Since 1977, Charles C. Mihalek, P.S.C., has represented the interests of Kentucky's investors and retirees in cases involving financial losses due to investment fraud, stockbroker misconduct and professional negligence.
Securities Arbitration
& Litigation
Securities Class Actions
Employment Disputes
Compliance &
Regulatory Matters
Auction Rate Securities
CMOs/CDOs
Private Placements
Over Concentration
Failure to
Execute Trades
The primary practice area of Charles C. Mihalek, PSC is alternative dispute resolution, with particular emphasis on the arbitration of securities disputes on behalf of investors before the Financial Industry Regulatory Authority (FINRA). We also represent registered representatives in disputes with broker dealers.
Charles C. Mihalek, PSC regularly represents individual investors whose claims arise out of broker and brokerage firm misconduct -- claims often based upon misrepresentations and omissions of material facts, negligent retirement advice, unsuitable recommendations, excessive trading, unauthorized transactions, theft or conversion of client funds, and breach of fiduciary duty.
June 22, 2011 Morgan Keegan Agrees Settles Fraud Charges, Agrees to
Pay $200 Million
February 24, 2011 SEC Charges Former Treasurer of Major Mortgage Lender for
Role in Securities Fraud and TARP Scheme
February 11, 2011 SEC Charges Former Mortgage Lending Executives
With Securities Fraud
January 25, 2011 SEC Charges Merrill Lynch for Misusing Customer Order
Information and Charging Undisclosed Trading Fees
The simple answer is that arbitration is an alternate forum to resolve disputes between parties. Instead of judges or juries, arbitrators decide if wrongdoing occurred and how to correct or compensate you for it. When the arbitration is over, the decisions of the arbitrators are final. If you are unhappy with the result, you cannot go to court to try again. The arbitrators' decisions can only be vacated under very limited circumstances - for example, if you can demonstrate arbitrator bias or fraud in the arbitration proceeding. If you want to vacate an arbitrator's decision you must do so within three months or less in a "motion to vacate."
If you have a brokerage account, you probably signed an agreement that requires you to settle any disputes with your broker through arbitration rather than the courts. Time is of the essence. To take advantage of your legal rights, you must take legal action promptly or you may lose the right to seek a remedy or recover funds. Time restrictions, called "statutes of limitations," vary from state to state and from claim to claim.
The majority of arbitration claims are filed with the Financial Regulatory Authority (FINRA). The remaining claims are filed with the exchanges, particularly the New York Stock Exchange. You'll find a wealth of information on arbitration - including rules, how to start a proceeding, and downloadable forms - at the website of FINRA.
Charles C. Mihalek is one of Kentucky's most experienced securities attorneys and has been a speaker at numerous securities law and business conferences. He is the founding member of Charles C. Mihalek, PSC, which he established in 1977.
Prior to establishing his private practice of securities law, Mr. Mihalek served as Senior Trial Attorney with the United States Securities and Exchange Commission, New York Regional Office, Division of Enforcement; Director of the Department of Banking and Securities, Division of Securities, for the Commonwealth of Kentucky; Special Assistant Attorney General in charge of Securities Crimes for the Commonwealth of Kentucky; and Special Counsel for the New York Stock Exchange, Inc., with the litigation and regulatory responsibility for the complex enforcement matters involving members of the NYSE.
A native of Pennsylvania, Mr. Mihalek graduated from Rutgers University in 1967 with a B.A. and graduated in 1969 from the University of Kentucky College of Law with a J.D. He is admitted to the Bars of the Commonwealth of Kentucky, District of Columbia, United States Courts in the Eastern and Western Districts of Kentucky, Southern District of Indiana and the Sixth Circuit Court of Appeals.
He is a member of the Kentucky Bar Association, the Fayette Bar Association and the Public Investors Arbitration Bar Association (PIABA). Mr. Mihalek concentrates his practice in the areas of investors' rights, securities, commodities and other complex civil litigation, including class actions, arbitration and mediation, and the representation of individuals and firms in securities investigations, disciplinary hearings and employment matters.
A native of Lexington, Kentucky, Mr. McCauley has been an attorney with Charles C. Mihalek, PSC for fifteen years. He graduated from the University of Kentucky in 1987 and received his law degree from the University of Kentucky College of Law in 1990. He also holds an MBA in Finance which he received (with distinction) from the University of Kentucky College of Business and Economics. Mr. McCauley is admitted to practice in all courts of the Commonwealth of Kentucky, the U.S. Supreme Court, the Sixth Circuit Court of Appeals, and the United States District Courts in the Western and Eastern Districts of Kentucky.
He is an active member of the Kentucky Bar Association, the Fayette County Bar Association, and the Public Investors Arbitration Bar Association (PIABA). Mr. McCauley serves as both an Arbitrator and Panel Chairperson for the NASD, Inc.
Mr. McCauley focuses his practice on securities law matters, including securities arbitrations and mediations, security enforcement matters, securities class actions, and litigation.
Mailing and Office Address:
Charles C. Mihalek, P.S.C.
167 W. Main St., Suite 510
Lexington, KY 40507
Phone: (859) 233-1805 or (800) 294-9198
Fax: (859) 233-7994
The early lawsuits filed concerning these events involve allegations that investment banks were in some way responsible. They have been accused of distorting the ARS markets by first preventing and then allowing failed auctions. In addition, they have been accused of failing to disclose their multiple roles to investors and of inadequately disclosing the risk of failed auctions. The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Massachusetts Secretary of State are probing how ARS were marketed. The New York Attorney General has subpoenaed 19 banks about ARS sales, and regulators in at least nine other states are investigating the securities.
Our firm is currently investigating auction rate securities sold by Morgan Keegan and other brokerage firms. If you believe you have been defrauded as a result of an investment in an auction rate security, please call us for a free consultation and case evaluation at (800) 294-9198.
Beginning in 2007, problems began appearing in the $300 billion Auction Rate Securities market. During 2007, some auctions failed for several closed-end funds offering preferred stock ARS backed by subprime debt. Then in February 2008, the ARS auction market failed on a large scale. More than 80% of the auctions scheduled for February 13 failed, and most of the auctions since then have also failed. So far, no secondary market of any substance has developed.
Sub-prime mortgages are offered to individuals with modest income and poor credit so that they can become homebuyers. Such mortgage loans often have below market teaser rates that will rise to above market level after the introductory period. Such mortgages are usually extremely difficult to refinance. Often the homeowners can no longer afford the mortgage payment once the interest rate increases to market rate or if the homeowner loses his job. Consequently, such mortgages have a relatively high rate of default and that rate is increasing.
Starting in the late 1990s, investment banks began creating mortgage-backed securities out of sub-prime mortgage loans by pooling loans and slicing them into various classes having different benefits and risks. Pooling the loans purportedly created a cushion against default by diversifying risk, and the higher interest rates gave such bonds the high yield that investors favored. Many of these classes or tranches were sold as "AAA" or "AA" rated.
Because of the CDO structure and the diversification gained by bundling different debts, underwriters have tried to package these high-risk debt instruments in a manner to receive investment grade ratings. The CDOs often use borrowed money or leverage to increase returns. The CDOs are sold to investors, including hedge funds, pension plans, and mutual funds. Because they are illiquid and do not trade regularly, it is difficult to value the CDOs accurately. As the sub-prime defaults have increased, there is concern that these instruments have not been properly valued.
If you believe you have been defrauded by an investment in a CDO or CMO, please contact us for a free consultation and case evaluation at (800) 294-9198.
ETFs are typically registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. (Some ETFs that invest in commodities, currencies, or commodity- or currency-based instruments are not registered as investment companies.) Unlike traditional mutual funds, shares of ETFs typically trade throughout the day on a securities exchange at prices established by the market.
Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs (also called "short" funds) seek to deliver the opposite of the performance of the index or benchmark they track. Like traditional ETFs, some leveraged and inverse ETFs track broad indices, some are sector-specific, and others are linked to commodities, currencies, or some other benchmark. Inverse ETFs often are marketed as a way for investors to profit from, or at least hedge their exposure to, downward moving markets.
Leveraged inverse ETFs (also known as "ultra short" funds) seek to achieve a return that is a multiple of the inverse performance of the underlying index. An inverse ETF that tracks a particular index, for example, seeks to deliver the inverse of the performance of that index, while a 2x (two times) leveraged inverse ETF seeks to deliver double the opposite of that index's performance. To accomplish their objectives, leveraged and inverse ETFs pursue a range of investment strategies through the use of swaps, futures contracts, and other derivative instruments.
The SEC staff and FINRA have issued an investor alert because they believe individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs). Leveraged and inverse ETFs typically are designed to achieve their stated performance objectives on a daily basis. Some investors might invest in these ETFs with the expectation that the ETFs may meet their stated daily performance objectives over the long term as well. Investors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.
If you believe you have been defrauded by an investment in an exchange traded fund, please contact us for a free consultation and case evaluation at (800) 294-9198.
MAT Five is a hedge fund managed by Citigroup Alternative Investments. It was marketed to high net worth investors, most of whom were retired, as a relatively conservative investment. However, since its inception, the fund has lost about 90% of its value. The MAT Five lawsuits claim that investors were not warned about the strategy that fund managers would employ, and that steps were not taken to prevent managers of the MAT Five Hedge Fund from making risky and speculative investments.
On March 20, 2008, Citigroup sent a letter notifying investors that the fund's income distribution would be suspended indefinitely. While Citigroup has offered to redeem shares held by investors, the offers are at considerably lower values than what the average investor paid to purchase them.
The MAT Five fund specialized in municipal arbitrage - highly leveraged financial activities in which fund managers hedge tax-free municipal bonds against riskier taxable corporate bonds. When Citigroup first launched MAT Five, investors thought they were investing in a relatively low-risk, conservative fixed-income alternative that had the volatility of Lehman Brothers Aggregate Bond Index. In reality, MAT Five was a risky investment. According to evidence presented to the FINRA arbitration panel, the fund exposed investors to a 100% more loss of principal, was 2.5 times more volatile than the S&P 500 and 7.8 times more volatile than a traditional portfolio of municipal bonds.
If you believe you were defrauded by an investment in the MAT Five Hedge Fund, please contact us for a free consultation and case evaluation at (800) 294-9198.
A preferred stock essentially is a security issued by companies to raise capital from investors. The advantage of owning a preferred stock is it pays fixed dividends. Banks and other financial institutions are among the main issuers of preferred stocks, accounting for approximately 80% of the S&P U.S. Preferred Stock Index.
Overconcentration in certain preferred stocks has devastated the portfolios of thousands of investors. Problems first began when already fiscally troubled companies such as Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers (LEH) and Citigroup (C) issued shares of preferred stocks as a way to raise capital. In turn, a number of brokerage firms marketed the preferred stocks of these companies and the preferred shares of other companies in the banking, insurance and financial sectors as safe and stable investments for income-minded investors, causing investors to over-concentrate their portfolios.
If you believe you have been defrauded by an investment in preferred stock, please contact us for a free consultation and case evaluation at (800) 294-9198.
Whether an investor has an account in which the broker is permitted to actively trade without the investor's prior authorization - commonly known as a discretionary account - or an account where all activity requires the investor's approval before any trades may be made - known as a non-discretionary account - a broker has a duty to follow the investor's instructions. A common example of the failure to follow a customer's instructions includes the resistance to sell securities promoted by the broker.
Often the case is that a broker will not necessarily ignore the customer's instructions, but for his own benefit may pressure the customer to hold a stock that the customer originally wanted to sell. This pressure by the broker to deviate from the customer's explicit instructions can constitute grounds for recovery if losses in the account can be directly attributed to that deviation.
If you believe that you have been defrauded by your stock broker or financial advisor, call us for a free consultation and case evaluation at (800) 294-9198 or (859) 233-1805.
Stockbrokers must truthfully disclose all material information, including the risks associated with the investments he or she is recommending. A fact is deemed material if it is one which a reasonable investor would want to consider when making an investment decision. Concealing the true risk or failing to disclose important information (i.e., the company has not earned a profit in the past three quarters) are examples of misrepresentation and/or omission. Often misrepresentations involve unrealistic rates of return, and omissions fail to disclose the risks associated with a particular investment.
A broker's failure to disclose all material information can constitute grounds for recovery of losses suffered as a direct result of the broker's misrepresentations and/or omissions.
With a margin account, an investor can borrow money from the brokerage firm to purchase additional securities in their account. The loan from the firm is secured by the securities the investor purchases. Investors need to be aware that when they buy on margin, they must repay both the amount borrowed and interest, even if money is lost on the investment. Many investors underestimate the risks of trading on margin and misunderstand the operation and reason for margin calls. If the market experiences a significant downturn, investors who cannot satisfy margin calls may have large portions of their accounts liquidated. Furthermore, the brokerage firm can sell securities in investors' accounts without contacting them, can choose which securities or other assets in the accounts are sold regardless of the investors' desires, and the brokerage firm can increase its maintenance requirements at any time and without advance notice. Stockbrokers have a duty to explain the risks associated with margin accounts and trading on margin.
A broker's failure to properly disclose the risks associated with a margin account, and/or failure to follow a customer's instructions not to trade on margin, may constitute grounds for recovery of losses.
Companies and individuals participating in the securities industries are subject to various overlapping and cumulative federal and state laws and to regulation by the United States Securities and Exchange Commission, securities commissioners of all states in which they conduct business and, for securities brokers and representatives, the Financial Industry Regulatory Authority (FINRA).
Charles C. Mihalek, P.S.C. regularly advises its clients with respect to issues including formation, regulation, reporting, advertising, supervision, and policies and procedures. The firm also has assisted clients in negotiation of asset purchase, stock purchase, and merger agreements. Federal or state regulations are implicated in a wide variety of situations that arise in the normal course of business. It is important to have experienced counsel to deal with such issues.
If questions or accusations of non-compliance are levied by regulatory authorities, aggrieved investors or law enforcement authorities, it is essential that regulatory counsel be engaged immediately.
Charles C. Mihalek, P.S.C. has extensive experience in the securities regulatory arena. The firm's attorneys have served as regulators and attorneys for regulators. They have represented companies and individuals in investigations and proceedings brought by the SEC, NASD (now FINRA) and many state securities regulators.
Call us for a free consultation and case evaluation at (800) 294-9198 or (859) 233-1805.
Charles C. Mihalek, P.S.C. routinely handles a wide variety of employment law matters. Over the years, the firm has developed particular experience and knowledge in dealing with employment law disputes associated with the securities and financial services industries. If you are involved in a securities and financial services industry employment dispute, call us for a free consultation and case evaluation at (800) 294-9198 or (859) 233-1805.
As the corporate scandals of the late 1990's demonstrated, public companies, their executives and accountants manipulated the prices of securities by misleading the public about the company's financial condition and future growth prospects. In turn this misleading information artificially inflated the price of securities leaving investors who relied on the information in purchasing or selling with losses.
Charles C. Mihalek, P.S.C. has represented investors in class actions against Wall Street banks and financial institutions involving violations of federal and state securities laws and regulations.
Investor complaints regarding private placements - including those linked to Medical Capital Holdings - have prompted several state and federal investigations into the private placement sales practices of broker/dealers across the country. In many instances, the investigations have revealed a significant lack of regulatory compliance.
In response, the Financial Industry Regulatory Authority (FINRA) has published new guidance for FINRA-registered firms about their obligations when it comes to customer suitability, disclosures and other requirements for selling private placements to customers. Specifically, FINRA Regulatory Notice 10-22 reinforces and details a broker/dealer's obligation to conduct a reasonable investigation of an issuer and the securities that are recommended in its offerings. The Notice also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that firms adequately investigate the private placements that they recommend.
Private placements under Regulation D are usually sold to "accredited" investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, the Notice emphasizes that a broker/dealer's suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D.
"An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests," said FINRA Chairman and CEO Rick Ketchum, in a statement. "That initiative has uncovered misconduct, including fraud and sales practice abuses. While several enforcement actions have been taken and additional investigations are underway, FINRA is taking this opportunity to remind firms of their substantial duties when engaging in the sale of private placement offerings," he said.
Non-traded REITs can be tricky, sometimes confusing investments. While they certainly can generate profits, they also come with unique and hard-to-discern risks. Following a major downturn of the market in 2008, the non-traded REIT industry took a nose dive. Investing largely in commercial real estate, many of the biggest non-traded REITs - including Behringer Harvard REIT I, Inland American Real Estate Trust and Inland Western Retail Real Estate Trust - slashed dividends or drastically limited their redemption programs.
In recent months, many investors have filed formal complaints against various broker/dealers who sold them shares in non-traded REITs. Most of the allegations stem to charges of misinformation and undisclosed risks regarding the investments.
Unlike their publicly traded counterparts, non-traded, or unlisted, REITs are illiquid, high-commission investments. Non-traded REITs dictate when investors can actually redeem their shares. In most instances, this "waiting period" is seven years or more.
The products themselves raise money for purchases by selling shares to investors via broker/dealers. In turn, the broker/dealers collect hefty commissions. When all is said and done, fees and commissions can claim up to 15% of an investor's outlay.
Also known as "revertible notes" or "reverse exchangeable securities" - and sold under a variety of proprietary names that may or may not use the term "structured" to describe the product - reverse convertibles are debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities. Although often described as debt instruments, they are far more complex than a traditional bond and involve elements of options trading. Reverse convertibles expose investors not only to risks traditionally associated with bonds and other fixed income products - such as the risk of issuer default and inflation risk - but also to the additional risks of the unrelated assets, which are often stocks.
FINRA has issued an investor alert to inform investors of the features and risks of reverse convertibles. They are complex investments that often involve terms, features and risks that can be difficult for individual investors and investment professionals alike to evaluate. If you are considering a reverse convertible, be prepared to ask your broker or other financial professional lots of questions about the product's risks, features and fees and why it's right for you.
If you believe you have been defrauded by an investment in a reverse convertible security, please contact us for a free consultation and case evaluation at (800) 294-9198.
When your broker recommends that you buy, sell or hold a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your risk tolerance, other security holdings, financial situation (income and net worth), financial needs and investment objectives. Your stockbroker has a responsibility to recommend investments based on your stated needs and goals, and to follow your instructions. If you don't want to make risky investments, they should not be recommended to you. For example, elderly people living on fixed incomes shouldn't have a lot of their money put into risky stocks, limited partnerships, or investments that don't provide ready access to funds in case of an emergency.
If an investor suffers losses as a direct result of a broker's unsuitable recommendation, an investor may have grounds for recovery of those losses, plus costs, reasonable attorneys' fees and interest.
If you believe you have been defrauded by your stock broker as a result of unsuitable recommendations, please contact us for a free consultation and case evaluation at (800) 294-9198.
Churning refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives. For churning to occur, your broker must exercise control over the investment decisions in your account, either through a formal written discretionary agreement or otherwise. For example, if you relied on your broker's advice because you were unable to evaluate the broker's recommendations and exercise your own judgment, your broker may have exercised control over your account. Churning can be a violation of SEC Rule 15c1-7 and other securities laws.
The major securities industry self-regulatory organizations have rules prohibiting churning and excessive trading. Excessive trading is the same as churning, but without the requirement that the person engaging in the trading does so for the purpose of generating commissions.
One of the most important rules of investing is diversification. If a broker concentrates your portfolio in any individual investment or type of investment, then the risk of losses with that portfolio is dramatically increased. Its the old adage that it is unwise to place all of your "investment" eggs in one basket. A broker who does not diversify his client's portfolio is potentially liable if that investment declines in value.
Financial and securities brokerage firms have a legal duty to supervise their brokers and their brokers' recommendations to clients to ensure compliance with and prevent violations of the rules of the security industry. When an individual broker is negligent or acts in an unlawful manner against the interests of the client and that client suffers damages as a result of such wrongdoing, the firm may be held liable for the investor's losses.
There are also instances in which a brokerage firm may be held liable for failure to supervise without the individual broker being held responsible for damages. Brokers are required to complete standardized training and pass exams administered by the FINRA. If it is found that a brokerage firm did not properly train a broker, did not ensure the broker obtained the necessary license, or furnished the broker with false information, the brokerage firm alone may be liable for damages caused by the broker's negligence or misconduct.
A “fiduciary” is defined in law as one who has the legal duty to act in the best interest of another. A “fiduciary duty” is an affirmative duty of good faith that compels the fiduciary to place the client’s interest before his or her own interest. Laws in different jurisdictions determine who is considered a fiduciary and the duties of fiduciaries.
When broker agrees to execute an order, the broker and firm have a fiduciary duty of “best execution” – to not place the firm’s interest before the clients and to execute the order at the best price available in the marketplace.
