Missouri Securities Arbitration Attorneys

The Securities Division under the Missouri Secretary of State is the state regulator responsible for protecting Missouri investors from financial fraud “with an emphasis on restitution for investors,” according to its website. Defrauded investors might like the sound of this, but they should know that relying solely on enforcement actions by a regulator is not typically guaranteed to result in full restitution or being financially made whole following a financial fraud. For this reason, investors who have been victimized should consider seeking counsel from experienced securities arbitration attorneys, such as the ones at the investment loss law firm of Malecki Law, to bring a parallel civil lawsuit alongside any regulatory or criminal action against the wrongdoer that may be in the works. 

Touting a recent enforcement action from last week, the Missouri Securities Division ordered David J. Spalding of Waterloo, Illinois, to repay $18,500 in lost principal to an elderly Missouri investor who Mr. Spalding solicited to invest in a Ponzi-like promissory note scam. Mr. Spalding apparently visited the home of the victim and solicited her to invest funds in Mr. Spalding’s own real estate company to complete some renovations. He also had her sign a promissory note that guaranteed a return of the principal through “prompt and punctual payment” to the investor. The Securities Division’s investigation revealed that Mr. Spalding misappropriated the funds, which is certainly “Ponzi-like.”

In a typical Ponzi scheme, which is often for a lot more money and involves many more investors, the fraudster will promise interest payments to new investors. The new investors would not receive actual interest because the investment product is not a real investment – it is fake. So no returns are generated, but they are instead “manufactured,” sometimes via fake monthly statements, and paid to the new investor from the original investment principal of an earlier investor. To keep a Ponzi scheme going, a fraudster needs to continually find new investors – i.e., new money – and hope that earlier investors don’t ask to make any substantial withdrawals that could upend the fraud. While many people believe Ponzi schemes to be rare and synonymous with Bernie Madoff, such schemes, in fact, continue to flourish, many times right within a legitimate financial institution that is failing to monitor its employees and accounts for warning signs as required by industry laws and rules.

The Securities and Exchange Commission (SEC), for example, is clear that customers of brokerage firms, especially large ones, should be able to expect their investments to be protected from fraud and that their accounts will be carefully supervised:

“Customers dealing with a securities firm expect, and are entitled to receive, proper treatment and to be protected against fraud and other misconduct, and may properly rely on the firm to provide this protection. Large securities firms generally have established fairly elaborate systems of supervision and internal control, in recognition of customer reliance on the existence of protective safeguards and of the fact that it is to be anticipated that in a large organization some employees may be tempted to engage in improper conduct.”

In the Matter of Reynolds & Col., SEC Broker-Dealer Proceedings, 39 S.E.C. 902, 916 (May 25, 1960).

The Financial Industry Regulatory Authority (FINRA) also has rules requiring supervision namely FINRA’s supervision rule, Rule 3110, stating:

“Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Final responsibility for proper supervision shall rest with the member.”

FINRA Rule 3111 (a).

Thus, imperative for any investor seeking a recovery against large financial firms with this supervision obligation, it is not only important to hire a securities arbitration law firm that is fully familiar with supervision issues, the types of documents and exception reports that would evidence supervision (or lack thereof), but also securities arbitration lawyers who understand how fraudsters operate, particularly in Ponzi schemes.

The problem in recovering investment funds with most Ponzi schemes is that the money is usually gone by the time the scheme is uncovered. Money is either spent, hidden offshore, or placed in assets assigned to other people besides the fraudster (e.g., a family member or co-conspirator). While the Missouri investor in the earlier example was ordered to receive full restitution of her $18,500, one needs to consider that this is a small amount, relatively speaking, and that in much larger financial frauds the money is usually going to remain missing. This makes it all the more important to not rely on a regulator for restitution, but to also file a parallel civil lawsuit against liable financial institutions with deep pockets, assuming there are signs that the institution was not providing reasonable supervision, as is required.

The securities arbitration attorneys at Malecki Law have extensive experience bringing successful failure to supervise actions against financial firms, especially those with a track record for failing to exercise their supervisory obligations as evidenced by prior censures and fines, which are publicly accessible. Malecki Law has recovered tens of millions of dollars for Ponzi scheme victims, almost all from financial firms who had the aforementioned duty to supervise – i.e., all while not even bothering to sue the fraudster Ponzi schemer, who most likely does not have any money left to repay the victims anyway. If you are a Missouri investor or retiree and have suffered investment losses, or believe your account was not properly supervised, please schedule a free initial consultation with Malecki Law – call us directly (212) 943-1233, or email jenice@maleckilaw.com.