FINRA Orders Merrill Lynch, Pierce, Fenner & Smith Inc., Raymond James & Associates, Inc., and Raymond James Financial Services, Inc. to Pay More Than $12 Million in Restitution to Customers for Supervisory Failures Involving 529 Plan Share Classes / Firms Failed to Reasonably Supervise 529 Plan Share-Class Recommendations Made to Customers; Matters Identified Prior to FINRA Initiative Launched in January (FINRA Release)
The Division continues to respond to the Supreme Court's June 2018 decision in Lucia v. SEC, which held that the appointment of the SEC's Administrative Law Judges (ALJs) violated the U.S. Constitution's Appointments Clause and requiring a new hearing in front of a different fact finder. After Lucia, the Commission stayed all pending administrative proceedings. The Commission lifted the stay on August 22, 2018, and approximately 200 administrative proceedings were reassigned. In Fiscal Year 2019, many of the matters resolved without the need to have a rehearing. Three matters were the subject of full rehearings before new ALJs and we anticipate additional rehearings in Fiscal Year 2020.
At Page 21 of the 2019 Report
The Supreme Court's June 2017 decision in Kokesh v. SEC continues to impact adversely the Commission's ability to disgorge and return funds to investors injured by long-running frauds, such as Ponzi schemes, that often directly impact retail investors. In Kokesh, the Supreme Court held that Commission claims for disgorgement are subject to a five-year statute of limitations. The Kokesh decision has had a significant impact, as many securities frauds are complex, well-concealed, and are not discovered until investors have been victimized over many years. The Division estimates that the Kokesh ruling has caused the Commission to forgo approximately $1.1 billion dollars in disgorgement in filed cases. The actual impacts of Kokesh are likely far greater than this number reflects, however, because-since the Kokesh decision-the Division has shifted its resources to those investigations which hold the most promise for returning funds to investors. Thus, although the Division has seen some improvement this year in its effort to uncover, investigate, and bring cases as quickly as possible, it is likely that Kokesh will continue to impact our ability to recover for harmed investors in long-running frauds.
Office of the WhistleblowerSince its enactment in 2011, the SEC's whistleblower program has been very successful. Whistleblowers have made meaningful contributions to significant cases: whistleblower tips have resulted in high-quality SEC enforcement actions covering a broad range of misconduct and led to more than $2 billion in financial remedies ordered by the Commission since inception of the program. The Commission has recognized the importance of these tips by awarding 66 whistleblowers approximately $387 million. Success begets success. As a result, we again received thousands of whistleblower tips and a record number of whistleblower claims in Fiscal Year 2019. In response, we have been working to streamline and substantially accelerate the evaluation of claims for whistleblower awards and we expect to see substantial improvement in this regard in Fiscal Year 2020.
Merrill Lynch AWC https://www.finra.org/sites/default/files/2019-11/merrill-awc-110619.pdfRaymond James AWC https://www.finra.org/sites/default/files/2019-11/rja-awc-110619.pdf
These matters pre-date FINRA's 529 Plan Share Class Initiative announced in January, which encouraged member firms to voluntarily self-report potential violations relating to 529 plans.
529 plans are tax-advantaged municipal securities that are designed to encourage saving for the future educational expenses of a designated beneficiary. 529 plans are sponsored by states, state agencies, or educational institutions. States offer 529 plans either directly, through designated broker-dealers, or both. Because 529 plans are municipal securities, the sale of 529 plans are governed by the rules of the Municipal Securities Rulemaking Board.
Shares of 529 plans are sold in different classes with different fee structures. Class A shares typically impose a front-end sales charge but charge lower annual fees compared to other classes. Class C shares typically impose no front-end sales charge but impose higher annual fees than Class A shares. Because Class C shares may be more expensive over extended holding periods, Class A shares are frequently a more suitable option for accounts with younger beneficiaries and longer investment horizons (and/or accounts that qualify for breakpoint discounts).
Both Merrill Lynch and the Raymond James firms failed to ensure that registered representatives considered the various fee structures when making 529 plan recommendations to customers, particularly for accounts that had young beneficiaries and long-term investment horizons. Specifically, FINRA found that Merrill Lynch and the Raymond James firms failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to supervise recommendations of share classes of 529 plans. The firms' supervisory systems did not require registered representatives or supervisors to evaluate beneficiary age and the number of years until expected withdrawals, combined with the different fees and expenses of the share classes, when making share-class recommendations.
The SEC previously charged Osegueda and three other defendants for deceiving a brokerage firm into allowing Osegueda and two other defendants to deposit their Green Cures stock into their accounts in advance of their pumping up the company's stock price through a promotional campaign. Osegueda and two other defendants then dumped their shares on unsuspecting investors, generating approximately $1.9 million in illicit proceeds.
From 2017 through September 2019, SAINT CLAIR solicited investors for the launch of IGOBIT through promised investment returns and representations about World Sports Alliance's development projects around the world. World Sports Alliance did not in fact participate in any international development projects and SAINT CLAIR did not dedicate investor funds to IGOBIT. Instead, SAINT CLAIR diverted those funds to other entities controlled by him and members of his family, as well as to pay his personal expenses, including dinners at Manhattan restaurants, airline tickets, and online shopping.
[F]rom August 2014 through at least the end of March 2018, Bolton Securities invested advisory clients in mutual fund share classes that charged 12b-1 fees, and which had an available share class without 12b-1 fees. Those 12b-1 fees were paid to an affiliated broker-dealer under common ownership and control with Bolton Securities, which in turn paid some of the fees to Bolton Securities' investment adviser representatives. Bolton Securities, however, did not disclose to clients that it purchased or held share classes for its clients that generated 12b-1 fees for Bolton Securities' affiliate when different share classes of the same mutual fund were available that did not carry 12b-1 fees. In addition, the SEC alleges that from November 2014 through at least March 2019, Bolton Securities used the principal trading account of the broker-dealer under common ownership and control to engage in self-dealing transactions with its advisory clients that generated principal trading compensation for the broker-dealer, without providing disclosure sufficient for clients to provide informed consent to the conflicted transactions, and without obtaining required client consent.
The Indictment alleges that PIERRE engaged in two separate fraud schemes. In the first scheme, PIERRE, as the owner of his own consulting firm, R. Pierre Consulting Group LLC ("RPCG"), solicited money from investors by falsely promising them that he would earn a 20% return on their initial investment every 60 days through stock trading. In truth and in fact, PIERRE lost most of the money he traded on behalf of his investors, while falsely reporting to investors that their funds were growing as promised. Also contrary to his representations, PIERRE secretly used investor funds to purchase luxury vehicles and even a fast food franchise for himself. He also used funds from new investors to make payments to other investors to avoid his scheme being detected. Through his lies, PIERRE obtained over $2 million from over 100 investors. In the second scheme, PIERRE defrauded his former employers, two hotels, by regularly embezzling funds out of bank accounts belonging to those hotels and then depositing those funds through structured transactions, into bank accounts PIERRE controlled. In total, PIERRE stole over $400,000 from the hotels. . . .
[R]uless Pierre ran an investment club called the Amongst Friends Investment Group that operated as a fraudulent Ponzi scheme. From at least March 2017, Pierre allegedly raised over $2 million from at least 100 investors, predominately Haitian New Yorkers, who purchased high-yield promissory notes through Amongst Friends. As alleged, Pierre induced investors by promising unrealistically high rates of return of at least 20 percent every 60 days. In reality, the complaint alleges that Pierre incurred heavy losses trading securities and concealed them by using new investor funds to pay older investors and issuing false account statements showing investment gains. Pierre allegedly further financed the fraud by using money that he embezzled from a former employer to make interest payments to investors.
The SEC's complaint also alleges that Pierre fraudulently raised at least $375,000 from more than 15 investors related to a scheme involving the sale of partnership interests in a fast food chain. In or about November 2018, Pierre began to sell partnership interests in a fast food franchise, with agreements that falsely guaranteed monthly returns of 10 percent (60 percent per year) plus quarterly profit sharing. As alleged, at the time he sold these interests, Pierre knew that the franchise could not provide sufficient profits to pay investors the promised returns.
The commissioner also granted the investment adviser registration of the firm, Saint Petersburg, Fla.-based .Frugal Financial Retirement Plan Services had acted as an investment adviser for Texas clients since June 2015, but did not have enough clients - six or more - to require registration with the Securities Commissioner.In April 2018, the firm had at least six clients in Texas, meaning it lost its exemption from state registration requirements. The firm did not register and continued to advise the clients until June 2019. . .