Securities Law Blog

On June 26th, the Massachusetts Secretary of State sued UBS Financial Services Inc. alleging the firm defrauded clients by telling them that investments in auction-rate securities were safe and liquid when it knew they were not. At least 24 class action lawsuits related to auction-rate securities have been filed and nine states have joined together to investigate the marketing of the securities.

A copy of the complaint can be found here http://www.sec.state.ma.us/sct/sctubs2/ubs2_complaint.pdf.

Massachusetts Secretary of State, William Galvin, discusses the charges here http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vZ0PZQ1teXHk.asf.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

FINRA has told industry members that it is serious about cracking down on brokers who falsely claim to have expertise in certain investment areas. Recently, the SRO put out a rule proposal limiting the tools that some brokers use to promote, and sometimes exaggerate, their expertise in certain areas. Many brokers host seminars and other sessions and show off books or magazine articles that they claim to have written to demonstrate their expertise in a given investment area. The problem often is that the broker did not write them. It is a ploy to gain the trust and confidence of investors, especially seniors. So FINRA has put forth a rule proposal that states that brokers can no longer fabricate such publications and that member firms must document their brokers’ expertise. “Registered representatives may not suggest (or encourage others to suggest) that they authored investment-related books, articles or similar publications if they did not write them,” FINRA said in its rule. The regulator discovered this issue as it was conducting its recent sweep of brokers who market to seniors. As part of their “free lunch” seminars, brokers were giving away such publications to the participants as a way to demonstrate their knowledge about investing. FINRA uncovered different types of publications brokers used, including books, magazine and online articles the broker had altered to appear as if he wrote them. Other brokers showed interview-style broadcasts, where it looked as if a neutral party was questioning him about investments. But the entire presentation was a just a sales ploy. The problem is not limited to just the brokers who deal with senior investors. The regulator also found firms that put together the documents specifically for brokers to mislead investors. “Some third-party vendors market ghostwritten books on senior investing to registered representatives as tools to establish credibility,” FINRA stated. “Implying that one is the author of a book on senior investing, and therefore an expert, could violate a number of rules ... these concerns would apply to any ghostwritten publication.” FINRA also decided to remind firms in its rule proposal specifically about marketing to seniors and. It stated that providing reps with certain job titles to make them appear to be more of an expert than they are with regards to senior investors is also problematic. “Firms that allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist may violate NASD Rules 2110 and 2210, Incorporated NYSE Rule 472 and, possibly, the antifraud provisions of the federal securities laws,” FINRA said. “This concern applies to the misuse of any title or designation in a manner that exaggerates the representative’s expertise or implies expertise where none exists. In addition, some states prohibit or restrict the use of certain senior designations.”

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

FINRA recently proposed a rule amendment that would require firms to report allegations of sales practice violations against an individual broker made in arbitration hearings or civil lawsuits, even if the individual in question is not named as a respondent or defendant. At the same time, the self-regulatory organization said it also is proposing to raise the dollar threshold under which customer complaints and settlements must be reported to CRD. FINRA explained that currently firms are required to report customer allegations against a broker in an arbitration claim or civil litigation complaint only if the legal document specifically names the broker as a respondent. Similarly, a settlement or ruling resolving the allegations also need not be reported if the broker is not named as a respondent. The SRO related, however, that “increasingly in recent years,” claimants and their lawyers have been naming only the firm in legal actions “to bolster their ability to settle their disputes more easily prior to hearing, or to litigate if they do not settle.” The result, FINRA said, is that “neither the allegations of sales practice violations made against the unnamed brokers nor the disposition of those proceedings are reported” to CRD. “Consequently,” it continued, “that important information is unavailable to regulators, to prospective broker-dealer employers and to the investing public through FINRA BrokerCheck.” At the same time, however, FINRA noted that if an investor were to make the same allegations against a broker in a written complaint to the firm, the firm and the broker would be required to report the complaint and its contents to CRD within 30 days. The resulting information also would then be available to regulators and to the public. FINRA said its proposed rule amendments were “aimed at eliminating the inconsistency regarding the reporting of alleged sales practice violations by brokers.” FINRA said it also was proposing raising the dollar-amount threshold for reporting customer complaints and settlements to the CRD. Currently, the threshold is $10,000; the SRO wants to raise it to $15,000 “to more accurately reflect today’s business conditions.” Further, FINRA said it also was proposing a rule amendment to allow firms to change the “reason for termination” and “date of termination” sections of the Form U-5, which is filed when a broker separates from a firm. As of now, FINRA explained, those sections cannot be changed absent a court order or arbitration award.

The FINRA Press Release may be found at http://www.finra.org/PressRoom/NewsReleases/2008NewsReleases/P038380

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

Brooks Automation Inc. settled Securities and Exchange Commission charges in the U.S. District Court for the District of Massachusetts May 19, 2008 accusing it of improperly accounting for employee stock options, resulting in an overstatement of income and understatement of employee compensation by more than $64 million over 10 years, the SEC announced (SEC v. Brooks Automation Inc., D. Mass., No. 08-CV-10834, 5/19/08). Brooks, a semiconductor equipment company, agreed to a permanent injunction against further violations of the federal securities laws. It settled without admitting or denying the allegations. The Commission said the settlement reflected Brooks’ “swift, extensive, and extraordinary cooperation” with the investigation. Brooks’ former president and chief executive officer, Robert Therrien, is the subject of a separate SEC enforcement action taken in July 2007. The SEC alleged that Therrien received millions of dollars in undisclosed compensation by backdating his exercise of options to purchase company stock. At the same time, he was indicted on a tax evasion charge for his alleged conduct in connection with a specific, November 1999 option transaction. According to the Commission, Therrien’s alleged actions and also “improper accounting” by Brooks resulted in misleading disclosures from 1996 through 2005. In 2000, for example, Brooks overstated its net income by as much as 30 percent, the SEC said. “Brooks,” the SEC said “misstated that all stock options were granted at or above the fair market value of the stock on the date of the award, when that was not the case.”

The Litigation Release for this matter may be found at http://www.sec.gov/litigation/litreleases/2008/lr20584.htm

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

Massachusetts “investment adviser” Stephen L. Hochberg was charged May 21,2008 in the U.S. District Court for the District of Massachusetts with misappropriating more than $1.7 million in client funds to pay off personal debts “and to finance an expensive lifestyle,” the Securities and Exchange Commission announced (SEC v. Hochberg, D. Mass., Civil Action No. 08-10848, 5/21/08). The Commission is seeking a permanent injunction, an officer/director bar, disgorgement plus prejudgment interest, and civil penalties. The SEC alleged that between September 2002 and August 2007, Hochberg obtained at least $1.6 million for seven investors for a nonexistent real investment fund, Realty Funding LLC. Moreover, in June 2003 and April 2004, “Hochberg obtained $150,000 from an elderly widow on fixed income for a purported investment in Massachusetts municipal bonds.” The SEC charged that in both schemes, Hochberg – “an accountant turned business consultant and unregistered investment adviser” – never invested any of the money. Instead, he allegedly used investor funds to pay off debts, to pay past investors or others who either had sued him or were threatening to do so, “and to pay various personal expenses, including payments to lawyers, credit card companies, and car payments.” He also allegedly spent investor funds on liquor store purchases, sporting events, and a clown and a juggler.

The SEC Litigation Release in this matter may be found at http://www.sec.gov/litigation/litreleases/2008/lr20591.htm.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.