Securities Lawyer Blog

The Auction Rate Securities troubles continue as the The Financial Industry Regulatory Authority (FINRA) has entered into a $3 million settlement with Nuveen Investments for "creating misleading marketing materials used in sales of auction rate preferred securities (ARPS)." Although a form of ARS, the Nuveen Funds' ARPS were preferred shares that were issued by closed end mutual funds which in turn were used to raise money for investment.

According to FINRA, one of the central problems with these ARPS were the materials used by third-party broker-dealers to sell them to customers. A staggering $15 billion of these securities were sold by third parties, but Nuveen created the marketing brochures for these securities.

Among the allegations were that these materials did not adequately disclose liquidity risks (which was a major problem with other ARS sold by other firms); there was no statement that the auctions could fail at some point, or that if they did fail, customers would not be able to gain access to their funds for some time. As was the case with ARS products sold by other firms, these were positioned as safe and liquid. Finally, FINRA alleged that the firm had failed to maintain adequate supervisory procedures that would make certain the materials reflected the actual risks of investing.

Prior to the wider failure of the auctions which impacted all ARS, the firm is alleged to have known of a problem with the auctions when its lead auction manager advised the firm that it would no longer manage these securities. An auction failed as early as January 2008 -- when the wider problem with these securities occurred in February. This led FINRA to conclude that Nuveen knew that liquidity could become a serious problem, but did not change its marketing of these securities or advise customers of the risks which kept them from knowing critical investment information.

Nearly all but $1 billion in these Nuveen securities have been redeemed. As part of the settlement, the firm has committed to continue the redemption process.

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues, including maintaining adequate supervision and providing marketing materials that properly disclose risks. Contact our law firm to consult with one of our attorneys.

As Wall Street securities lawyers, we know what the law requires and what regulators expect from broker-dealers and we routinely advise industry representatives on compliance so that they can avoid potential problems traversing the vast regulatory schemes that govern the securities industry.

The consequences to a broker-dealer for failing to comply can be harsh. Losing the ability to work in the industry is one of the harshest blows one can experience. We report on cases in which industry members have been fined or barred so that others might ensure that they are in compliance and are reminded of some of the activities that can lead to major consequences.

In a recent case out of Chicago, a now-former registered representative has been barred by the Financial Industry Regulatory Authority (FINRA) for two major alleged breaches of industry rules and regulations: insider trading and failing to truthfully respond to questions by investigators in FINRA's Office of Fraud Detection and Market Intelligence (OFDMI).

The former representative has also been fined for the illegal profits gained during illegal transactions. He had served as a divisional vice president of Pacific Select Distributors, Inc. for a five-year period.

During this time, he obtained significant insider information about Boots & Coots, Inc. (WEL) that the company was about to be acquired. He then purchased 73,000 shares of the company prior to the acquisition by Halliburton, which resulted in nearly $70,000 in illegal gains. He then sold his shares and profited as a result. While working this case, FINRA found that this representative had "purchased shares of WEL while in possession of material, non-public information about the company's pending acquisition."

FINRA also found that he allegedly failed to comply with FINRA Rule 8210, requiring an individual who is under investigation to testify truthfully while under oath. Rather, it is alleged that the member gave untruthful statements to OFDMI investigators responding with false information that the WEL shares were purchased based on research that he had performed. He did not disclose that an insider provided him with information and denied knowing anyone "currently or formerly employed at WEL." But this allegedly turned out to be false.

This case underscores the fact that FINRA has made its intentions clear to members -- they will deal "aggressively with any individuals who lie to or mislead our investigators."

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters before FINRA and other regulatory agencies. Our lawyers advise and defend industry members in matters involving a broad spectrum of issues before regulatory bodies, including sales practice violations; Forms U4 and U5 reporting violations; Insider trading; Trading issues and many more areas of regulation and enforcement. Please contact our law firm to consult with one of our attorneys.

When firm's sell mutual fund shares to customers, delivery of the fund prospectus matters and for some that is a tough lesson to learn. Wells Fargo Advisors has just agreed to settle its alleged failure to timely delivery prospectuses to customers in the purchase of mutual funds in 2009.

The Financial Industry Regulatory Authority (FINRA) issued a press release yesterday to announce that the firm has agreed to pay $1 million for prospectus delivery delays. In addition, the firm is settling alleged delays in informing and reporting to customers fully about certain issues involving arbitrations and complaints with mutual fund representatives.

The allegations center around prospectuses for mutual funds that were allegedly delayed from as little as one day and as long as 153 days. The federal securities laws require that these be delivered within three business days after the transaction has occurred.

But the problem for Wells Fargo apparently did not end with delivery issues. According to the allegations in this matter, the outside provider that mails prospectuses for the firm informed Wells Fargo that some customers did not receive them in a timely manner. FINRA alleged that even after learning of this, Wells Fargo did not rectify the situation.

The notice to Wells Fargo was provided in the form of quarterly reports that apparently revealed that a percentage of the mutual fund purchasers had not received timely mailings. Further, the firm received notice in daily reports that delivery had not been accomplished for some customers. The firm did not correct the situation even after receiving more specific notice of this problem.

A tough lesson learned, but the lessons did not end there. The firm also settled alleged violations of FINRA rules in addition to these allegations. FINRA claimed that Wells Fargo "did not promptly report required information to FINRA regarding its current or former representatives."

Specifically, the requirement under FINRA rules that a securities firm ensure that Forms U4 and U5 are current regarding a representative's termination, formal investigation, customer complaints or arbitrations. As part of this matter, FINRA determined that the firm did not update about 8 percent of Forms U4 and over 7 percent of Forms U5 in a timely manner.

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues before FINRA and other regulatory bodies, including sales practice violations; Forms U4 and U5 reporting violations; Insider trading; Trading issues and many more areas of regulation and enforcement. Contact our law firm to consult with one of our attorneys.