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Investor Alert: Nutraceutical Stock Scams

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Nutraceutical Stock Scams—Don’t Supplement Your Portfolio With These Companies is the title of a new alert issued by the Financial Industry Regulatory Authority (FINRA) to warn investors about stock scams related to companies selling everything from fortified foods and energy drinks to “natural” medicines.

Like many investment scams, pitches for nutraceutical stocks may arrive in a variety of ways—from cold calls to email, tweets, blogs or message board posts.

Nutraceuticals are products that claim to help people to lose weight, get an energy boost, live longer or fight the common cold, and can include dietary supplements and food and drink products that contain additives purporting to provide health benefits. While some nutraceutical companies are legitimate, others could be bogus operations with the potential to harm unsuspecting investors.

The con artists behind nutraceutical stock scams may try to lure in investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly-traded companies that often have little or no history of financial success. The con artists behind these “pump and dump” scams can then sell off their shares, leaving investors with worthless stock.

One company claimed to have acquired rights to “all-natural” medicines that treat maladies ranging from the common cold to kidney disease. The company claimed it had “the potential to capture 3 percent of the US market within a 3 year period” and “potentially generate “$100,000,000 in revenues.” Investors who took a look at the company’s unaudited financials would have found a firm with almost no cash on hand and no track record of sales.

“While nutraceuticals claim to help people become healthy, investing in some of the companies associated with these products can make investors’ portfolios sick,” said Gerri Walsh, FINRA’s Vice President for Investor Education. “The best way investors can inoculate themselves against investment scams is to ask and check. Find out whether the promoter is licensed using FINRA BrokerCheck, and check out the investment using the Securities and Exchange Commission’s EDGAR database of company filings.”

The Alert warns investors to ignore unsolicited investment recommendations and to question the source of investment information. Investors should also be wary of investments that promise fantastic growth and check out the person promoting the stock or investment. Nutraceutical Stock Scams also includes detailed information to help investors spot potential scams and distinguish frauds from legitimate investment opportunities.

Florida Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

FINRA Sanctions Wells Fargo, Citigroup, Morgan Stanley & UBS

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Sales tactics for leveraged and inverse exchange-traded funds draw fines and client restitution requirements from FINRA.

The Financial Industry Regulatory Authority (FINRA) announced that it has sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

FINRA sanctioned the following firms:

  • Wells Fargo – $2.1 million fine and $641,489 in restitution
  • Citigroup – $2 million fine and $146,431 in restitution
  • Morgan Stanley – $1.75 million fine and $604,584 in restitution
  • UBS – $1.5 million fine and $431,488 in restitution

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”

ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

Leveraged and inverse ETFs have certain risks not found in traditional ETFs, such as the risks associated with a daily reset, leverage and compounding. Accordingly, investors were subjected to the risk that the performance of their investments in leveraged and inverse ETFs could differ significantly from the performance of the underlying index or benchmark when held for longer periods of time, particularly in the volatile markets that existed during January 2008 through June 2009. Despite the risks associated with holding leveraged and inverse ETFs for longer periods in volatile markets, certain customers of these firms held leveraged and inverse ETFs for extended time periods during January 2008 through June 2009.

In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Florida Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Recycle Tech (RCYT) of Miami Trading Suspended by SEC

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Securities trading is suspended in Recycle Tech, a Miami container home manufacturer.

The U.S. Securities and Exchange Commission (SEC) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the Exchange Act), of trading in the securities of Recycle Tech, Inc. (Recycle Tech), a Colorado corporation headquartered in Miami, Florida, at 9:30 a.m. EDT on May 2, 2012, and terminating at 11:59 p.m. EDT on May 15, 2012.

The SEC temporarily suspended trading in the securities of Recycle Tech because of questions that have been raised about the lack of current and accurate information concerning the securities of Recycle Tech because it has not filed a periodic report since its Form 10-Q for the quarterly period ending November 30, 2009, filed on January 13, 2010.

According to the firm’s website, “RCYT manufactures and delivers premium eco-friendly Container Homes, as well as LEED Certified Green Homes, Communities, Buildings, and City Structures across the world. These structures and developments, combined with a very affordable pricing structure, will decrease pollution, reduce waste materials, and increase the overall quality of life for millions of homeless and/or those in a low-income housing bracket. Green Building and Engineering Contractors (RCYT) is the only builder of container homes in South Florida.”

The SEC cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.

Further, brokers and dealers should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule.

Florida Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

SEC Suspends Trading in HydroGenetics of Fort Lauderdale

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HydroGenetics, Inc. of Fort Lauderdale, FL is subject to an SEC Order charging that the firm violated Sections 5(a) and 5(c) of the Securities Act of 1933 by issuing shares of its stock without a registration statement being in effect, or without an applicable exemption from registration.

The Securities and Exchange Commission announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the Exchange Act), of trading in the securities of HydroGenetics, Inc. (HydroGenetics), of Fort Lauderdale, Florida at 9:30 a.m. EDT on May 2, 2012, and terminating at 11:59 p.m. EDT on May 15, 2012.

The Commission temporarily suspended trading in the securities of HydroGenetics because of questions that have been raised about the accuracy and adequacy of publicly available information about HydroGenetics because it has not filed a periodic report since its Form 10 registration statement became effective in January 2005.

According to the firm’s website, President and CEO, Charles Hansen III is responsible for day-to-day operations and leading the strategic direction of HydroGenetics, Inc.

Furthermore, the HydroGenetics website reports that the firm “recently changed its business focus from acquiring emerging alternative energy companies and incubate into revenue producing, profitable businesses… to the research and development of a high quality on demand hydrogen assist fuel cell system for internal combustion gas engines that will significantly reduce the consumption of fossil fuel through a hydrogen on demand fuel cell and for the betterment of the environment. HydroGenetics, Inc also owns HydroAxis Technologies, Inc.”

The Commission cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.

Further, brokers and dealers should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule.

Florida Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Pinnacle Partners Financial Corp. Expelled by FINRA

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A FINRA hearing officer has expelled Pinnacle Partners Financial, Corp., a broker-dealer based in San Antonio, TX, and barred its President, Brian Alfaro, for fraudulent sales of oil and gas private placements and unregistered securities. In addition, Brian Alfaro was found to have used customer funds for personal and business expenses. As restitution, Pinnacle and Alfaro are ordered to offer rescission to investors who were sold fraudulent offerings and refund all sales commissions to those customers who do not request rescission.

On the day Alfaro and Pinnacle Partners were to appear before the hearing panel, Alfaro decided not to attend the hearing. As a result, the hearing officer issued a default decision.

The hearing officer found that from August 2008 to March 2011, Alfaro and Pinnacle operated a boiler room in which approximately 10 brokers placed thousands of cold calls on a weekly basis to solicit investments in oil and gas drilling joint ventures Alfaro owned or controlled. Alfaro and Pinnacle raised over $10 million from more than 100 investors, and that Alfaro diverted some of the customer funds for unrelated business and personal expenses.

The hearing officer also found that Pinnacle and Alfaro included numerous misrepresentations and omissions in the investment summaries for 11 private placement offerings, including grossly inflated natural gas prices, projected natural gas reserves, estimated gross returns and estimated monthly cash flows. Pinnacle and Alfaro deliberately attempted to mislead investors by deleting material, unfavorable information from well operator reports and providing investors with maps that omitted numerous dry, plugged and abandoned wells near their projected drilling sites. In addition, Pinnacle and Alfaro distributed an offering document claiming that a previous venture had distributed more than $14 million to its investors when the actual distribution was less than $1.5 million.

The hearing officer decision also notes that from January 2009 to March 2011, Alfaro misused customer funds entrusted to him with the belief that the funds would be used for drilling and production in the wells in which their ventures invested. The funds were used for Alfaro’s personal expenditures and for business purposes that were not related to the purposes of the customers’ investments. When projects failed or were failing, Alfaro concealed his misuse of customers’ funds by persuading them to transfer their investment to his other oil and gas ventures. In one instance, Alfaro collected more than $500,000 in subscription costs for a well that was never drilled, and used those funds for unrelated personal and business expenses.

In April 2011, FINRA had suspended indefinitely Pinnacle and Alfaro for failure to comply with a FINRA Temporary Cease and Desist Order prohibiting their fraudulent misrepresentations. The suspension resulted from FINRA’s Notice of Suspension, which alleged that Pinnacle and Alfaro had continued to make fraudulent oral and written misrepresentations and omissions in connection with their offer and sale of certain oil and gas joint interests, and had otherwise failed to comply with the terms of the Temporary Order FINRA issued on January 21, 2011.

FINRA was represented at the hearing by Mark Dauer, Enforcement Deputy Chief Litigation Counsel, and Robert Long, Enforcement Senior Regional Counsel.

With a default decision, unless the hearing officer’s decision is appealed to FINRA’s National Adjudicatory Council (NAC) or is called for review by the NAC, the hearing officer’s decision becomes final after 25 days.

Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Pay Disclosures May Await Brokers Switching Firms

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Industry observers expect FINRA may soon begin requiring that highly-paid brokers who are lured from one financial services firm to a competitor must disclose any “enhanced compensation” that sweetened the employment offer. The Wall Street Journal reported on the expected move recently in an article titled “Brokers Face Pay Disclosures.”

FINRA closed comments in March on a proposed rule to require disclosure of conflicts of interest relating to recruitment compensation practices (Regulatory Notice 13-02).

At issue is what brokers must disclose when clients naturally follow them to a new firm on the basis of personal relationships, or when the broker attempts to encourage a client to move their account to the broker’s new place of employment.

The term “enhanced compensation” means compensation paid in connection with the transfer of securities employment to the recruiting firm, other than the compensation normally paid by the recruiting firm to its established registered persons. Enhanced compensation includes but is not limited to:

  • Signing bonuses
  • Upfront or back-end bonuses
  • Loans
  • Accelerated payouts
  • Transition assistance
  • Other similar payments

Investor protection is behind FINRA’s initiative. Many member firms offer significant financial incentives to recruit registered representatives to join their firms, according to FINRA, yet these compensation arrangements are not disclosed to customers when they are asked to transfer their accounts to a representative’s new firm.

Morgan Stanley, with 17,000 financial advisors, “fully supports the uniform disclosure of firms’ recruiting compensation arrangements as outlined in the Rule Proposal,” according to a firm comment letter submitted to FINRA. The University of Miami School of Law Investor Rights Clinic “supports the aims of transparency and disclosure … but would suggest certain modifications.” Click on the link to read all FINRA comment letters.

The proposed FINRA rules are intended to apply to financial services companies regulated by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), state securities authorities, and related firms.

Exemptions are provided for compensation under $50,000 or institutional customer accounts.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Do-It-Yourself IRAs Result in Litigation

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Lawsuits targeting custodians of self-directed IRAs made the news this week, in a Wall Street Journal article titled “New Suits Over Do-It-Yourself IRAs.”

A self-directed individual retirement account (SIDRA) is an IRA held by a trustee or custodian that permits investment in a broader set of assets than is permitted by most IRA custodians.

SIDRA investment options may include tax lien certificates, promissory notes, real estate, businesses, and LLCs.

The Retirement Industry Trust Association reports that self-directed IRAs have grown rapidly in the past three years, and now make up an estimated 2% to 5% of the $4.6 trillion held in IRAs overall.

According to the Wall Street Journal, experts expect to see more SIDRA lawsuits, as regulators fight investment frauds involving older Americans’ retirement savings.

Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

FINRA Board Authorizes Arbitration Panel Changes

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The FINRA Board of Governors authorized FINRA to file with the SEC proposed amendments to FINRA Rule 12403 to simplify the panel selection rules.

Rather than requiring the customer to elect a panel selection method, parties in all customer cases with three arbitrators would have the same selection method.

Under this method, all parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The rules would permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list.

Alternatively, if the parties leave on the non-public list one or more of the same non-public arbitrators, the parties could have a majority public panel—that is two public and one non-public arbitrator.

Other actions from the FINRA Board’s April 18th meeting include:

  • Beginning with the next FINRA Board meeting in July, designated Board members will host a webcast immediately following the meeting to share key points with investors.
  • The Board authorized FINRA to file with the SEC proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases, and to clarify existing provisions relating to affirmations.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Goldman Sachs Lacked Adequate Policies for Research “Huddles”

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Goldman agreed to pay a $22 million penalty and consent to a censure, a cease-and-desist order, and undertakings to settle SEC charges that the firm lacked adequate policies and procedures to address risks associated with weekly “huddles.” Huddles were a practice where Goldman’s stock research analysts met to provide their best trading ideas–frequently material, nonpublic information about upcoming research changes–to firm traders and later passed them on to a select group of top clients.

Goldman also agreed to review and revise its written policies and procedures to correct the deficiencies identified by the SEC. The Financial Industry Regulatory Authority (FINRA) also announced today a settlement with Goldman for supervisory and other failures related to the huddles.

The Commission’s Order finds that from 2006 to 2011, Goldman held weekly huddle meetings in each of its research sectors, sometimes attended by sales personnel, in which analysts discussed their top short-term trading ideas and traders discussed their views on the markets. Beginning in 2007, Goldman began a program known as the Asymmetric Service Initiative (ASI), in which analysts shared information and trading ideas from the huddles with select clients. The huddles and ASI were extensive undertakings by Goldman and were created with the goals of improving the profitability of the firm’s traders and generating increased commission revenues from ASI clients.

Research analysts were made aware of the importance of huddles and ASI to Goldman and to their own evaluations and potentially their compensation. The huddle program created a serious and substantial risk that analysts could share material, nonpublic information concerning upcoming changes to their published research with ASI clients and the firm’s traders. The risks were further increased by the fact that many of these clients and traders were frequent, high-volume traders. Despite those risks, Goldman failed to establish adequate policies or adequately enforce and maintain its existing policies, to prevent the misuse of material, nonpublic information concerning upcoming changes to its research.

The Order also finds that Goldman conducted limited surveillance of trading ahead of research changes, but did not perform any surveillance specifically related to huddles. Furthermore, Goldman’s surveillance of trading ahead of research changes was not reasonably designed to ensure that analysts were not prematurely disclosing material research changes to firm traders and clients, either through the huddles, ASI or otherwise.

In 2003, Goldman paid a $5 million civil penalty and disgorgement and interest totaling more than $4.3 million to settle SEC charges that, among other violations, Goldman violated Section 15(f) of the Securities Exchange Act of 1934 (the Exchange Act) by failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information obtained from outside consultants concerning U.S. Treasury 30-year bonds. In re Goldman Sachs & Co., Exchange Act Rel. No. 48436 (Sept. 4, 2003). Goldman settled the SEC’s 2003 proceeding without admitting or denying the findings.

The Order issued today finds that Goldman willfully violated Section 15(g) of the Exchange Act (previously Section 15(f)). The Commission censured the firm and ordered it to cease and desist from committing or causing any violations and any future violations of Section 15(g) of the Exchange Act.

Goldman was ordered to pay a civil money penalty of $22 million, $11 million of which shall be deemed satisfied upon payment by Goldman of an $11 million civil penalty to the Financial Industry Regulatory Authority in a related proceeding.

In addition, Goldman agreed to complete a comprehensive review of the policies, procedures, and practices relating to the findings of the Order, and to adopt, implement and maintain practices and written policies and procedures consistent with the findings of the Order and the recommendations contained in the comprehensive review. In June 2011, Goldman entered into a consent order relating to huddles and ASI with the Massachusetts Securities Division (Docket No. 2009-079).

In the SEC’s action, Goldman admits to the factual findings to the extent those findings are also contained in Section V of the Massachusetts Consent Order, but otherwise neither admits nor denies the SEC’s findings. (Rel. 34-66791; File No. 3-14845)

Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

FINRA Fines David Lerner Associates $2.3 Million

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David Lerner Associates, Inc. (DLA) of Long Island was fined $2.3 million by FINRA, the Financial Industry Regulatory Authority, for selling municipal bonds and collateralized mortgage obligations (CMOs) to retail customers at unfair prices, and for supervisory violations. In addition to providing restitution to customers, the firm’s head trader, William Mason is suspended and fined $200,000. The ruling resolves charges brought by FINRA’s Department of Enforcement in May 2010.

The panel found that from January 2005 through January 2007, DLA and Mason charged retail customers excessive markups in more than 1,500 municipal bond transactions and charged excessive markups in more than 1,700 CMO transactions from January 2005 through August 2007. FINRA rules require that the amount of a markup must be fair and reasonable, taking into account all relevant factors and circumstances, including the type of security involved, the availability of the security in the market and the amount of money involved in a transaction.

The hearing panel decision notes that DLA’s municipal bond and CMO trades reflected a pattern of intentional excessive markups. The municipal bonds and CMOs in the transactions were all rated investment grade or above, and were readily available in the market at significantly lower prices than DLA charged.

The panel noted that DLA charged markups on the municipal bonds ranging from 3.01 percent to 5.78 percent and charged markups on the CMOs ranging from 4.02 percent to 12.39 percent. Regardless of whether a DLA customer bought as much as $225,000 or as little as $8,000 of a CMO, the price was marked up “without consideration for the amount of money involved in the transaction.” The hearing panel concluded that as a result of the unfair markups, the customers received lower yields than they would have received if the markups had been fair and reasonable.

The panel also found that DLA’s supervisory system for its municipal bonds and CMOs was inadequate on several levels. DLA failed to establish and maintain adequate procedures to monitor the fairness of pricing for municipal bonds and CMOs, and failed to have adequate procedures in place to ensure that it recorded the time that the municipal bond orders were received from customers. DLA also failed to record the order receipt time of municipal order tickets.

In determining the sanctions, the panel took into consideration DLA’s relevant disciplinary history. Despite having received a Letter of Caution raising FINRA’s concerns about DLA’s markup practices after a 2004 exam, and after having received a Wells Notices concerning the matter in July 2009, DLA continued its unfair pricing practice. The panel’s decision notes that “in keeping with their unwillingness to accept responsibility, DLA has not taken any corrective measures to improve their fixed income markups policies and practices.”

Unless the hearing panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel’s decision becomes final after 45 days.

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.