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Erez Law Files Claim Against Aegis Capital Corp. and Former Broker Alan Appelbaum For Structured Product Losses

Posted on Monday, September 23rd, 2019 at 8:18 pm    

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Erez Law recently filed a FINRA arbitration against Aegis Capital Corp. Their customer alleges that she suffered losses due to recommendations by her broker Alan Appelbaum (CRD# 500336), who has been registered with Aegis Capital Corp. in Boca Raton, Florida since 2015.

The Erez Law client alleges the following in the newly filed FINRA claim:

The client entrusted Aegis and Appelbaum with her securities investments. The client was a risk-averse investor that was interested in high-quality fixed-income investments that generated a sustainable yield and preserved capital. Appelbaum recommended high-risk and unsuitable structured products, which is the reason for the claim.

Erez Law alleges that Applebaum sold the client complex, high risk, illiquid, and unsuitable structured notes. It is alleged that Applebaum recklessly recommended that the client over-concentrate her account in complex, high risk, and illiquid investments including unsuitable structured products and structured CDs by making egregious misrepresentations and omissions.

Additionally, it is alleged that Appelbaum generally executed the purchases of the structured products in the client’s account without obtaining her required prior approval for every transaction.

Financial advisors such as Appelbaum can only enter trades for a customer after obtaining their prior authorization. These trades are deemed unauthorized unless Aegis obtained her written discretion in favor of Applebaum. Upon information and belief, Aegis did obtain written discretionary authority from the client.

In addition to obtaining authorization for each transaction, Appelbaum was required to make a balanced presentation about the investment he was recommending and disclose all material facts. It is alleged that Appelbaum also failed in this regard.

According to the claim, Appelbaum sold the client complex structured products, often with short-term teaser interest rates, long-dated maturities and obscure features that caused them to lose capital rapidly along with greatly diminished interest payments.

Structured products are complex securities derived from or based on a single security or index, basket of securities or indices, a debt issuance, a commodity and/or a foreign currency. Most Structured Products pay an interest or coupon rate based on certain defined parameters. Structured Products typically consist of a note and a derivative, most often an option. While the note pays interest, the derivative defines the payment at maturity. Despite the fact that structured products most often involve options, they are typically marketed as debt securities. Structured products can offer a form of principal protection and frequently cap the upside participation in the underlying investment. Additionally, structured products do not trade on an exchange and are generally not liquid investments. Structured products are issued by brokerage firms and are registered with the SEC. Structured CDs are issued by banks and are not registered with the SEC.

Given the complexity of these Structured Products and their similarities to options, securities regulators have required brokerage firms such as Aegis to specifically approve clients for structured products. The Structured Products Appelbaum sold to the client were generally long term, illiquid debt that paid quarterly interest, if any, equal to a multiple of the difference between two interest rates less a spread. The Structured Products were generally callable at par plus accrued interest for part of a quarter, typically after just one year. Since the issuers would call the notes unless the interest, they were likely to pay were below market rates, investors were virtually certain to not be compensated for the risk of these Structured Products.

The Structured Products sold to the client by Appelbaum generally amounted to an opaque and complex wager on the yield curve. The yield curve is a curve showing interest rates at different lengths of time. Generally, If the yield curve flattened and the difference between two points on the yield curve did not exceed a certain threshold, the Structured Products sold to Lauri would cease paying the same level of interest or any interest and their value would decline. These investments are referred to as “steepeners.”

Some or all of the Structured Products Applebaum sold the client were hybrid steepeners and reverse convertible notes. Such notes had features that based performance on the yield curve as explained above as well as the performance of certain market indexes so that Lauri would only be paid par at maturity if the issuer did not call the notes and the notes closed above certain threshold levels of given market indexes.

Many of the structured products paid an attractive teaser interest rate for one or two years with no guarantee of additional interest payments.

The structured products generally had long maturities such as 10-15 years. Given that the securities are not listed on an exchange and therefore highly illiquid, investors such as the client would have to sell the structured products at significant discounts if they sold prior to maturity.

It is alleged that Applebaum further compounded the risks to which the client was unknowingly exposed by over-concentrating her account in structured products. This strategy only served to further increase the risks in her account. The drastic level of concentration recommended by Applebaum resulted in an unsuitable investment strategy.

Regrettably, this claim against Appelbaum for reckless misconduct in connection with the sale of structured products and illiquid investments is not unique or isolated. A recent copy of Appelbaum’s CRD reveals that he has been the subject of at least one other customer complaint involving the same or substantially similar investments as those at issue in the instant case. Upon information and belief, it is expected that many more similar claims will be filed.’s

Additionally, Appelbaum’s CRD further reveals at least a half dozen other customer complaints involving allegations of fraud, negligence, misrepresentations, and breach of fiduciary duty against Applebaum, similar to the instant case.

In addition to the case above, Appelbaum has been the subject of 11 customer complaints between 2001 and 2015, one of which was denied, according to his CRD report. Recent complaints are regarding:

December 2015. “Allegations include failure to recognize claimants change in circumstances and desire to pursue a low risk conservative strategy, unsuitable trading in proprietary investments and structured products between the years of 2012 and 2014.” The customer sought $50,000 in damages and the case was settled for $20,000.

August 2014. “Client alleges breach of fiduciary duty, a failure to supervise, negligence, fraud, breach of contract and violation of NASD and FINRA rules.” The customer sought $350,000 in damages and the case was settled for $25,000.

Moreover, Applebaum’s checkered history as a financial advisor is not limited to customer complaints. In particular, Appelbaum’s CRD exposes the fact that he has been involved in three regulatory actions.

In 2006, Appelbaum was sanctioned by the state of New Hampshire and ordered to pay a fine of $55,000. The state found that Appelbaum serviced eight brokerage accounts for New Hampshire residents, even though Appelbaum was not licensed to sell securities in New Hampshire.

In 1991, the National Association of Securities Dealers, now known as FINRA, charged Appelbaum with violations for his role in: (i) effecting transactions in non-exempt securities while failing to maintain the firm’s required minimum net capital; (ii) failing to determine from the firm’s books and records the quantity of fully paid and excess margin securities in its possession or control and the quantity of such securities not in its possession and control; (iii) failing to obtain physical possession or control of all fully paid and excess margin securities; (iv) hypothecating securities carried for the accounts of the firm’s customers so as to permit securities to be commingled with the securities of the firm under a lien for a loan to the firm; (v) failing to maintain an adequate amount in the reserve bank account; (vi) failing to preserve records; and (vii) failing to establish, maintain and enforce adequate written supervisory procedures. The charges against Appelbaum were settled and as a result, he was censured and fined $10,000.

Finally, in 1982, the Securities and Exchange Commission (SEC) alleged that Appelbaum violated Section 17A and rule 17A-3 under the Securities Act of 1934 and Rules G-8, G-16 and G-26 of the MSRB and sections B(C)(1) of the Securities Exchange Act for his role in amongst other things, opening and maintaining customer accounts in fictitious names and addresses, making false entries in the firm’s books and records, failing to deliver customer confirmations of bond transactions and overcharging or permitting customers to be overcharged and making or causing false statements to be made to customers.

Previously, Appelbaum was registered with Herbert J. Sims & Co. Inc. in Boca Raton, Florida from 2002 to 2015.

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Herbert J. Sims & Co. Inc. may be liable for investment or other losses suffered by Appelbaum’s customers.

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.