Securities Lawyer Blog

This is a very sad story. But in some ways it mirrors other recent cases the Securities Lawyer Blog has noted, in which the trust of unsuspecting investors is completely shattered by someone within their own community.

Earlier this month, the Securities and Exchange Commission (SEC) sought a civil injunction in Ohio against an Amish man who targeted mainly Amish investors in an "unregistered and fraudulent offering of securities" through a company called A&M Investments. This scheme occurred over a twenty-year period in which the defendant, Mr. Beachy, raised over $33 million from 2,600 mainly Amish investors.

The promise Mr. Beachy is alleged to have made to investors was that they would receive a return on their investments that was greater than that offered by banks. He said these returns would come from risk-free United States government securities. Many investors treated their relationship with the investment business, A&M Investments like a money market account and they withdrew funds from time to time.

Rather than invest as he promised his investors, Mr. Beachy is alleged to have "used the money to make speculative investments in high yield (junk) bonds, mutual funds, and stocks." And in its complaint, the SEC alleges that not only did he lose large amounts of his investors' principal, but he also falsified their monthly statements with fake rates of return, no information on their actual losses and inflated balances that were not accurate.

Investors were not aware that the $33 million they thought was in these accounts, was actually less than $18 million after the major losses that the investment company apparently suffered in the investments Mr. Beachy was making without authorization or knowledge of his investors. And now, the remaining assets of the investment company and what is left of the funds owned by formerly unsuspecting investors, are held by a bankruptcy trustee as Mr. Beachy has filed for Chapter 7 bankruptcy.

Although subject to the approval of the United States District Court for the Northern District of Ohio, Mr. Beachy has agreed to settle the action and has consented to entry of a permanent injunction in which he is enjoined from further violations under various provisions of the Securities Act and the Exchange Act.

New York City's Wall Street law firm, Gusrae Kaplan Nusbaum PLLC, represents brokers and traders before all regulatory agencies and handles securities and commodities litigation and appeals. Please contact our law firm to talk with one our lawyers about representation and our litigation and advisory practice. Our lawyers are former regulators and experienced litigators in all aspects of securities practice.

This week, FINRA settled with Lincoln Financial Securities, Inc. (LFS) and its affiliate, Lincoln Financial Advisors Corporation (LFA) for $600,000 in total fines relating to alleged failure of these entities to "adequately protect non-public customer information."

The sanctions imposed were most likely lower than they might have been, because FINRA considered the fact that these firms notified all customers impacted by the security issues and offered them both credit monitoring and restoration services for a one-year period.

This alleged security failure impacted more than 1 million customer accounts and included a lack of security application software in the personal computers of brokers working remotely. Further, due to Internal tracking failures, it was not possible for the firms to know which employees gained access to client accounts.

Although both the SEC and FINRA rules mandate the adoption of customer records security safeguards, this situation fell short. For several years, it was possible for both current and former employees of these firms to access customer accounts by logging onto any Internet browser, using shared login credentials. Confidential customer information was exposed in this web-based system so that employees from the firms were able to access customer accounts through any Internet browser via the system's website.

Part of what was lacking in this case was the mandated policy and procedure that would "monitor the distribution of the shared user names and passwords." This meant that tracking who was gaining access was not possible. Once access was gained there was a lack of security in place, which allowed users to view very specific customer information such as account balances and social security numbers.

Another layer of security was missing in that allegedly, the firms did not have procedures to disable these shared user names and passwords to customer accounts after employees were no longer with the firms. Even after employees were no longer working with the firms, there was no way for these entities to determine whether these individuals were continuing to access the confidential customer accounts and information.

It was certainly in the firms' best interests that they responded quickly to this situation and addressed it directly with customers. This likely saved them significantly, since FINRA took these actions into account when determining the sanctions.

Early intervention and legal counsel is very important in situations like this. That is why it is crucial for broker-dealers to seek the advice of legal counsel with significant experience in dealing with regulators. If you have any questions about a potential or ongoing regulatory situation with regard to your firm, contact New York's Gusrae Kaplan Nusbaum PLLC for expert legal representation as well as advice and counsel.

Earlier this week, the Securities and Exchange Commission (SEC) filed charges in an alleged scheme involving coordination between a hedge fund based in New York and four hedge fund portfolio managers and analysts. The allegations are that confidential information was used to trade illegally on information provided by various tech employees who were also "moonlighting as expert network consultants."

The SEC claims in its complaint that the coordinated scheme resulted in gains of $30 million that derive from trades based on "material, nonpublic information" about several tech companies such as AMD, Seagate Technology, Western Digital, Fairchild Semiconductor and Marvell.

These charges are part of a wider investigation being conducted by the SEC into insider trading that is predicated on expert networks. In this case, the allegations are based on technology company employees (expert network consultants) that secured "consulting fees" for illegal tips based on inside information. The named hedge funds and portfolio managers and analysts are then alleged to have traded on the illegal information.

Claimed to be trading on an illegal playing field, rather than a level one, Robert Khuzami, the SEC's Director Division of Enforcement said in a news conference and press release that "these hedge fund managers sought to illegally trade today on what others would not learn until tomorrow."

The SEC apparently intends to make clear to traders and analysts that there is difference between expert networks that "provide investment research" to clients, and those that provide "material nonpublic information obtained in violation of a duty to keep that information confidential."

New York City's Wall Street law firm, Gusrae Kaplan Nusbaum PLLC, represents brokers and traders before all regulatory agencies. Please contact our law firm to talk with one our lawyers about representation and our litigation and advisory practice. Expertise and experience, as well as the regulatory background of many of our preeminent lawyers, provides the legal support needed to help ensure the best outcomes.

Late last year, the Securities Lawyer Blog posted that the Financial Industry Regulatory Authority (FINRA) had proposed a rule change to enable customers to select an "all public panel." This week FINRA announced that the Securities and Exchange Commission (SEC) has approved this proposed rule change.

The new Optional All Public Panel Rule 12403(d) is the result of concerns about investor confidence as to how business is conducted Wall Street and the desire to enhance the investing public's perception of the fairness of arbitration proceedings when they have a dispute involving their investments. Providing "an additional choice" to investors in arbitration proceedings is intended in part to "increase public confidence in the fairness of [the} dispute resolution process," says FINRA Chairman and CEO, Richard Ketchum.

Prior to this change, panels have included one arbitrator that is in the securities industry and two public arbitrators. The all-public arbitration panel option will apply going forward, and will be available to those arbitrations for which the list of potential arbitrators has not been provided. FINRA is imposing a brief moratorium on sending arbitrator lists in customer cases with three arbitrators, from the time of the issuance of the SEC approval order and ending with publication of FINRA's Regulatory Notice.

After a lengthy pilot program that took place over a 27-month time frame, with 14 firms volunteering to participate, FINRA determined that in about 60 percent of the arbitrations included in the pilot, customers chose the all-public option. In many instances, investors also included a non-public arbitrator.

Public perception was apparently key in this rule change, as the ability to choose was a favorable part of the process for investors involved in the pilot. The "right to decide" whether a panel included a non-public member was strongly support by investors and consumer groups.

For detailed information on the new "Optional All Public Panel Rule" please click here.

Wall Street's Gusrae Kaplan Nusbaum PLLC acts as counsel to FINRA underwriters, placement agents and issuers in private placement and public offerings of equity and debt securities under the Securities Act of 1933, as amended. We also have extensive experience representing broker-dealers in all regulatory proceedings. Please contact our law firm to discuss legal representation before FINRA and other regulatory entities.