COVID-19 Update: How We Are Serving and Protecting Our Clients.

Arbitration at FINRA has long been known as a quicker, more efficient alternative to court litigation of disputes eligible for submission to FINRA’s Dispute Resolution forum.  This continues to be true, to an even greater extent, during the COVID-19 pandemic.

Many courts at the federal and state levels, both in New York and across the US, have indefinitely suspended the filing of new nonessential cases during this time. Courts have also frozen the commencement of trials and the perfection of appeals in pending cases. And conferences, depositions and other in-person court appearances cannot take place where social distancing and large-group gathering guidelines are in effect. Thus, both new and pending court cases are in large part on hold until further notice, to protect the safety of parties, court personnel and the public.

At FINRA, however, the processing and handling of arbitration cases is primarily done electronically, with very little need for in-person contact until the final hearings on the merits. Even during the current unprecedented situation, parties can still file new cases at FINRA using the Dispute Resolution Portal, and can choose arbitrators and engage in discovery. Because FINRA arbitration does not allow for depositions except in extraordinary circumstances, the discovery process and exchange of documents and information can be done completely remotely and electronically, and without delay.  Parties or potential parties should be reassured that their new or already-pending cases will continue to be administered as they were before the current pandemic.

Cantor Fitzgerald has a practice of awarding its FINRA registered employees compensation in the form of partnership units in an associated entity called Cantor Fitzgerald, L.P. (CFLP), which is not a member of FINRA.  The employees are often employed by or registered with Cantor Fitzgerald & Co. (CF&Co.), the main Cantor FINRA-registered broker dealer.  Many Cantor employees have employment agreements with CF&Co. which provide for payment in CFLP partnership units.  The compensation in the form of CFLP partnership units can only be for the employees’ work as FINRA-registered representatives for CF&Co since the employees don’t work for CFLP.

As Bloomberg reported. Cantor recently announced layoffs.  https://www.bloomberg.com/news/articles/2020-04-16/cantor-to-cut-hundreds-of-jobs-in-break-from-wall-street-pledge

Many employees who are laid off may own significant amounts of CFLP partnership units.  If an employee believes he or she is not being compensated fairly with respect to the partnership units, what can an employee do?  Our firm has handled this issue with Cantor before.  The answer, if the employee is a FINRA registered representative, is he or she can bring a FINRA arbitration against CF&Co. to recover the value of the partnership units.

We are increasingly hearing from investors who say that their investment representative at their “self directed” broker dealer—such as T.D. Ameritrade—recommended an outside investment advisor who was not formally affiliated with the firm and incurred investment losses as a result.

There could be many reasons why this may happen: the investment representative may have a financial arrangement with the advisor, or a personal relationship, or even just trying to be helpful. However, this is a problem that is obviously foreseeable for such firms, and sometimes lands an unwitting investor with a fraudster.  In fact, such firms discourage their investment representatives from giving any investment advice because that can expose them bring to potential liability if the advisor or advice is unsuitable or fraudulent. Nevertheless, investment representatives sometimes make recommendations of outside unaffiliated advisors to their customers.  The question is can the firm be legally responsible if the recommended advisor’s strategy is not suitable or fraudulent. The general rule is that if an investment representative recommends that a customer use an outside advisor, or even brings such an advisor or her strategy to the attention of the customer, the firm may be liable in FINRA arbitration to the customer if the advisor/strategy is unsuitable or fraudulent and losses are incurred as a result.

Brokerage firms that use the self directed business model try to protect themselves by inserting language in their client agreements that purports to absolve them of such liability. However, FINRA frowns on brokerage firm attempts to insulate themselves contractually for liability resulting from breach by their registered representatives of industry rules, such as the suitability rule. In addition, at least one FINRA panel has awarded damages against T.D. Ameritrade in just such a case. https://www.finra.org/sites/default/files/aao_documents/18-01404.pdf

The market for financial advisors to transition from one firm to another is thriving despite less broker dealers being part of the Broker Protocol, the global economy being at a near standstill, and millions of Americans applying for unemployment on a weekly basis. The wire houses are actively recruiting and Fidelity recently announced its hiring efforts: https://jobs.fidelity.com/ With a volatile stock market causing extreme angst among investors, advisors are in high demand as they calm unsteady nerves and identify investment opportunities for weary clients. Given these realities, it would seem an unlikely time for advisors to make the jump from one firm to another. But many advisors – and the firms who have stepped up their recruiting efforts during the pandemic – feel otherwise.

Attempting to move an entire book of business during unprecedented market volatility can certainly be a risky endeavor, but there are good reasons to consider taking the leap at this particular time. Having experienced counsel will help too.

First, in light of the stock market roller coaster of the past several weeks, investors are more inclined to remain with the advisor upon whom they’ve come to rely, regardless of which firm he or she works.

Mortgage REITs have often been recommended by brokerage firms as safe investments that generate consistent income.  However, during the recent market turmoil the bottom has fallen out for many Mortgage REITs.  For example, AGNC Investment and Annaly Capital are down over 50% in the last month or so, a way larger drop than the general equities markets.  Another Mortgage REIT, AG Mortgage, is down 75%.  Many of these mortgage REITs do not expect to be able to meet upcoming margin calls.

How did these mortgage REITs end up here?  Well, first of all, a REIT is a real estate investment trust which is a security that invests in real estate directly either through properties or in this case, mortgages or mortgage-related bonds.  The mortgage REITs listed above are publicly held and sold on exchanges. There are also what are called non-traded REITs which are often sold through broker-dealers and are not traded publicly.  Mortgage REITs invest and own property mortgages. They also loan money for mortgages to real estate owners, buy existing mortgages and purchase complicated MBS (mortgage-backed securities). Mortgage REITs generate revenue by collecting interest on the mortgage-related products.

As reported widely this week, the Mortgage REITs often fund themselves by pledging bonds in return for cash in the repo markets.  They are highly leveraged which in good times allowed them to pay dividends at higher yields than most bonds.  Brokers often recommend to investors to reach for yield in low yielding time periods and many brokers sold Mortgage REITs to investors without fully disclosing the risks associated with them.  In recent weeks, many Mortgage REITs found that the mortgage bonds they held dropped in value which triggered margin calls which then forced the Mortgage REITs to sell bonds into a falling market.

Margin call disputes often arise during times of market turmoil such as now.  Knowing what to do and whom to speak to when a margin call is issued is vitally important to an investor’s financial well-being.  Here is a little primer on what to do.

A margin call often occurs when the value of an investor’s margin account falls below the broker dealer’s required amount. A margin call is the broker dealer’s demand that an investor deposit additional money or securities so that the value of the account is brought up to the minimum value, which is known as the maintenance margin.  Some margin calls are small and an investor simply has to move securities in from another account or write a check to the broker.  However, in other situations, the acts by the broker dealer prior to the margin call being issued may have played a role in the margin call itself.

For example, a conservative investor often should not be holding any securities on margin at a brokerage firm.  If the firm recommended an unsuitable investment strategy that contained a significant amount of margin, and the market turned bad, and the investor sustained losses, said investor may have a potential FINRA arbitration claim against the broker.  In these situations, when a margin call is issued on the account, we highly recommend that the investor call a law firm such as ours who regularly represents investors in disputes with the financial industry.  It is paramount that the investor receives legal advice as soon as possible.  Most broker dealers have very broad powers in how to handle margin calls pursuant to onerous margin agreements.  The brokers sometimes even blow out investors’ portfolios without providing any notice (though they are supposed to exercise good faith in any decision they implement).  Time is usually of the essence.  It is important to have counsel engage with the broker dealer as soon as possible to potentially work out any issues.

Many firms, such as TD Ameritrade, Charles Schwab and Fidelity, whose business model includes or is tailored primarily to investors who want the benefits of a self-directed account also offer to introduce investors who wish independent investment advice to professional investment advisors who are technically “unaffiliated” with the firm.  Such investment advisors are often small SEC Registered Investment Advisors (“RIA”s) who are thinly capitalized and have supervisory systems that are well below FINRA broker dealer standards. The brokerage firms contract with such RIAs to be on their platforms and available to provide advice to customers that the firm introduces them to.   Those contracts are often designed to, among other things, insulate the brokerage firm from liability for investment advice given to the investor. This is so even though the brokerage firms vet such advisors, who become part of a “platform” they market to investors. Investors who are “introduced” by their firm to an RIA who will provide them investment advice may not realize that the firm’s position is that if the advice is inappropriate the RIA and not the firm is legally responsible.  Indeed, the firms structure their contracts with the customer as well as the RIA to give them this protection. Customers can be easily misled by such “introductions” into believing that the firm stands behind the RIA. Although the legal documents, couched in legalese, may so specify, the customer, who often does not read all the legalese in these documents, can be forgiven for believing that the firm that recommended the advisor and investment plan should have some responsibility if that advisor acts improperly. Investors at such firms need to know that they are taking a risk that if their firm recommended RIA gives them unsuitable advice they may be stuck suing a potentially judgment proof RIA in court (rather than the more cost effective FINRA arbitration).

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.

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 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.

Contact Information