Fines UBS Financial Services Inc. $2 Million for Continued Failures Relating to Short Positions in Municipal Securities / Firm Inaccurately Represented the Tax Status of Thousands of Interest Payments to Customers; Restitution Ordered (FINRA Release)AG James Imposes $12.5 Million Penalty On Brokerage Firms For Martin Act Violations (NYAG Release)New Jersey Court Sustains Banking/Insurance Commissioners Penalties. Marlene Caride, Commissioner, New Jersey Department of Banking and Insurance, Petitioner/Respondent, v. Randolph A. Fisher, Jr., Kevin G. Madden, and Regal Financial Group, LLC, Respondents/Appellants (Opinion, Superior Court of New Jersey/Appellate Division)[In]Securities Guest Blog: Singin' the Varsity Blues, Part 2: Whose Intentions Are Good by Aegis Frumento (BrokeAndBroker.com Blog)SEC Obtains Final Judgments Against Lek Securities and CEO in Layering, Manipulation Case Litigation Continues Against Ukraine-Based Firm, Individuals (SEC Release)'The IPO process has devolved,' tech investor Bill Gurley says as he leads a direct listing movement (CNBC.com by Lauren Feiner)
FINRA found that from August 2015, when FINRA previously sanctioned UBS for similar violations, through the end of 2017, UBS continued to fail to timely identify and properly address certain short positions in municipal securities. As a result, UBS inaccurately represented on customer account statements and Forms 1099 that interest payments for 2,853 positions in municipal securities were tax-exempt when, in fact, they were taxable, and inaccurately represented on approximately 950 additional customer account statements and Forms 1099 that interest payments were taxable, when they were tax-exempt. FINRA found that these failures were the result of the firm's continued failure to establish reasonably designed supervisory systems and written supervisory procedures to timely identify short positions in municipal securities and its failure to provide reasonable guidance to its registered representatives instructing them how to address the short positions.
From July 2009 through December 2013 (the "relevant period"), UBS failed to reasonably supervise and to have an adequate supervisory system, including adequate written supervisory procedures, to address short positions in tax-exempt municipal bonds that resulted primarily from trading errors at the Firm's retail branches. As a result of these supervisory failures, UBS inaccurately represented to approximately 4,371 customers that at least $1,165,000 in interest that the Firm paid to those customers was exempt from taxation. In fact, the Firm did not hold the bonds on behalf of the customers and the interest that the customers received was paid by UBS and thus taxable as ordinary income, The Firm failed to consider -- and its automated system that calculated the interest owed to customers did not take into account -- whether the interest it paid to customers should be coded as non-taxable when the interest was paid by the Firm rather than the municipal issuer. UBS's failure to have adequate systems and procedures to address instances in which it became short municipal bonds violated MSRB Rule G-27. The Firm's misstatements to customers regarding the tax-exempt status of interest payments violated MSRB Rules G-17 and G-8. And, its failure to maintain a record of the customers to whom its municipal short positions were allocated violated MSRB Rule G-8.
FINRA found that from August 2015, when FINRA previously sanctioned UBS for similar violations, through the end of 2017, UBS continued to fail to timely identify and properly address certain short positions in municipal securities.
ln AWC No. 2009018081101 (October 2013), FINRA censured and fined UBS for violating, among other rules, MSRB Rules G-17 and G-30(a). $20,000 of the $260,000 fine was apportioned to the violations of MSRB Rules G-17 and G-30(a). FINRA found that UBS violated MSRB Rules G-17 and G-30(a) by transacting municipal securities between its own account and customers where, in five instances, the aggregate price (including any mark-down or mark-up) was not fair and reasonable.My, my, my -- ain't those dollar fines sumthin'? In 2011 it was $300,000. In 2013 it was $260,000 (apparently a discount for volume). In 2015 it was $750,000. In 2019 it was $2 million.
In AWC No. 2007009401302 (September 2011), FlNRA censured and lined UBS $300,000 for failing to reasonably supervise certain cross-trades of municipal bonds by retail customers, in violation of MSRB Rule G-27.
[T]he Attorney General's investigation uncovered the posting of fake trades, bids, and offers by brokers of FX options, in order to ramp up interest from New York traders in largely illiquid emerging market currencies. An FX option is a financial instrument that confers the right to buy or sell a fixed amount of a specified currency at a specified exchange rate on or before a specific expiration date. Globally, trading in FX options averages billions of dollars per day and trillions of dollars per year. Banks typically use multiple, competing brokers for their FX options trading. Bank traders can post bids or offers for FX options directly on the electronic platform of a brokerage firm, but primarily negotiate trades by calling, messaging, or chatting with an individual broker. Brokerage firms are compensated based on volume of executed trades, and individual brokers are paid commissions based on trade volume. Prior to 2013, the FX options market was largely unregulated. However, in the wake of the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act required brokers of FX options to retain records regarding their trading activity and communications.The Attorney General's investigation revealed that between January 1, 2014 and December 31, 2015, brokers of FX options for emerging market currencies (EFX options) at BGC and GFI posted fake bids and offers on their electronic platforms for EFX options at a particular level to New York traders, when, in fact, no financial institution had actually bid or offered the option at that level. This practice, known as "flying" prices, was done to create a false appearance of greater liquidity in the EFX options market. During the subject two-year period, brokers at BGC and GFI "flew" hundreds of thousands of bids and offers for EFX options.Additionally, the Attorney General's investigation revealed that between 2014 and 2015, EFX options brokers at BGC and GFI announced fake trades to New York traders that had never actually occurred. This practice is commonly referred to a "printing" a fake trade. Brokers at BGC and GFI "printed" fake trades in EFX options to New York-based traders over the phone, via instant message chats, and on their electronic platform. These non-existent trades were intended to deceive traders into believing that a trade had occurred at a particular level and to induce traders to enter into genuine "follow-on" trades for EFX options, i.e., trades at the level at which broker had falsely reported a trade, in order to generate commissions.
Bill Singer's Comment: I compliment the NYAG's office on responding to the corrosive fraudulent trading practices with bespoke sanctions that creatively address some of the conduct. The NYAG's sanctions are necessary given the nature of the fraud; however, the sanctions also nurture and promote better policies and practices going forward. Of particular merit was the firms' certification that certain of its agents who were employed during the relevant period "are no longer employed," and that for a a five-year period, said agents will not be re-appointed "to any managerial position . . . to any supervisory role related to the brokering of FX Options to New York-Based Traders, or to any position as a broker of FX Options to New York-Based Traders . . ."
New Jersey Court Sustains Banking/Insurance Commissioners Penalties. Marlene Caride, Commissioner, New Jersey Department of Banking and Insurance, Petitioner/Respondent, v. Randolph A. Fisher, Jr., Kevin G. Madden, and Regal Financial Group, LLC, Respondents/Appellants (Opinion, Superior Court of New Jersey/Appellate Division, A-5327-1714 / October 2, 2019)
Appellants Randolph A. Fisher, Jr., Kevin G. Madden, and Regal Financial Group, LLC (Regal) appeal from the final agency decision of the Commissioner of the Department of Banking and Insurance (the Department) imposing monetary penalties and revoking Fisher and Regal's insurance-producer licenses, for violating the New Jersey Insurance Producer Licensing Act of 2001 (IPLA), N.J.S.A. 17:22A-26 to -57, and related regulations. We affirm.
Fisher and Madden were each fifty-percent owners of Regal. In October 2006, Fisher and Madden, on behalf of Regal, began to promote and sell an investment plan offered by National Foundation of America (NFOA), a Tennessee corporation not registered to do business, or authorized to sell insurance, in New Jersey. Fisher and Madden collectively met with four sets of prospective purchasers: J.K. and M.K., W.B., G.B. and M.B., and D.C. Each prospective purchaser was over eighty years old and planned using lifetime savings to purchase the plans. All four sets of clients signed an NFOA installment plan agreement. NFOA's application for 26 U.S.C. § 501(c)(3) status as a nonprofit charitable organization was pending before the Internal Revenue Service (IRS) when the meetings took place.
In May 2007, the Tennessee Commissioner of Commerce and Insurance (Tennessee Commissioner) notified the Department of a pending investigation of NFOA. In July 2007, a Tennessee court entered an order appointing the Tennessee Commissioner as a receiver of NFOA. That same month, a courtappointed special deputy receiver requested and received reimbursement from Regal of all commissions associated with the sale of the NFOA investment plans. The refunded commissions totaled $37,489.75. In March 2013, Richard Olive, the president of NFOA, was convicted in federal court of mail fraud, wire fraud, and money laundering. He was sentenced to a thirty-one-year prison term and ordered to pay nearly $6,000,000 in restitution to approximately 190 NFOA plan purchasers.
In January 2011, the Department of Enforcement at the Financial Industry Regulatory Authority (FINRA) filed a disciplinary proceeding against Fisher relating to his sale of NFOA investment plans. In March 2012, FINRA issued an order accepting an offer of settlement that suspended Fisher from associating with FINRA members for six months and required him to pay a $15,000 fine and restitution totaling $47,258.90.The Department asserted Fisher, Regal, and Madden violated IPLA and related regulations. Among other things, it claimed Fisher failed to conduct adequate due diligence prior to recommending the purchase of NFOA investment plans to the four sets of Regal's clients. The Department contended the NFOA product was always "too good to be true," adequate investigation would have revealed NFOA was not granted Section 501(c)(3) status, and NFOA was not authorized to sell insurance products in New Jersey. The Department alleged presenting the product as investment-worthy amounted to misrepresentation that harmed the elderly purchasers.
["F]isher erred, but his mistake did not rise to bad faith." His ability to pay monetary penalties was "very limited" based on his 2015 income tax return. Fisher realized no profit from the sales because the commissions were repaid to NFOA in 2007. As to injury to the public, the ALJ found "the public is harmed when faith in the insurance markets is damaged by illegal activity." The duration of the improper conduct was only five months. The case did not involve criminal activity by Fisher, Regal, or Madden. FINRA imposed a $47,258.90 restitution obligation, a $15,000 fine, and a six-month suspension against Fisher. Madden was not named in the FINRA proceeding. Fisher, Regal, and Madden had no past violations
an aggregate $4000 monetary penalty on counts one, four, seven, and ten; an aggregate $6000 monetary penalty on counts two, five, eight, and eleven; a $500 monetary penalty on count two; an aggregate $400 monetary penalty on counts three, six, nine, and twelve; and a $2000 monetary penalty on count 17. Fisher and Regal were made jointly and severally liable for the monetary penalties on counts one through twelve, totaling $10,900. Madden was made individually liable for the $2000 monetary penalty on count seventeen. Finally, the ALJ concluded license revocation was not warranted, and license suspension should be imposed only if Fisher, Regal, or Madden "fail to comply with the payment of penalties within a reasonable time."
[T]he Commissioner increased the aggregate penalty assessment on counts one through twelve to $60,000 against Fisher and Regal, for which they were jointly and severally liable. She imposed an aggregate $5000 penalty against Fisher individually on counts thirteen and fourteen. The penalty against Madden on count seventeen was increased from $2000 to $5000.
The Commissioner concluded the record compelled the revocation of Fisher's producer license. She found his "pattern of misrepresentation" related to over $800,000 in sales of annuities to senior citizens over eighty years old. Fisher induced four clients "to divest their life savings from legitimate financial products and invest that money in a product that Fisher had failed to vet prior to his recommendation." He promoted a product that "he should have known" was "too good to be true," yet "was not troubled enough by these enchanted promises to investigate any further." He solicited sales of "an annuity without knowing what it was he was selling to his elderly clients." His misconduct only ceased upon intervention by Tennessee regulatory authorities. His misbehavior was aggravated by his sale of products that were not permitted to be sold in New Jersey by an insurer that was not permitted to do business in this State. Fisher's testimony "indicates that he did not concern himself with the ramifications of recommending elderly clients to invest in a product that could jeopardize their life savings." The Commissioner determined Fisher's breach of trust and fiduciary duties through "gross incompetence" "constitut[ed] a gross deviation from the standard of care required of insurance producers."The Commissioner also found revocation of Regal's insurance producer license was appropriate, since it was vicariously liable for Fisher's actions under N.J.S.A. 17:22A-40(c).
[W]ith all due respect to the ALJ's evaluation of sanctions, the Commissioner has the final word as regulator and did not misapply her authority in strengthening them. Although these were appellants' first violations, they jeopardized the lifetime savings of elderly investors through purchasing investment plans that were nothing more than part of a large scale Ponzi scheme. The decision to impose substantial monetary sanctions was reasonable given the nature of the violations, the magnitude of the investments involved, and the need for deterrence. We discern no abuse of discretion.
[L]ek Securities agreed to a three-year injunction requiring it to terminate business with foreign customers potentially engaged in market manipulation or manipulative trading and largely prohibiting it from providing intra-day trading to foreign customers. Lek Securities also agreed to retain an independent compliance monitor for a three-year period and, along with Sam Lek, agreed to permanent injunctions from violations of the charged anti-fraud and manipulative trading provisions. Lek Securities will pay a $1 million penalty plus $525,892 in disgorgement and prejudgment interest, and Sam Lek will pay a $420,000 penalty. In settling the SEC's charges, Lek Securities and Sam Lek admit that as alleged in the SEC's complaint, Avalon's trading activity through Lek Securities constituted violations of the federal securities laws.
Special Agents from Homeland Security Investigations identified Curry and Brooke as managers of a San Diego-based business advertising the ability and willingness to sell Bitcoin (a specific type of cryptocurrency) for a premium, and always in cash, to the public. Persons who purchase or sell contraband on online black markets (also known as the "Dark Web") use cryptocurrency such as Bitcoin to conduct transactions. Cryptocurrency provides a vendor and customer with perceived anonymity. The Dark Web is a network of encrypted communication systems that can only be accessed using special software tools. Before someone can use cryptocurrency, they must first convert their "real," fiat currency (such as United States Dollars) into the cryptocurrency. A common way to do so is through an unlicensed money transmitting business (an "MTB") that exchanges cryptocurrency for cash.
As admitted in the plea agreements entered today before U.S. Magistrate Judge Michael S. Berg, Curry and Brooke conducted, controlled, managed, supervised, directed and owned all or part of a cryptocurrency MTB called "BayCoins." Curry described the unlicensed MTB to an acquaintance over text messages, stating: "I'm basically like a currency exchange place for Bitcoin"; and that he and Brooke advertised their MTB on a website that was equivalent to the "Craigslist of bitcoin".
By August 2018, BayCoins had posted two separate online solicitations - one with Curry's information and the other with Brooke's. The advertisements promised "quick, easy, and hassle free" Bitcoin transactions, with a "non-negotiable" five percent transaction fee, and always for cash. By accepting cash in exchange for cryptocurrency, as opposed to other forms of payment such as electronic money transfers, checks, or cash deposits into a bank account, Curry and Brooke operated their MTB in relative anonymity and evaded the anti-money laundering scrutiny of other licensed and registered financial institutions. This anonymity extended to their customers as well.BayCoins generated sufficient profits, alongside a growing inventory of cryptocurrency, to fund the defendants' acquisition, sale, and distribution of marijuana on various Dark Web marketplaces. After receiving payment for the marijuana, Curry and Brooke then sold the cryptocurrency for additional profit through the BayCoins unlicensed MTB.
In the past three years it's gotten worse and I think that's because the IPO process has devolved . . . it used to be that the IPO process was about disseminating and marketing and selling far and wide and it's become a game of just hand-allocating shares to the same 10 or 15 firms.Market Regulation Enforcement: Ensuring Market Integrity (FINRA Unscripted)
What happens if a brokerage firm doesn't report trading information appropriately? At first, it might seem like it isn't a big deal - just a data issue. But is vital. Accurate market data is at the foundation of FINRA's efforts to ensure the integrity of our markets.
On this episode of FINRA Unscripted, we are joined by Lizzie Hogan, senior vice president of Market Regulation Enforcement, to learn what her group does, how it fits under the broader Enforcement team umbrella and why market data cases matter.Bill Singer's Comment: One of FINRA's better podcasts. Interesting subject matter presented in a compelling fashion. Nice job!
The 2019 FINRA Industry Snapshot provides a high-level overview of the industry, ranging from the number of FINRA-registered individuals to the overall revenues of firms, and from trading activity to how firms market their products and services. All of the data are reported in aggregate to respect the confidentiality of regulatory information.