Tags: compliance | fraud

Securities attorneys at Klayman & Toskes say they are investigating claims of UBS Financial Services customers who purchased the UBS Willow Fund, a private hedge fund formed in 2000. In October of 2012, investors were notified that the Fund would be liquidated. With the massive losses losses reportedly sustained by investiors in this UBS hedge fund, it's wise for RIAs to be aware of the case.

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According to a press release, "many investors were advised that the Fund was a safe, low risk product." The Fund has declined about 80%.

"K&T is investigating whether UBS adequately disclosed the risks associated with the Willow Fund," says the release, "as well as whether investors’ portfolios were over-concentrated in the Fund."

The individual brokers and advisors who sold the Willow Fund are not the target of this investigation.

K&T is looking into UBS’s conduct in connection with its marketing of the Fund to its customers, and whether the Willow Fund deviated from its disclosed strategy of investing in distressed debt and instead started speculating in foreign sovereign debt credit default swaps. It is believed that credit default swaps eventually led to the collapse of the fund, and caused investors to lose a substantial portion of their investment.

Tags: Advisor businesses | CFPB | client education | fraud | regulation

Consumer Financial Protection Board (CFPB), an agency created by Dodd-Frank Act as an uber-regulator of financial services in the U.S., issued a report and recommendations today addressing the problem to senior citizens by of designation proliferation. The report offers some very sound conclusions that any sensible, informed, and well-meaning individual would have to agree with, but whether or not CFPB’s recommendations will prompt any reform is anybody’s guess.

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The CFPB could turn out to be an agency with little power. It doesn't have the staff to police the securities industry and it's difficult to to know if the Securities and Exchange Commission, state regulators, or other regulators of the financial services industry will act on its recommendations. This report shows that the agency can study an issue and come up with some pretty obvious conclusions, but we'll have to see if it has the political capital to get anything done and whether it wants to spend that capital addressing issues that financial advice professionals care about. 

Some of the reports recommendations, which start on page 48, and some highlights are clipped below:

• The SEC may wish to consider establishing a centralized tool through which senior investors can verify a financial adviser’s designations.
   
• The SEC may wish to consider establishing a mechanism to capture complaints and enforcement actions against senior designation holders and consider reporting the data to designation providers consistent with and to the extent allowed by the Commission’s legal obligations.
   
• The SEC may wish to consider establishing a mechanism to capture complaints and enforcement actions against senior designation holders and consider reporting the data to designation providers consistent with and to the extent allowed by the Commission’s legal obligations.
   
• The Bureau found that the use of senior designations is extremely confusing for consumers. There are more than 50 different senior designations currently used in today’s marketplace with senior designees recommending or selling a variety of products, such as securities, investment opportunities, financial products.
   
• The titles and acronyms for the different designations are often similar or nearly identical to other designations, making it difficult for consumers to distinguish between different The use of senior designations is extremely confusing for consumers.
   
• Every senior designation is different, and there is a very wide range in their characteristics. For example, there are differences regarding training requirements, qualifying examinations, continuing education requirements, oversight by the conferring organization, complaint procedures for aggrieved clients, and accreditation. Moreover, the presence, depth and rigor of these components vary widely among designations.
   
• Rigorous training standards for the approved use of senior designations would reduce risks to consumers. If state and federal regulators imposed rigorous criteria for acquiring senior designations, including specific standards for qualifying prerequisites, education, training, and accreditation, consumers would likely encounter fewer designations, and those offered would require a consistent and a high-level of training and oversight. Rigorous standards of conduct for those using senior designations would reduce risks to consumers. If state and federal regulators set minimum standards for the conduct of senior designation holders, consumers would experience a more predictable, consumer-oriented market when shopping for senior financial expertise.

In FINRA arbitrations brought by disgruntled customers, Claimants routinely sue both the rep and the firm.  If the arbitration Panel issues a severe Award against you that makes no sense, your only recourse may be to bring a civil lawsuit demanding the Award be vacated pursuant to the Federal Arbitration Act.  The question arises however: what happens if you want to sue to vacate, but your firm just wants to pay up and move on--can you move forward alone?

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Recently, a Federal Court in Michigan issued a decision that bears directly on this issue.  In Intervest International Equities Corporation v. Aberlich, (12-CV-13750, E.D. Mich.) Defendant Aberlich was an investor who obtained a large damage Award against several parties in an underlying FINRA arbitration.  After the decision was issued, Intervest filed a civil lawsuit to have the decision vacated.  Aberlich sought to have Intervest's case thrown out, arguing that because not all of the Respondents in the underlying FINRA case had joined the lawsuit, the judge did not have the authority to take up Intervest's action to have the Award thrown out.  

The judge agreed with Aberlich, finding that it was essential that all the same parties to the FINRA case also be parties to the lawsuit challenging the Award, and that the court could not provide complete relief without all the same parties being in the new case.  The court reasoned that, because Claimants and all the Respondents agreed to be bound by the Award by virtue of their Arbitration Agreement, it could not consider whether the Award should be vacated or confirmed without all the Respondents from the arbitration participating in the challenge, and that to rule otherwise would be prejudicial to both the Claimants and the non-participating Respondent.

This decision has important implications for your professional reputation in the event you are sued in a FINRA customer arbitration.  In the event the Award does not go your way, and you want to file a lawsuit to get the decision overturned, your firm will have to agree to participate in the separate lawsuit.  Absent that participation, you may be stuck without a remedy, much like Intervest was in this case.  Having a frank discussion early on with your firm's legal department about its willingness to challenge a negative Award in the event the arbitration goes badly will help inform your litigation strategy, and whether you have a need to retain separate counsel to represent your interests.

Tags: compliance | RIA compliance | sec

RIAs better be accurate in disclosing how much money they manage. The Securities & Exchange Commission suddenly seems interested in such disclosures.

Umesh Tandon, 37, owner and chief compliance officer of an Simran Capital Management in Chicago, last week consented to a bar from the securities business for allegedly telling the California Public Employees Retirement System (CalPERS) that his firm managed more than $200 million when Simran actually managed only about $80 million.

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According to the SEC, Simran won a contract to manage money for CalPERS, one of the nation’s largest public pension funds, by marketing Simran as an experienced fixed income manager that applied a unique risk-averse strategy bearing a low correlation to equity and debt markets. CalPERS initially gave Simran $50 million to invest in May 2009, and the firm ran as much as $122 million for the pension fund in May 2010.

According to the SEC, CalPERS was one of at least 14 clients who agreed to hire Simran based on information that was purposely misleading.

An interesting side note: CalPERS fired Simran in April 2010, but it was only after a routine audit by the SEC that the agency found the allegedly fraudulent AUM figures. It’s unclear from the SEC cease and desist order whether CalPERS, which is known for shareholder activism, reported the allegedly inflated AUM figures to the SEC when it discovered them.

In addition to being barred from affiliation with a BD, RIA, and other securities businesses, ordered to disgorge $20,018 CalPERS had paid him, and to pay a $100,00 civil penalty plus interest.

RIAs that disclose their asset under management on their websites and in marketing materials should take note of this case. It's rare for the SEC to take action against a firm for misleading prospects and clients about how much it manages. However, with the SEC budget nearly doubling in the last few years, in compliance with the Dodd-Frank Act encated in July 2010, you can expect more actions like this one.