Bar Harbor Taxi Business Owner Indicted in Multimillion Dollar Penny Stock Scheme

The Bangor Daily News reports that Joseph Dervali, owner of a Bar Harbor-based taxi company, has been indicted for his alleged involvement in a stock manipulation scheme that defrauded investors of hundreds of millions of dollars.

It is alleged that Dervali, and others, between April 2009 and May 2012, promoted penny stocks while conspiring with individuals in control of public companies to “pump-and-dump” the companies’ stock. Dervali, and others, allegedly controlled numerous penny stock websites, from which they promoted the sale of the stocks to thousands of investors.

These individuals, including Dervali, allegedly acquired public shell companies with which to issue millions of shartes to themselves, associates and family members, in order to control the supply of those shares and drive up the price of the stock. Potential investors were encouraged to purcahse shares. As demand and the price of shares rose, they allgedly "dumped" their shares, causing the stock price to plummet leaving investors with nearly worthless investements.

Dervali was recently arrested by Bar Harbor police at the request of New York City Police. He was extradicted to New York where he plead not guilty to eight counts of scheming to defraud in the first degree and four counts of violating the Martin Act.

SEC Approves FINRA Rule 2081 Regarding Prohibited Conditions Relating to Expungement of Customer Dispute Information

By notice issued Monday July 28, 2014, the SEC approved FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of Customer Dispute Information) to prohibit member firms and associated persons from conditioning settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not oppose, the request to expunge such customer dispute information from the Central Registration Depository (CRD).

This is the latest step in what has been a longstanding FINRA concern about the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief and, thereby, removing information from CRD that could be useful to investors.  In approving the rule change the SEC concluded that it is “a constructive step to help assure that the expungement of customer dispute information is an extraordinary remedy that is permitted only in the appropriate narrow circumstances contemplated by FINRA rules.”

The CRD contains a variety of licensing and registration information, including disciplinary information about registered personnel.  Information accessible by the public through FINRA’s BrokerCheck comes from the CRD system.

The rule is effective immediately.

Claimants' Perspective: What to Do When FINRA Enforcement Launches Inquiry in Response to Filing an Arbitration Claim

An investor may file a complaint before contacting an attorney.  And every now and then FINRA finds the allegations in an arbitration claim interesting and decides to ask questions and launch an investigation after a claim has been filed.  What considerations should a claimant's attorney (or claimant if representing himself or herself) have in mind when that happens?

1. The claimant may learn important information relevant to a claim by cooperating with FINRA.  Of course, respondent may pick up information too.

2. If FINRA asks questions of the respondent, then the claimant should ask to see the questions and the responses.  I have seen the broker disclose to FINRA information and documents that I had not received (and should have) in discovery.  I have also seen brokers provide such information on request or, if not, panels have ordered that brokers provide information in discovery over objection.  A claimant would be well advised to think hard about putting information in writing in response to a FINRA request.  A  respondent has little choice. but to provide written responses. 
 

3. Even if FINRA decides not to pursue enforcement or issues a no action letter, FINRA has taken steps to prevent respondents from exploiting that decision to their advantage at arbitraiton hearings.  I recently saw the following language at the end of a 2014 FINRA no action letter:

 

"It is our view that a determination by FINRA not to take action against a FINRA member or a member's associated person in connection with an examination has no evidentiary weight in any mediation, arbitration or judicial proceeding.  Further, it is inconsistent with just and equitable principles of trade for a FINRA member or a member's associated person to attempt to introduce such a determination into evidence in any of these forums."

FINRA's "Investor Complaint Program" booklet advises that a decision to close an investigation without taking discplinary action "can result from many factors unrelated to the merits of a complaint . . . ."  The same booklet states that it is "inconsistent with" the rules for a brokerage firm or its employees to even "attempt to introduce" a no action determiantion into evidence. 

4. If the claimant does not cooperate FINRA will proceed anyway and draw its own conclusions, possibly conclusions that would have differed if the claimant had been willing to cooperate.  FINRA states, "Without your cooperation we may be unable to take disciplinary action against a brokerage firm or its employees.  A complaint, by itself, without supporting evidence may not be sufficient to prove a rule violation.  That's why it is important that you be willing to speak with FINRA staff, provide documentation or supply a sworn statment of facts supporting your complaint." 

 

5. "X" factors.  Each case and client is unique. 

 

Conclusion.  An investor's decision whether to cooperate with FINRA depends on the facts and circumstances of each situation.  If an investor's purpose is recovery money or securities, a complaint to FINRA is not going to accomplish that goal -- a point FINA itself has made: "If your purpose in filing a complaint is to recover money or securities, we suggest that you also consider arbitration, mediation or the courts.  You may want to contact an attorney that specializes in resolving securities complaints to advise you." 

 

 

 

 

 

Maine Supreme Court Affirms Revocation of Securities Licenses

In North Atlantic Securities, LLC et al. v. Office of Securities, 2014 ME 67, an individual, his son and entities under his control received more than $200,000 in loans from the individual’s mother-in-law, a former client. On at least three occasions, the individual copied and pasted a copy of his mother-in-law’s signature to authorize additional borrowing. During this time, written supervisory procedures were in effect which specifically provided that a Registered Representative may not “Lend[] to or borrow[] from a client” and that forgery “. . . will lead to severe disciplinary action against the employee.”

The Securities Administrator found the individual committed unlawful practices by: (1) borrowing from a client when written supervisory procedures did not permit such loans; (2) using loan proceeds for purposes other than the intended purpose; (3) creating authorization letters that bore forged, cut-and-pasted signatures; and (4) making false statements under oath to the Office of Securities during the disciplinary proceeding. The Administrator revoked the securities licenses of the individual and two related entities.

The Maine Supreme Court affirmed, finding no bias on the part of the Administrator. It also found the penalties imposed were not excessive. Interestingly, the Court afforded little weight to the fact that the individual’s mother-in-law did not object to the conduct or seek sanctions, because he “impermissibly placed his own interests ahead of his client.” The Court found lying under oath and submitting false documents “substantial justification” for harsh sanctions.

 

North Atlantic Securities demonstrates that conduct by a broker-agent in contravention of written supervisory procedures will inevitably result in disciplinary action. Equally interesting is the severity of the sanctions even in the face of the victim’s sentiment. Clearly, a broker-agent’s engagement in a course of misconduct on more than one occasion, resort to forgery and deception to avoid responsibility are factors likely to result in harsh penalties.

FINRA Arbitrators: "Dubious, Asleep, Sometimes Dead?"

According to a recent Bloomberg News article FINRA arbitrators are "dubious, asleep, sometimes dead."  The article makes the case that FINRA should do more to ensure that its arbitrators are up to snuff.  And FINRA could do more.

But the article contains for the most part anecdotal information.  Little in the way of hard data shows up to support the notion that the horror stories presented in the article are common place.  To be sure such data is hard if not impossible to come by.  Still, reporting that in 1994 nearly 9 out of 10 arbitrators were white men over age 60 is stale news.  The story may be that the only real information on the demographics of FINRA arbitrators is now 20 years old -- but if that is the case the article does not make that absolutely clear.

I cast my vote in favor of arbitrator pools that are larger, more diverse, vetted more carefully, and (as FINRA has recently begun to address) afforded greater compensation.  But for those who prefer the jury system, we have a long way to go before jurors are paid adequately for their time (they are not), and more could be done to ensure diverse and well vetted jury pools as well.  As for federal judges, 70% are white men, although that has been changing.

When criticizing the FINRA arbitration process one would do well to ask, "compared to what?"

New England Securities Arbitration Hearing Locations: Where Are They and How Many Hearings Have Been Held?

Each New England state has its own securities arbitration hearing location, although the parties can stipulate to change the location (with arbitrator approval) at their cost.  The locations in each of the New England states and the number of awards appearing on FINRA's Arbitration database online for each location are as follows:


Maine: Augusta (8)
Massachusetts: Boston (513)
New Hampshire: Manchester (17)
Vermont: Montpelier (7)
Rhode Island: Providence (18)
Connecticut: Hartford (98)


The Boston location has been in use the longest, and that biases the results but only to a point -- over 200 hearings have been held in Boston since 2006, after all of the other hearing locations in New England had gone live.  The Hartford hearing location came on line in March 2004, followed by Providence (December 2004), and Augusta, Manchester, and Montpelier (March 2005).

What you don't know can't hurt you? -- Gaps in FINRA's BrokerCheck.

A new study hot off the presses by the Public Investors Arbitration Bar Association (PIABA) raises tough questions about gaps in the Financial Regulatory Authority's BrokerCheck tool for checking the background and credentials of stock brokers and other licensed professionals in the scurities industry.

The PIABA report can be accessed on the organization's website here. The headline on PIABA's press release, "PIABA WARNING: FINRA WITHHOLDS CRITICAL 'RED FLAG' INFORMATION IN BROKER BACKGROUND CHECK DISCLOSURES TO INVESTORS."  The call to action, "It’s Time to Harmonize FINRA and State Disclosures to Public: FINRA’s BrokerCheck Routinely Deletes Information about Bankruptcies, Tax Liens, Firings, Flunked Tests, Sales Practice Abuse Investigations, and Other “Red Flags” for Investors."

The Wall Street Journal has picked up the story here as well, pointing out that its own reporting showed that more than 1,600 brokers' records don't show personal bankruptcies and criminal charges that should be reported.  Investment News published an article covering the story this afternoon here.

There are competing arguments as to how much information ought to be disclosed and whether certain information is actually useful to investors, but I fall in the camp that believes that more information is better.  But wherever you draw the line between privacy and the public's right to know the good the bad and the ugly about investment professionals . . . PIABA reports that state regulators in many jurisdictions make public information that FINRA choses to excise from its BrokerCheck system.  This would seem to undermine any privacy rationale behind FINRA's choice to release less information on BrokerCheck.  If information is available from state regulators is there any good reason not to make that same level of information available to the public through BrokerCheck?