Securities Industry Commentator by Bill Singer Esq

November 25, 2019

featured in today's Securities Industry Commentator:

CFTC Orders BGC Financial, L.P. to Pay $3 Million for Supervision, Reporting, and Recordkeeping Violations (CFTC Release)
We got this guy who defrauded elderly widows into buying annuities. It's tough to come up with a worse lead-in for an article, no? The good news is that he was sentenced to 40 years in prison. The bad news . . . well, it just doesn't seem to stop.
In a FINRA Arbitration Statement of Claim filed in February 2019, associated person Claimant Davis sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Raymond James did not oppose the requested relief, the customer at issue indicated that he did not opposed the expungement, and neither Respondent nor the customer participated at the expungement hearing. The FINRA Arbitration Panel recommended expungement pursuant to a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous, and false. As set forth in the Panel's rationale:

As a preliminary matter, the Panel notes that the overstated claim was for $55,000 which settled by Respondent for $7,500.00 to avoid the costs of defense. Under oath, Claimant credibly testified that he in fact did not contribute to the settlement amount irrespective of the error on his CRD records and BrokerCheck Report. Claimant voiced to Respondent his strongly felt desire to contest the claim completely, however, Respondent chose for economic reasons to do otherwise. the Panel finds it serves no public or regulatory interest to keep an exaggerated claim on the record of this broker.

Specifically, the Customer's complaint arose from an investment in early 2012 by the Customer in a single oil security being Linn Energy. The Customer left Respondent and Claimant in September 2012. At the time, his investment in Linn Energy had an unrealized gain of approximately $36,812.00.  Three years later, while at a different firm with a different financial advisor, the Customer sold his Linn Energy at a loss.

The Customer's Statement of Claim lacked credibility and was structured to elicit sympathy from a claim otherwise devoid of merit Further, the exaggeration continued when the claim was couched as "speculative oil investments such as Linn Energy." The plural is great for effect but not the truth. There was only one such investment-Linn Energy. It also is phrased to suggest that broker was engaged in misconduct over a long period of time The testimony presented to this Panel is that the Linn Energy investment was purchased and held at Respondent for less than nine months. The allegations on the CRD and BrokerCheck Report of "Incident Dates 2004 through 2017" are false. 

Beyond the above, the Customer's Statement of Claim is devoid of any facts to substantiate its meritless claim as to all of the allegations asserted on the CRD. The pleadings in the underlying case show that the Linn Energy investment was less that 5% of the Customer's total portfolio and the risk tolerances and investment objectives were within those of the Customer as stated in the New Account form at the the time the investment in Linn Energy was made. Considering the investment experience, income and net worth of the Customer, the investment was suitable.

This expungement will have no adverse effect on the investing public, regulators or both, and is [sic], in fact, does unwarranted harm to the financial advisor.

Bill Singer's Comment: About as perfect a bit of a Panel's rationale for recommeding expungement as anyone could (or should) ask. No . . . let's not get carried away here and cite this matter as proof that all customer complaints are rubbish and every associated person is a victim. That's nonsense. On the other hand, let's credit this FINRA Decision as a fair and reasonable example of correcting a wrong that emerged from a customer's exaggeration of the facts and served to cause unwarranted harm to a victimized advisor. Compliments to Bruce W. Barnes, Esq. of Bruce W. Barnes, P.A. for an excellent job furthering Claimant Davis's expungement.
In an Indictment filed in the United States District Court for the District of New Jersey, Herbert Whalen a/k/a "Bert Whalen" was charged with one count of conspiracy to commit wire fraud and three counts of wire fraud. As alleged in part in the DOJ Release:

Between August 2016 and July 2018, Whalen, the owner of Oceanpointe Property Management in Indianapolis, Indiana, engaged in a scheme to obtain money from victim real estate investors by misrepresenting and concealing the poor condition of properties managed by Oceanpointe and by creating fake leases for unoccupied Oceanpointe properties. Employees from Company 1 and Oceanpointe promised investors that, after repairs and rehabilitations were completed, and tenants rented the properties, investors would receive copies of the leases and begin to receive rent payments as their return on investment. In reality, many Oceanpointe properties were not repaired and rehabilitated, and were not ready for occupancy. To conceal this fact from victim investors, Whalen and Coconspirator 1 directed Oceanpointe employees to draft fake leases, making it appear to investors that Oceanpointe properties were rented, when, in fact, the properties remained vacant. Whalen instructed Oceanpointe employees to place fake tenant names on leases to send to Oceanpointe investors.

When investors attempted to view the properties that they had purchased, Whalen directed Oceanpointe employees to cover the windows to make the properties appear to investors as if work was being completed, when, in fact, it was not. Oceanpointe employees did this to conceal the poor condition of the properties and the fact that the properties remained vacant. Whalen, Coconspirator 1, and others commingled tenant rent payments and selected which investors would be paid from the pool of funds in order to silence investors who voiced concerns and evade detection of the fraud. In order to prevent investors from leaving Oceanpointe and exposing the fraudulent conduct, Whalen directed an Oceanpointe employee to create a false identity and falsely claim, on an online real estate message forum, that the Oceanpointe employee was an investor with Oceanpointe and Company 1, and that Oceanpointe had addressed all of the concerns regarding the investment property. These misrepresentations and others led to millions of dollars in losses to investors, which Whalen used to, among other things, fund his and Coconspirator 1's lifestyle.
The CFTC issued an Order, which filed and settled charges against future industry voice broker and registered futures commission merchant BGC Financial L.P. The Order imposes a cease-and-desist upon BGC and requires it to pay a $3 million civil monetary penalty and to comply with specified undertakings, including remediation and retention of an outside consultant to assess compliance, recommend improvements, and generate reports on its findings and remediation efforts. As alleged in part in the CFTC Release:

From at least 2014 to March 2019, BGC failed to establish an adequate supervisory system and to diligently perform its supervisory duties with respect to its traditional and block trading futures brokerage businesses.  Among other things, BGC lacked adequate procedures or processes in such areas as the creation, maintenance, and retention of audit trail data and failed to follow its policies and procedures regarding brokers' use of personal cell phones to conduct firm business.  Also, in two instances, BGC branch managers were unaware of their designation in BGC's FCM Manual as the designated supervisory manager for several brokers at their respective branch.  BGC's failure to supervise contributed to its other violations of its recordkeeping, reporting, and other obligations.    

In particular, the order finds that BGC had multiple voice recording or retention failures, resulting in BGC's failure to capture verbal bids, offers, orders, and other important trade communications.  For example, in 2016, BGC lost nearly four months of voice recordings for thousands of brokered block trades.  Additionally, BGC took more than two months to complete an initial production of audit trail data for a sample of 100 block trades requested by the CFTC Division of Enforcement due to its difficulty identifying and compiling the audit trail.  The order finds that, upon learning of repeated voice recording and other recordkeeping failures, BGC failed to meaningfully alter its policies and procedures.         

According to the order, BGC also failed to adequately disclose in its 2015 and 2016 Chief Compliance Officer (CCO) reports material noncompliance issues related to voice capture and retention and to sufficiently describe the connection of those issues to identified remediation efforts.  As a result, the CFTC was unable to accurately evaluate the noncompliance issues and remediation efforts.

The order further finds that BGC failed to notify the CFTC of numerous formal investigations by other regulatory bodies and was delinquent by months, and even years, in notifying the CFTC of other required events.  For example, BGC failed to notify the CFTC of a Securities & Exchange Commission (SEC) investigation until more than four years after BGC was aware of it and only after a $1.25 million settlement was reached.