The Law Offices of Robert Wayne Pearce, P.A. filed its first claim against Santander Securities. Below is a summary of the allegations made by the Claimants against the Puerto Rico based brokerage. If you or any family member received similar misrepresentations and misleading statements from Santander Securities and its stockbrokers or found yourself with an account overconcentrated in Puerto Rico bank preferred stocks, or if you borrowed monies from Santander Securities and used your investments as collateral for those loans, we may be able to help you recover your losses.
SUMMARY OF ALLEGATIONS MADE AGAINST SANTANDER SECURITIES
I. INTRODUCTION
This arbitration arises out of a Santander Securities LLC (Santander) stockbroker’s recommendation that a retired couple invest their life savings, $500,000 in Westernbank preferred stock. The Claimants had never made any stock market investments before they met the Santander stockbroker. The Westernbank preferred stock was the only investment in their accounts. The Santander stockbroker misrepresented the nature and risks in Westernbank preferred stock and misled them to hold the stock until it became worthless. The Santander financial advisor continuously and fraudulently concealed the risk of holding the stock through a series of false and misleading statements about the security of the Claimants’ principal even in the event of failure by Westernbank. The Claimants sued Santander for fraud, breach of their fiduciary duty, negligence, negligent supervision, breach of contract, and violation of FINRA Code of Conduct.
II. THE RELEVANT FACTS
The Claimants first met the Santander stockbroker when he cold-walked into the Claimants’ family owned and operated sporting goods store.[1] The Claimants were in their 70’s and on the verge of retirement after running their small family business for over thirty years.
The financial advisor introduced himself as a broker working at R-G Investments and solicited Claimants to purchase Westernbank preferred stock. He presented himself as an expert on bank stocks, a person with superior knowledge and upon whom Claimants could rely for investment advice. The stockbroker pitched the Westernbank preferred stock as a safe investment; one that was ideal for retirees; one that would not only preserve their capital but earn them 6.7 percent in annual interest paid monthly.[2] He assured the Claimants that the Westernbank preferred stock were “inversiones aseguradas,” i.e. “insured investments.” He said many times “no van a perder su dinero,” i.e. “you are not going to lose your money” because they were investing in a bank. Having no prior investment experience whatsoever, the Claimants believed the financial advisor and transferred their life savings, $500,000, from their bank account to purchase Westernbank preferred stock.
Shortly after the Claimants’ account transferred from R-G Investments to Santander, they contacted the stockbroker about a decline in the value of their accounts. The account value was down approximately ten percent (10%) at that time. They questioned the stockbroker about selling the Westernbank preferred stock as they could not risk losing any of their retirement savings. The Santander advisor told Claimants not to panic and told them to hold the Westernbank preferred stock because “es una buena inversion,” i.e. “it is a good investment;” “es una curva,” i.e. “it is a curve” (stock prices go up and down); “esto es temporal,” i.e., “this is temporary;” “su dinero esta seguro,” i.e. “your money is secure;” and “estas son inversiones aseguradas,” i.e. “these are insured investments.”
The Claimants and the Santander stockbroker met on a number of occasions as the value of the accounts continued to decline. On every one of those occasions, Claimants asked whether they should sell, and the stockbroker said “no, es una buena inversion,” i.e. “no, it is a good investment;” “su dinero esta seguro,” i.e “your money is secure;” and “estas son inversiones aseguradas,” i.e. “these are insured investments.”
Eventually, W Holding Company suspended dividend distributions on Westernbank preferred stock. The Claimants contacted the Santander broker to inquire about the monthly distribution he expected but never received. The Santander stockbroker replied “no se preocupe,” i.e. “do not worry.” The Claimants sought the broker’s advice on whether they should sell, and once again, the Santander stockbroker said “su dinero esta seguro,” i.e. “your money is secure;” and “estas son inversiones aseguradas,” i.e. “these are insured investments.”
One year later, the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico closed Westernbank and appointed the Federal Deposit Insurance Company (FDIC) as receiver. The Santander stockbroker continued to tell Claimants that their investments were insured and that the FDIC would make sure they were repaid their investment.
On August 2, 2011, the FDIC made a determination that insufficient assets existed to make any distribution on general unsecured creditor claims, i.e. lower priority claims such as stockholders would recover nothing. The Claimants’ investments in the Westernbank preferred stock were not insured and they were repaid nothing.
The last time Claimants spoke with the Santander broker about their investments, he said the money was lost and there is nothing you can do to get it back. The stockbroker apologized about giving the Claimants incorrect information but continued to hide the fact that his initial recommendation to these inexperienced and unsophisticated investors to invest in a single stock was an unsuitable recommendation. Further, he did not tell them that he had intentionally misrepresented facts about the nature and risk of owning the Westernbank preferred stock. The Westernbank preferred stock was never insured and the Santander stockbroker knew it was never insured. He misrepresented that fact to fraudulently conceal his misconduct and to deter Claimants from bringing any action against him or his employer sooner.
The Claimants lost their entire investment in Westernbank preferred stock. The value of the investment in their accounts is near worthless. Currently, the Claimants’ only source of income is social security and a small pension payment. The Santander stockbroker’s fraud has crushed the Claimants not only financially but also emotionally.
III. THE WRONGFUL CONDUCT
The Santander stockbroker exploited the Claimants’ lack of investment experience and naive character to sell them Westernbank preferred stock. The stockbroker took the Claimants life savings and invested in a single stock so that he could write a big ticket and make a hefty commission. Equally appalling was the financial advisor’s ongoing fraud to convince the Claimants not to sell their stock and realize the losses he caused them to suffer. The Claimants believed the broker because they trusted him and had no independent advisors or other means, e.g. a computer, of determining for themselves whether their investment was as “seguro,” i.e. “secure” as he portrayed their investments in Westernbank preferred stock.
It is widely understood in the securities industry that the key to sound investing is diversification. First, investors need proper asset allocation (diversification among various asset classes, i.e., cash, bonds, and equities). Second, further diversification by geography, sector, issuers, styles, credit availability, etc. is very important. Financial industry regulators including the Securities and Exchange Commission (SEC) have prosecuted financial advisors for violation of these basic investment principles in cases involving overconcentration and suitability. The Claimants’ financial advisor ignored the very basic principles of asset allocation and diversification when he recommended that 100% of the Claimants’ investable assets in a single bank stock.
The Santander stockbroker’s recommendation violated FINRA’s Conduct Rule 2111 (f/k/a 2310) governing suitability:
2111. SUITABILITY
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
The recommendation that Claimants invest in a single stock, i.e., put all of the Claimants’ eggs in one basket was unsuitable for the Claimants and anyone for that matter. Further, the broker’s recommendations to “hold” also breached FINRA’s suitability rule, a rule that has long been applied to recommended “investment strategies” including “hold” recommendations.[3]
In addition, the Santander stockbroker continuously made a series of misleading statements to induce the Claimants to “hold” the Westernbank preferred stock while it declined in value to virtually zero. He knew the Westernbank preferred stock was not insured and intentionally misled the Claimants when it started to decline in value to avoid this arbitration claim. The financial advisor’s ongoing fraud led the Claimants to believe their principal was safe even in the event of failure by Westernbank. The broker’s actions fraudulently concealed the true nature and risk of holding the Westernbank preferred stock in violation of FINRA Rules of Conduct 2110 and 2120:
2110. STANDARDS OF COMMERCIAL HONOR AND PRINCIPLES OF TRADE
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
* * *2120. USE OF MANIPULATIVE, DECEPTIVE OR OTHER FRAUDULENT DEVICES
No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.
The financial advisor was well aware of the Claimants and Westernbank’s circumstances and continuously covered-up his misconduct knowing that the Claimants’ principal was never fully insured and that the Claimants would never be the first in line to be paid in the event of failure by Westernbank.
Pursuant to FINRA Rule 3010, Santander was obligated to design and implement a reasonable system of supervision to assure compliance with FINRA conduct rules and its own policies and procedures. On information and belief, Santander did not even have any computer exception reports designed to detect and prevent the excessive concentration of a single investment in Claimants’ accounts. At no time did any Santander supervisory or compliance personnel ever question the overconcentration of Westernbank preferred stock in the Claimants’ accounts or take any action to stem the continuous flow of misinformation from its employee to the Claimants.
IV. SANTANDER IS LIABLE FOR ITS EMPLOYEES AND ITS OWN MISCONDUCT
Santander is responsible for its own wrongs and, under the doctrine of respondeat superior and/or principles of actual, apparent and implied agency, is liable for the acts and omissions of its employee’s. Specifically, Santander is liable for its stockbroker’s recommendation that the Claimants “hold” an overly concentrated portfolio of Westernbank preferred stock, for failing to supervise him, and for his continuous and fraudulent concealment of facts about the risk of the Claimants’ investment in a single bank stock. Had Santander and its employee recommended and adhered to a diversified investment strategy and not continuously and fraudulently concealed the truth from the Claimants, they would not have been damaged. Accordingly, Santander and its employee violated FINRA’s Code of Conduct and committed common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligent management, negligent supervision of its employees, and fraudulent concealment.
CONTACT US FOR A FREE CONSULTATION ABOUT YOUR CLAIM.
The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in Santander Securities preferred stock and closed-end bond fund disputes and is working hard to secure the best possible result for your case. Attorney Pearce provides a complete review of your case and fully explains all of your legal options. The entire firm works to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case.
For dedicated representation by a law firm with substantial experience and knowledge in all kinds of securities, commodities and investment disputes, contact the firm by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail. We may also be able to arrange a meeting with you at offices located in San Juan, Puerto Rico or in Boca Raton, Fort Lauderdale, Miami and West Palm Beach, Florida and elsewhere.
[1] Cold-walking is a term used to describe a door-to-door sales technique utilized in Puerto Rico by salespersons such as brokers and financial advisors in the retail financial services sector.
[2] In 1999, Westernbank went under reorganization, which created the parent company, W Holding Company, and converted Westernbank into a wholly-owned subsidiary of the newly-formed parent.
[3] The phrase “investment strategy involving a security or securities” used in this Rule is to be interpreted broadly and would include, among other things, an explicit recommendation to hold a security or securities.
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