Rep's Use of White-Out Erases Clean FINRA Regulatory Record. In the Matter of Peter Allan Earp, Respondent (FINRA AWC)FINRA Fines ABN Amro Clearing for Incorrect Margin Calculations. In the Matter of ABN AMRO Clearing Chicago LLC, Respondent (FINRA AWC 2016049875801)FINRA NAC Modifies Findings and Sanction in CL King Appeal. FINRA Department of Enforcement, Complainant, v. C.L. King & Associates, Inc. and Gregg Alan Miller, Respondents (National Adjudicatory Council Decision, Disc. Proc. 2014040476901 / October 2, 2019)
KPMG is one of the largest accounting firms in the world. In recent years, KPMG fared poorly in PCAOB inspections, and in 2014 received approximately twice as many comments as its competitor firms. By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel, including Brian Sweet. At the time, BRITT was a partner in DPP, which was broadly responsible for the quality of KPMG's audits and KPMG's performance in PCAOB inspections.KPMG's efforts to improve inspection results, however, were not limited to legitimate means. Instead, between 2015 and 2017, BRITT, David Middendorf, Thomas Whittle, Cynthia Holder, Brian Sweet, and Jeffrey Wada worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results. For example, during Sweet's first week of employment at KPMG in 2015, BRITT, Middendorf, and Whittle began asking Sweet for confidential PCAOB information about which KPMG audits would be inspected by the PCAOB that year.In March 2016, Holder obtained the PCAOB's confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion. Wada - who was not responsible for KPMG inspections at the PCAOB- accessed and stole valuable confidential information from the PCAOB and passed it on to Holder. Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to Middendorf, Whittle, and BRITT. Middendorf, Whittle, BRITT, and Sweet then agreed to launch a stealth program to "re-review" the audits that had been selected. In order to cover up their illicit conduct, BRITT gave other KPMG engagement partners a false explanation for the re-reviews. The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder. At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG. Sweet shared the preliminary inspection selections provided by Wada with Whittle and BRITT, while noting that the information was only preliminary. Whittle's response was to ask Sweet to confirm that they would get the final list as well.In February 2017, Wada texted Holder saying "I have the grocery list. . . . All the things you'll need for this year." Wada then spoke to Holder and provided her with the full confidential 2017 final inspection selections. Holder again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and BRITT, so that it could be acted upon to improve the audits on the list.In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, and it was ultimately reported to KPMG's Office of General Counsel.
[S]abengsy forged the signatures of two of her customers in order to facilitate unauthorized insurance transactions and obtain commissions on those transactions. Specifically, in August 2017, Sabengsy forged the signature of her customer RD on two documents related to the purchase of a variable annuity policy. RD was not aware of, and did not authorize or consent to, the purchase of the variable annuity policy.1 In addition, in October 2017, Sabengsy forged the signature of another customer, SM, on two insurance policy documents in order to effect a transaction converting his term life insurance policy to a whole life insurance policy. SM was not aware of, and did not authorize or consent to, the policy conversion.2Sabengsy forged customers' signatures on at least 10 other documents while associated with the Firm. Although in these instances the underlying transactions were authorized, the customers did not authorize Sabengsy to sign their names on the documents. Sabengsy forged the customers' signatures in order to advance the receipt of commissions. Specifically, in April 2016, Sabengsy forged the signature of her customer RM on eight documents relating to the purchase of two term life insurance policies, and in May 2017, Sabengsy forged the signature of her customer RD on two documents related to the purchase of a whole life insurance policy. Neither RM nor RD authorized Sabengsy to sign their names on the documents.
= = = = =Footnote 1: After learning of the purchase, RD chose to keep the variable annuity policy although she did not contemporaneously authorize the purchase.Footnote 2: The Firm reinstated SM's original term life insurance policy and refunded the premiums he paid associated with the whole life insurance policy.
From approximately 2008 through 2018, Earp was the registered representative of record for customer JL at Schwab. In April 2018, JL informed Earp that he wanted to transfer securities from the Joint Account to his own account at the Firm. JL informed Earp that he had funded the purchase of the securities himself.Earp advised JL of his belief that JL, as a joint accountholder, had the authority to transfer the securities without his brother's consent.Earp further advised JL that by using Schwab's form for requesting transfers of securities (the "Schwab Transfer Form"), the Firm would retrieve the stock from the Custodian and deposit it into IL's Firm account without requiring his brother's consent. However, upon subsequently reviewing the Schwab Transfer Form, Earp realized that the form, in fact, required the names and signatures of all of the accountholders on the account from which the securities would be transferred. Notwithstanding the requirements of the Schwab Transfer Form, Earp believed the requirement was administrative and that in practice Schwab did not require the signature of JL's brother to transfer the securities.In order to effect the transfer for JL and minimize the risk that the Firm would administratively reject the transfer request, in June 2018, without JL's knowledge, Earp falsified the Schwab Transfer Form by omitting the name of JL's brother. JL signed the Schwab Transfer Form without noticing that Earp had omitted his brother's name. In addition, the Finn required Earp to attach to the Schwab Transfer Form an account statement for the Joint Account from which the securities would be transferred. Without JL's knowledge, Earp also altered a copy of that statement with correction fluid to remove the name of IL's brother from the document.After Earp submitted these documents to the Firm, the Firm effected the transfer of the securities. Earp obtained $12 in connection with the transfer.After discovering the falsification, the Firm terminated Earp's association with the Firm, reversed the transfer and returned the securities to the Joint Account JL held with his brother at the Custodian.
During a routine exam, FINRA found that the firm was calculating portfolio margin requirements incorrectly. AACC was including non-margin equity securities as margin eligible for certain customer accounts. The firm incorrectly applied a 15 percent margin requirement to equities that were not margin eligible, instead of the 100 percent required amount. As a result, the firm failed to require adequate equity to support the margin borrowing in these accounts. The non-margin eligible securities at issue were traded OTC and not on a domestic exchange, consisting principally of American Depositary Receipts of foreign equities. The firm mistakenly categorized the OTC traded equities at issue as margin eligible because of an incorrect definition of margin eligible securities used by the firm. After the problem was identified by FINRA, the firm corrected the issue.Based on a sampling methodology, FINRA found that during the relevant period, the firm understated margin requirements at various points of time for 22 accounts. The aggregate understatements in the firm's portfolio margin accounts on the sampled dates ranged from approximately $1.27 million to more than $101 million. Generally, these understatements did not result in margin deficiencies because the accounts at issue had sufficient margin on deposit in the form of securities and other assets in excess of the recalculated requirement. In no instance did the understatements cause the firm to have a net capital deficiency.
On appeal to the NAC affirmed the OHO Panel's findings with the exception that it reversed the findings that C. L. King & Associates negligently made material misrepresentations and omitted to disclose material information to the issuers of debt securities Also, the NAC modified the OHO Sanctions by reducing the firm's total fines and reducing Miller's suspension from six to 3 months. As such, the NAC found that:Respondent Firm negligently made material misrepresentations and failed to disclose all material facts to issuers in connection with its redemptions of debt securities on behalf of a customer, in contravention of Sections 17(a)(2) and (3) of the Securities Act of 1933, which constitutes a violation of FINRA Rule 2010.In connection with its debt securities business, the Firm failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to ensure that the Firm complied with Section 17(a) of the Securities Act.The Firm and Respondent Gregg Alan Miller failed to establish and implement an Anti-Money Laundering program reasonably designed to cause the detection and reporting of suspicious transactions under the Bank Secrecy Act related to the liquidation of billions of shares of low-priced penny stocks by two Firm customers.Respondents failed to conduct adequate due diligence and respond to red flags indicative of potential money laundering activity by a Firm customer, a foreign financial institution.The Firm is censured and fined $750,000. Miller is suspended in a principal capacity for six months and fined $20,000. Respondents also are ordered to pay costs, for which they are jointly and severally liable.
We have considered that the Hearing Panel fined CLK a total of $450,000 for the firm's AML-related violations, but we determine that a reduction in the fine is appropriate given that we direct the firm to retain an independent consultant. Good compliance is critical to the business of the firm. A culture of compliance must be established and passed down through all levels of the firm, with adequate resources allocated to assure that appropriate supervisory and compliance controls are in place. An independent consultant should assist the firm in establishing a successful supervisory program going forward.
JOHN GERACI was the principal and founder of Meridian Capital Asset Management. In or about February 2015, GERACI was introduced to another individual, Nicholas Mitsakos, who purported to operate a hedge fund called Matrix Capital ("Matrix"). Mitsakos told GERACI that Matrix had tens of millions of dollars under management and had achieved annual returns between 19.4% and 66.3% from 2012 to 2014. GERACI and Mitsakos subsequently entered into an arrangement whereby GERACI would raise money for Mitsakos, Mitsakos would manage that money through a new vehicle, the Meridian Matrix Fund, and GERACI and Mitsakos would then split any fees that the Meridian Matrix Fund generated. As part of this arrangement, GERACI solicited Victim-1 and Victim-2 to invest approximately $2 million in the Meridian Matrix Fund, in large part by relying on Mitsakos's claims about his supposed fund's assets under management and performance returns.In or about December 2015, however, GERACI learned that Mitsakos had only invested approximately $1.2 million of Victim-1 and Victim-2's investment, and had misappropriated significant portions of the remaining money. GERACI also learned that Mitsakos never had any actual assets under management, and that his performance returns were accordingly fictitious and misleading. Nonetheless, GERACI never told Victim-1 or Victim-2 that their investment was in jeopardy or had been solicited with misleading information. To the contrary, GERACI sent Victim-1 and Victim-2 updates that hid Mitsaskos's misappropriation and falsely claimed that their investment had appreciated. GERACI sent these fictitious updates even after GERACI had liquidated the Meridian Matrix Fund's trading positions in or about June 2016.In or about August 2016, Mitsakos was charged in this District with securities fraud and other offenses. In or about September 2016, GERACI changed course: instead of providing fictitious account updates to Victim-1 and Victim-2, GERACI told them, in substance and in part, that their entire investment had been wiped out through Mitsakos's fraud. GERACI did this even though he had ultimately received approximately $1.1 million of Victim-1 and Victim-2's investment back from Mitsakos after liquidating the Meridian Matrix Fund's trading positions. Rather than returning this amount to Victim-1 and Victim-2, GERACI used it to pay for his own personal and business expenses, including, for example, payments on a BMW automobile, a gym membership, gas, groceries, travel expenses, and his cellphone bill.In addition to sending false account updates to Victim-1 and Victim-2 even after learning that Mitsakos had lied about his fund's assets and performance and that Mitsakos had stolen significant portions of Victim-1 and Victim-2's investment, GERACI continued to try to raise money for an investment related to Meridian Matrix Fund from others. In attempting to do so, moreover, GERACI relied on the same representations about Matrix's assets and performance that he knew to be false.Mitsakos pled guilty to conspiring to commit securities fraud and wire fraud on May 25, 2017, and on November 7, 2017, was sentenced to 30 months in prison by the Honorable Denny Chin, a judge on the United States Court of Appeals for the Second Circuit who was sitting by designation in the Southern District of New York.