015 when Credit Suisse closed its private wealth management business. Messrs. Buchsbaum and Rosenberg ran the YES options program at Credit Suisse for many years.

UBS allowed its financial advisors other than Messrs. Buchsbaum and Rosenberg to market and sell the YES options program to their own clients. Cases filed by aggrieved investors allege that UBS represented that its YES options program was a low-risk strategy to generate modest income. However, the program is actually a complex investment strategy that carried significant risk and caused substantial investor losses.

UBS’s Flawed Yield Enhancement Strategy (YES)

April 8, 2019 | By John G. Rich

The so-called “Yield Enhancement Strategy,” or “YES,” has seen a major rise in popularity at large investment firms, especially UBS, as a vehicle for investors to “enhance” returns relatively safely. “YES” has been pitched as a relatively safe way to generate enhanced returns on a consistent basis, especially when markets are flat. Fairly stable markets have been norm for many years, until recently, making this approach attractive to many investors. However, because of this historic stability, the inherent risks of the investment have not been widely known to investors.

As a result, because “YES” relies on stability in the market place, when significant volatility does hit, as it has at various times in the last 18 months, particularly last December, it can cause major losses to unsuspecting investors who were not prepared for them.

The “YES” Strategy is not only risky, but exceedingly complicated, involving an exotic options play, which is difficult for all but the most sophisticated investors to understand. YES is only appropriate for the most experienced and sophisticated investors, those with a high risk tolerance and who understand options strategies, and only when accompanied with proper and specific disclosure of all the underlying risks. Unfortunately, it appears that this product may have been sold to many investors without proper risk disclosure who did not meet the above criteria.

RIK investigating TD Ameritrade for unregistered former TD broker Ralph Wood, Jr.’s illegal trading activity

June 6, 2018 | By John G. Rich

RIK filed a FINRA arbitration against TD Ameritrade last week on behalf of a New Jersey family. A former TD Ameritrade broker named Ralph Wood, Jr., acted as an unregistered advisor to numerous customer accounts in the Short Hills, New Jersey branch (including our client’s), and lost tens of millions of dollars trading the SVXY for various clients of the firm. It is believed former TD broker Rushi Patel introduced Wood to the customers and knew that the accounts were being traded by Wood, an unregistered, unapproved third party advisor. If you invested with TD Ameritrade through Ralph Wood, Jr. or Rushi Patel, please contact us as we are actively investigating this improper activity.

Allowing an unregistered advisor to trade customer accounts without express written authority and oversight is a violation of FINRA Rules, including rules concerning account documentation and supervision. Investors who lost money with Wood in this strategy may have claims against TD Ameritrade for their losses.

Broker Protocol — Legal Pitfalls for Brokers/Advisors Switching Firms Post-Protocol

January 30, 2018 | By John G. Rich

Morgan Stanley, UBS and Citigroup recently left the Protocol for Broker Recruiting (“Protocol”), which established procedures allowing advisors to switch firms and bring their clients with them. The Protocol helped protect such advisors from legal liability to their old firm for soliciting clients and using certain client information, provided the Protocol was followed. It remains to be seen how many other major firms will follow suit. But for advisors employed by the above firms and planning to move, this significantly alters the playing field, making them legally vulnerable for taking steps to move their business that were protected under the Protocol. Advisors planning to move from firms still subject to the Protocol need to take into account that by the time they leave, their old firm may have withdrawn from the Protocol. In either event, careful planning and legal advice every step of the way is crucial.

Unlike a typical Protocol move, advisors at non-Protocol firms now have to budget for possible court litigation, in which their old firm would seek to obtain an order precluding them from soliciting clients and from using or removing client records or information. Generally speaking, under the Protocol advisors are allowed to take client lists containing certain limited information and to solicit clients once they move to their new firm. Without the Protocol, a major legal factor governing transitions will be the advisors’ employment agreements with their old firm, which often broadly restrict solicitation of clients and other firm employees, and the use or removal of client or firm confidential information. There is also legal precedent imposing liability under common law and state statutes for conduct constituting unfair competition and theft of trade secrets.

Such court litigation, while often of short duration, is expensive. It requires the parties to appear for an evidentiary hearing before a judge on a expedited schedule usually not much longer than a couple of months. This means the lawyers typically work almost around the clock to be prepared for the hearing. After resolution of the court proceeding, the dispute may continue in FINRA arbitration.

Private Share Litigation Cases are Challenging

October 27, 2016 | By Ross B. Intelisano

In a very high profile private share litigation, Theranos, a privately held health-technology and medical-laboratory-services company worth $9 billion as of 2014, has been sued this Monday by one of its largest and trusted financial backers, San Francisco hedge fund Partner Fund Management, LP (PFM). It will be a widely watched, difficult case.

In its lawsuit in the Delaware Court of Chancery, PFM has accused Theranos Inc. and its founder Elizabeth Holmes of deceiving their fund to attract a $100 million in investment. PFM has sent a letter to investors accusing Theranos of “a series of lies, material misstatements, and omissions” and also “engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company.” Furthermore, PFM makes the claim that Theranos intentionally lied about having developed “proprietary technologies” that would work and also lied about being in the process of receiving regulatory clearance and approval.

The Theranos case highlights the risks of even institutional investors like hedge funds investing in private companies. It is very difficult for investors to do proper due diligence on private companies. If things go poorly as they have here, a securities fraud case in Delaware court is challenging. There are strenuous pleading requirements and dispositive motion practice. Major investors are actually better off in arbitration where there are no pleading requirements and very limited dispositive motion practice. However, Theranos isn’t looking down a clear path to victory because the Securities and Exchange Commission is investigating the allegations that Theranos misled investors. The SEC has subpoenaed PFM in the case and PFM will likely be more than willing to cooperate with authorities.

Split Decision on Arbitration in Bank of America Case

June 19, 2015 | By Jessica A. Murzyn

This week, a Florida appeals court partially reversed a ruling denying Bank of America’s efforts to arbitrate various claims related to the Scott Rothstein Ponzi scheme. Bank of America, N.A. v. Beverly, Nos. 4D14-3167, 4D14-3168 (Fla. Dist. Ct. App. June 10, 2015). The appellate court ordered arbitration in a case brought by Douglas Von Allmen, a long-time customer of Bank of America, who alleged that the bank’s improper advice led him to invest in a feeder fund to the Rothstein Ponzi scheme. Von Allmen had entered into a loan agreement with the bank that had a broad arbitration clause, which the court found to be enforceable.

In a second case consolidated for purposes of appeal, the Florida court refused to order arbitration in a case against Bank of America brought by plaintiffs who had no relationship to Bank of America, but who alleged that the bank’s advice to Von Allmen propped up Rothstein’s Ponzi scheme. The court found that these plaintiffs, who were non-signatories to any agreement with Bank of America, could not be forced into arbitration.

For a potential plaintiff, knowing whether your dispute arises from an agreement and whether that agreement has an enforceable arbitration clause can save not only time but also legal costs.

SEC Fines Deutsche Bank $55 Million for Overvaluing Derivatives Portfolio During Financial Crisis

June 4, 2015 | By Diane Mall Sammarco

Deutsche Bank has agreed to pay a fine of $55 million to settle charges by the SEC that it filed misstated financial reports during the height of the global financial crisis relating to a multibillion dollar portfolio of derivatives.

The SEC’s multi-year investigation culminated in an Order Instituting a Settled Administrative Proceeding, available on the SEC’s website. According to investigators, the bank overvalued a portfolio of derivatives consisting of Leveraged Super Senior (“LSS”) trades, through which it purchased protection against credit default losses. This leverage created a “gap risk”, which the bank initially took into account in its financial statements, by adjusting down the value of the LSS positions. However, according to the SEC’s Order, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether. In other words, the bank slowly tweaked its formula over the months so that the risk didn’t show in its financial reports.

Therefore, “at the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions”, according to Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

FINRA’s Regulatory Arm Announces Strengthening of Sanction Guidelines for Fraudulent Conduct by Brokers

May 22, 2015 | By Diane Mall Sammarco

In a move intended to emphasize that FINRA’s ultimate mandate is to protect investors, the SRO’s National Adjudicatory Council last week issued newly-revised Sanction Guidelines including tougher ranges of recommended punishments to be meted out against member firms or brokers who commit fraud or make unsuitable recommendations to customers.

Since 1993, FINRA has maintained and published “Sanction Guidelines” setting forth common securities rule violations and the range of disciplinary actions FINRA can issue for such violations, including monetary fines as well as suspensions, bars from the industry and other sanctions.

Specifically, the revised Guidelines, announced in Regulatory Notice 15-15 available on FINRA’s website at www.finra.org, contain revisions to the Sanctions relating to two specific areas: (i) fraud, misrepresentations or material omissions of fact; and (ii) suitability and the making of unsuitable recommendations to investing customers. According to the Notice, the ramped-up sanctions are meant to reinforce that fraudulent conduct is unacceptable, and that FINRA adjudicators on the Regulatory side should consider strong sanctions for such conduct, including barring or expelling repeat offenders, particularly where aggravating factors outweigh mitigating ones. With regard to unsuitability, the heightened punishments include an increase in the high-end range of suspensions from one year to two, as well as recommending bars, suspensions or expulsions for the most egregious recidivists.

FINRA Fines LPL for Failure to Supervise on Complex Products

May 8, 2015 | By Ross B. Intelisano

What are non-traditional exchange-traded funds (ETFs) and non-traded real estate investment trusts (REITs)? Why are independent broker dealers selling these complex products without proper supervision? FINRA wants to know and just slammed LPL Financial for doing such a thing.

This week, FINRA censured and fined LPL $10 million for broad supervisory failures in the sale of complex products such as leveraged ETFs and non-traded REITS. It also ordered LPL to pay an additional $1.7 million in restitution to certain customers who bought non-traditional ETFs.

This is a watershed moment for these and other complex products. First, LPL has over 14,000 brokers nationwide and is by a wide margin the largest independent broker dealer in the U.S. (Lincoln Financial Network with over 8,000 brokers is second). The biggest independent broker-dealer getting hit like this by FINRA is the equivalent of FINRA fining the old Merrill Lynch in wire house terms.

Liability of Commercial Banks for Investment Advisor Fraud

May 1, 2015 | By Rich, Intelisano & Katz

An increasing issue in investment fraud cases is the liability of commercial banks for aiding and abetting fraud by an investment advisory firm that engages in fraud and then goes defunct. Such firms typically house their investment clients’ accounts with an independent broker dealer clearing firm that clears or processes the trading activity of the advisor. Cases against the clearing firm are typically resolved in arbitration at FINRA, and are subject to strong legal defenses based on claims of limited or nonexistent obligations of the clearing firm to the investor. Proof of the clearing firm’s knowledge and participation or knowing assistance in the fraud can sometimes be difficult, and what if the clearing firm itself has minimal assets? Another avenue to explore is the liability of the commercial bank that housed the non-investment bank accounts of the investment advisor. In the context of Ponzi schemes, such as Madoff, court cases have been brought with mixed results. But there are other forms of advisor misconduct that can implicate the bank as well.

When the nature of the fraud is outright theft or diversion of investor funds by the advisor this can occur through improper use by the advisor of its bank accounts. For example, the advisor may keep a bank account in its name and deposit customer funds into it, through various means, including having the check made out to the advisor “for the benefit of ” or “FBO” the investor. After the funds are deposited in the bank account in the name of the advisor it can often readily be stolen or diverted from the account by the advisor. Traditionally, bank laws have been structured to protect the banks from liability for routine check processing functions absent proof of aiding and abetting fraud. In the check processing part of the bank, until relatively recently, there would ordinary be little evidence of knowledge by the bank of wrongdoing. However, with the advent of strict anti-money laundering laws and regulations (AML), banks must now monitor for and report suspicious activity. Thus, improper activity by the advisor of the nature described above should be flagged by the bank’s own surveillance system. If the “red flags” of wrongful activity by the advisor in its bank accounts are disregarded by the bank, this can constitute evidence of the bank’s knowledge of and responsibility for the fraudulent activity. Expect to see more court cases being filed against commercial banks for investor losses stemming from fraudulent activity of investment advisors who manipulate their commercial bank accounts to cheat investors.