CCO Investment Services Corp. is a wholly owned subsidiary of Citizens Financial Group, Inc., which is owned by the Royal Bank of Scotland, and in substantial part, operates from kiosks located in traditional retail bank branch offices of Citizens Bank.
Since 2006, CCO has been fined more than $4.9 million by a series of federal and state securities regulators in connection with sales practice violations, including the failure to supervise, and telemarketing, and “cross-selling” of Citizen’s bank customers, in connection with the sale of variable annuities and other securities.
Tellers and other working for Citizens Bank the bank are provided bonuses, and are subject to the imposition of “goals,” in connection with the referral of traditional bank customers to CCO for the purpose of soliciting the sale of securities.
Third Arbitration Award Against CCO Investment Services
On November 15, 2012, a FINRA Arbitration Panel in Southfield, Michigan, handed down the third arbitration award against CCO Investment Services Corp. relating to fraud in connection with the sale of the Oppenheimer Rochester National Municipals Fund, awarding the customer 100% of their losses, plus costs and attorney’s fees.
Prior Arbitration Awards Against CCO Investment Services
The FINRA securities arbitration award and decision and in Michigan follows a 2011 arbitration award in Pittsburgh, and another identical securities arbitration award and decision in Philadelphia in June 2012.
Citizens Bank Customers Referred to Brokers of CCO
In each of these cases, customers of Citizens Bank were referred to brokers of CCO Investments and were solicited to purchase the Oppenheimer Rochester National Municipals Fund with otherwise conservative funds previously held in certificates of deposit at Citizens Bank. In the most recent decision, the Arbitration Panel specifically found that:
The Claimants
Claimants are recent immigrants to the United States and they had very limited investment experience. Claimants went to their bank, to roll over their CD. The bank directed them to a registered representative. Claimants’ primary objective was capital preservation. The broker recommended a solicited trade placing one third of Claimants’ net worth in one speculative fund. The broker made material misrepresentations and omissions concerning risk. Claimants lost approximately 50% of their investment in 18 months. The broker invested Claimants’ whole account into one high risk junk municipal bond fund. [the Oppenheimer Rochester National Municipals Fund].
In fact, CCO had a special “Cost Sharing” relationship with the Oppenheimer Funds, whereby provided CCO included the Oppenheimer funds on its platform and allowed its wholesaler’s access to its registered representatives (and customers), Oppenheimer would pay for sales presentations and seminars conducted in the bank, and in addition to 12b-1 fees, CCO would receive from Oppenheimer an additional percentage of the assets CCO customers held in the Oppenheimer funds.
Since its inception, all seven of Oppenheimer’s “Rochester” Funds are managed using a common “Rochester style management,” which is self-described as a “contrarian” and “yield-driven” style which involves “lower-rated, unrated and generally underappreciated municipal securities.” The “high-risk, high-reward” Rochester style is relatively well known in the investment community. See, e.g. Barrons, May 6, 2002 (“Rochester Fund Municipals’ willingness to take risks explains its relative success well but it’s still not the right fund for everyone”).
According to the March 9, 2007 Registration Statement and Prospectus the Rochester Fund filed with the SEC (collectively, the “March 2007 Prospectus”), investors are cautioned that:
- since the Fund may invest in lower rated securities without limit, the Fund’s investments should be considered speculative
- Up to 100% of the securities the Fund buys may be high-yield, lower-grade fixed income securities, commonly called “junk bonds.”
- investors should be willing to assume the greater risks of short-term share price fluctuations that are typical for a fund that invests in those debt securities, which also have special credit risks.
- since the Fund’s income level will fluctuate, it is not designed for investors needing an assured level of current income.
March 2007 Prospectus
As set forth in the Prospectus, and elsewhere, the risks associated with the Fund are primarily attributable to the Funds investment in:
- real estate development bonds including speculative “Dirt Bonds,” which are secured only by bare, undeveloped land
- below investment-grade securities many of which were not even rated by an independent ratings agency
- illiquid securities including Tobacco Bonds
- the Fund used leverage and speculative borrowing strategies, including investment in “inverse floaters” to enhance returns.
Each of these risks are disclosed at length in the March 2007 Prospectus. With respect to the Funds investment in non-rated or below investment grade “junk bonds,” the prospectus discloses that:
The Fund buys lower-grade, high-yield municipal securities to seek high current income. There are no limits on the amount of the Fund’s assets that can be invested in debt securities below investment grade. Securities that are rated below “investment grade” are those rated below “Baa” by Moody’s, or lower than “BBB” by Standard & Poor’s Rating Services, or comparable ratings by other nationally recognized rating organizations.
The Fund can invest in securities rated as low as “C” or “D” or which may be in default at the time the Fund buys them. March 2007 Prospectus. In fact, as of December 31, 2006, Lipper estimated that 60.27% of the Fund’s bonds were not rated by any independent rating agency. Not only was the Fund concentrated in un-rated bonds, but the ratings that the Manager assigned to many of these bonds as set forth in the Funds SEC filings were only slightly above junk. Similarly, according to Morningstar, as of March 30, 2007, the Fund held 78% of its assets in BB bonds and below.
The Fund’s March 2007 Prospectus also discloses that the Fund may invest in tobacco settlement revenue bonds, from which payments of interest and principal are made solely from a state’s pledge of its interest in a Settlement Agreement. The Fund discloses that “Annual payments on these bonds, and thus the risk to the Fund, are highly dependent on the receipt of future settlement payments by the state or its governmental entity, from tobacco manufacturers, and that the Settlement Agreements themselves have been subject to various legal claims.
The Prospectus also discloses that “Because tobacco settlement bonds are backed by payments from the tobacco manufacturers, and generally not by the credit of the state or local government issuing the bonds, their creditworthiness depends on the ability of tobacco manufacturers to meet their obligations.”
Similarly, the risk associated with the Funds investment in “inverse floaters” is also disclosed in the March 2007 Prospectus, which discloses that the Fund may invest up to 35% of its total assets in “inverse floaters” to seek greater income and total return. The Prospectus also discloses that “The Fund’s investments in inverse floaters involve certain risks. An inverse floater that has a higher degree of leverage is typically more volatile with respect to its price and income than an inverse floater having a lower degree of leverage.” and that “[w]hen the Fund invests in certain derivatives, for example, inverse floaters with “shortfall agreements … The market value of an inverse floater residual certificate can be more volatile than that of a conventional fixed-rate bond having similar credit quality, maturity and redemption provisions.”
These disclosures were not lost at Morningstar, which since 2005 has rated the Fund, “highest risk.” On August 9, 2006, Morningstar’s Andrew Gunter reported “Oppenheimer Rochester National Municipal boasts impressive returns, but investors should be willing to think differently about a muni-bond fund before investing here.” According to Mr. Gunter and Morningstar, “The fund’s risk extends beyond its tobacco holdings, as its focus on income means it normally devotes 50%-70% of assets to bonds rated BB or below. At 50.5% today, it’s at the low-end of that window. Yet that cautious tack–by its own standards–still looks aggressive versus its rivals.” (Id).
Similarly on January 16, 2007, Morningstar’s Andrew Gunter reported that the “Oppenheimer Rochester National Muni’s bold strategy isn’t for the faint of heart. At 2006’s end, about 56% of assets here were in bonds rated below BBB or not rated by an outside agency. This offering’s large stake in non-investment-grade/non-rated bonds and hefty holdings in inverse floating-rate notes makes it suitable only for a minor portion of one’s muni portfolio. (“Oppenheimer Rochester National Municipals is too bold for the vast majority of investors”); See also, Barrons, May 6, 2002 (“Rochester Fund gets higher yield from exotic mix”); Wall Street Journal, March 6, 2006 (“the Rochester National Fund Prospectus describes its investments as speculative”); The Bond Buyer, March 8, 2006 (“we buy a lot of bonds you wouldn’t ever sell to your aunt Gladys . . . from airports to tobacco bonds or very illiquid dirt deals in California”); Morningstar, November 14, 2005 (“Rochester Funds Willingness to Take Risk”); Morningstar, April 13, 2006 (“Rochester Municipals. . . Still Not the Right Fund For Everyone”); Morningstar, November 9, 2007 (“Recent events are reminder why Oppenheimer Rochester National Municipals is only for the gutsy long term investors.”)(emphasis added).
CCO Investments Were Negligent
In each of these cases, investors alleged that agents of CCO Investments were either negligent in failing to perform any due diligence with respect to the recommendation of these securities based upon the disclosures in the Fund’s Prospectus and the information in the marketplace, or alternatively, were reckless, if after having ascertained this information, they recommended these otherwise speculative investments to these investors anyway, in direct contravention of their stated investment objectives, and in direct contravention of the agents’ representations that these were conservative investments.
Securities dealers must have an adequate and reasonable basis in order to recommend a security. Hanly v. Securities and Exchange Comm’n, 415 F.2d 589, 596-7 (2nd Cir.1969). In connection with recommendations, securities dealers “owe a special duty of fair dealing to their clients.” Securities and Exchange Comm’n v. Hasho, 784 F.Supp. 1059, 1107 (S.D.N.Y.1992)(quoting, Hanly v. Securities and Exchange Comm’n, 415 F.2d 589, 596 (2d Cir.1969)( the Second Circuit articulated the duties which inhere in this “special relationship” where a dealer “implicitly represents he has an adequate basis for the opinions he renders.”) Id. A stockbroker cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. Keenan v. D.H. Blair & Co., Inc., 838 F.Supp. 82, 89 (S.D.N.Y. 1993). These duties have been described as” implicit warranties of the soundness of the stock, in terms of value, earning capacity, and the like.” Kahn v. Securities and Exchange Comm’n, 297 F.2d 112, 115 (2d Cir.1961) (Clark, J., concurring)(failure to disclose information in contravention of the warranty is tantamount to an omission of a material fact).
Here, it would appear that agents of CCO Investments did not to have had a reasonable basis for purchasing the Oppenheimer Rochester National Fund for these investors given the readily available information about this Fund as set forth above.
These investors also had the right to believe that their CCO Investment brokers had read the Prospectus.
As the Securities and Exchange Commission has long held, information contained in prospectuses “furnishes the background against which the salesman’s representations may be tested. Those who sell securities by means of representations inconsistent with it do so at their peril”. Ross Securities, Inc., 41 SEC 509, 510 (1963). Further, the Securities Exchange Commission “believes that a determination in private actions as to whether investor’s reliance on a registered representative’s oral representation is reasonable depends upon the circumstances of each case. See In Re: Robert Foster, 51 SEC 1211, Release Number 7077 (July 20, 1994); See also Larry Ira Klein, 52 SEC 1030, 1036 (1996) (“Klein’s delivery of a prospectus to Towster does not excuse his failure to inform fully the risks of the investment package he proposed.”).
Guiliano Law Group
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
