National Securities Corporation
National Securities Complaints
Our attorneys are interested in evaluating complaints on behalf of customers of National Securities Corporation. If you or someone you know lost money investing with National Securities, please contact us at 212-203-9300 for a free and confidential consultation.
A History of Customer Complaints
National Securities’ history of ethical conflicts may not be the only thing that raises potential investors’ eyebrows. As Reuters reported in 2017, 35% of the firm’s brokers “had a history of regulatory run-ins, legal disputes or personal financial difficulties that must be disclosed to investors under FINRA rules.” That number represents “more than three times the industry average” of brokers with disclosures at a given firm.
Among the brokers with disputes on their records was Mike McMahon, per Reuters, who was alleged in a 2015 complaint to have churned a customer’s account to generate excessive fees. The customer who filed the complaint, a North Dakota soybean farmer named Richard Haus, said he lost $261,441 in transactions for which he was charged $267,676. He told Reuters he considered suicide after losing more than half a million dollars working with McMahon and other representatives.
Financial Industry Regulatory Authority records show that McMahon left National Securities in 2014, later working at Worden Capital Management—another firm cited in Reuters’ report on broker-dealers with extensive disclosures. McMahon’s disclosure report shows numerous customer complaints concerning his conduct at National Securities, many of which reached settlements with the customers. A 2016 complaint alleging he breached his fiduciary duty and misrepresented stock investments settled for $210,000; a 2015 complaint detailing the same allegations settled for $400,000. Other complaints concerning his conduct as a National Securities representative settled for $345,000, $262,500, $210,000, $180,000, $115,000, $75,000, and $50,000.
As the Reuters report indicates, those were hardly the only complaints against National Securities. In fact, there may be more than Reuters’ analysis turned up. Just last year FINRA sanctioned the firm for failing to disclose customer complaints in a timely manner. The regulator found that from 2015 to 2018, National Securities either failed to report or failed to timely report information concerning 19 customer complaints as well as a $30,000 settlement of one such complaint. The firm also allegedly failed to enforce supervisory protocols concerning the reporting of customer complaints. FINRA censured the firm and ordered it to pay a fine of $125,000.
National Securities told Reuters in 2018 that the data underlying its analysis of customer complaints against the firm was out of date. The firm said the data did not reflect its culture since the removal of 298 representatives after National Holdings’ acquisition by Fortress Biotech. But Reuters’ reporting suggests the ethical issues persisted even after that point. One former broker told Reuters he did not realize he was selling investments in Fortress Biotech-related companies until “after several months of recruiting investors for Mustang Bio.”
When he raised his concerns with a supervisor, he said, he was instructed to “stop asking questions and get back to dialing.”
National Securities specializes in underwriting in initial public offerings, one of which landed the firm in a recent class action lawsuit. The complaint, filed in 2018, alleged that the firm collected more than $1.1 million in fees from the IPO of Restoration Robotics, a company that allegedly made “materially untrue statements of material fact” and/or omissions of material facts in its registration statement and prospectus. While a proposed settlement was announced earlier this year, the case remains unresolved.
For a few years, National Securities had something of an unusual ownership structure compared to other broker-dealer firm. Back in 2010, a pair of biotech investors, Lindsay Rosenwald and Michael Weiss, invested $3 million in the firm’s parent company, National Holdings. Then, in 2016, their company Fortress Biotech bought control of National Holdings. As Reuters noted in 2018, this purchase afforded Fortress Biotech an “in-house underwriter and a private sales force of about 700 brokers… to help it raise money for its stable of nine ventures that are developing new drugs or treatments.”
Then something else unusual happened. As the Reuters report describes, over several months in 2017, a National Securities analyst named Johnathan Aschoff recommended several biotechnology companies to the firm’s investors. One was Avenue Therapeutics, which had “no revenue and one drug in clinical trials,” and whose share price he predicted would grow 100% over the following year. Another was Checkpoint Therapeutics, whose share price he predicted would increase by almost eight dollars overt he following year. A third was Mustang Bio, whose share price Aschoff predicted would increase almost $10 over the following year.
The stock prices did not increase over the following year. Avenue Therapeutics’ shares fell 36%. Checkpoint Therapeutics’ shares fell from $10.75 to $2.60. Mustang’s share prices fell from $12 to $6.62. Aschoff’s predictions did not come to fruition. Why did he make them?
One possible reason offered by the Reuters report: all of those companies were controlled by Fortress Biotech. Aschoff did not disclose this conflict of interest in his recommendations, even though regulations mandate that brokers only recommend investments that are considered suitable for their customers, and biotech investments are considered highly risky.
While the firm did disclose the arrangement in prospectuses for the investments, experts questioned the ethics of a company buying a brokerage to sell its own stocks. “I’ve never seen a firm that needs to raise a lot of capital acquire a brokerage for that purpose,” said a University of Nevada professor of securities law. “Most small investors don’t read the prospectus,” added a Cornell University finance professor. “If you are selling your own company, you want to sell it at the highest possible price. This is a situation that is very troublesome.”
While National Securities told Reuters that Aschoff’s were forthcoming about the conflict of interest, an ethics expert responded that the conflict of interest still applies, adding that National Securities’ ownership arrangement “raises questions about the ability of its analysts to remain independent and objective” when it comes to companies owned by Fortress. After Reuters questioned National Securities about its ownership arrangement, it dedicated a webpage to its majority shareholder that said the two companies “have built a unique model that inherently aligns Fortress’ business objectives with the financial interest of National’s clients.”
Then, a few months later, Fortress Biotech announced that it was selling its stake in National Securities to B. Riley Financial, an investment bank and broker-dealer firm. B. Riley reportedly sought to acquire National Holdings a few years earlier, and agreed in 2018 to buy Fortress Biotech’s stake for approximately $22.9 million. “The opportunity to strategically invest in a growing business, below book value and near cash value,” said B. Riley chairman Bryant Riley, “is in my view, an excellent investment for our stakeholders.”