NOTE: Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

2009

FINANCIAL INDUSTRY REGULATORY AUTHORITY
FINRA
NASD Rules CASES OF NOTE 

DEVELOPING ENFORCEMENT TRENDS AS NOTED BY BILL SINGER

OUTSIDE ACCOUNTS

BORROWING

E-COMMUNICATIONS

WEBSITES

 PRIVATE PLACEMENTS

Cagan; Stebbins

Chiappetta; Mispel; Tipton; Wacik

The Firm distributed a mailing referencing private placements offered by the firm that were represented to be exempt from registration pursuant to SEC Rule 506 of Regulation D, which requires compliance with SEC Rule 502 that prohibits general solicitations. Because individuals who received the mailing lacked a pre-existing business relationship with the firm, the mailing was considered a general solicitation in contravention of SEC Rule 502 and therefore, the firm’s transactions did not qualify for an exemption under SEC Rule 506--no other exemption was available and the securities were not registered. Individuals made investments in the offerings and the transactions constituted the sale of unregistered securities. The firm’s supervisory system and its written supervisory procedures addressed private placements but were not reasonably designed to achieve compliance with the registration requirement of Section 5 of the Securities Act of 1933 or the eligibility requirements for Regulation D exemptions. The system and procedures did not provide adequately for the detection and prevention of general solicitations by firm personnel. 

Stonehurst Securities, Inc.: Censured; Fined $25,000

The Firm

• failed to preserve business-related instant messages its associated persons sent or received; and 
• failed to establish and maintain a supervisory system reasonably designed to achieve compliance with securities laws, regulations and FINRA rules applicable to the preservation of business-related instant messages. 

The Firm’s membership agreement with FINRA precluded it from holding customer securities and, without filing an application for approval of a material change in business operations, the firm held customer securities on numerous dates within an eight-month period. The Firm conducted a securities business without maintaining its required net capital and maintained materially inaccurate computations of its excess net capital in its books and records for several months. 

Nexcore Capital, Inc.: Censured; Fined $35,000

The Firm failed to establish and maintain a system to retain for more than 30 days its electronic communications related to the firm’s business, including emails firm employees sent or received, and failed to retain a record of supervisory review of those electronic communications for production to FINRA upon request. 

Meyers Associates, L.P.: Censured; Fined $60,000

The Firm failed to develop and implement a customer identification program. The Firm’s Checks Received and Forwarded Blotter or an equivalent record was inadequate in that the firm failed to record checks received. The Firm failed to develop and maintain a continuing and current education program for its covered registered persons for one year, in that it failed to develop a written training plan outlining the Firm Element program and failed to maintain records documenting the content and completion of the Firm Element by its covered registered persons. 

Kern, Suslow Securities, Inc.: Censured; Fined $22,500

The Firm failed to enforce written supervisory procedures, in that it failed 

• to maintain separation between its sales and investment banking departments to prevent communication of material, non-public information concerning investment activity to anyone outside the investment banking department without the prior approval of designated managers; 
• to establish “Grey List” procedures to be implemented when the firm is about to obtain, or has obtained, material, non-public information concerning a security; and 
• to establish a “Restricted List” procedure designed to prohibit insider trading violations and appearances of impropriety. 

The Firm failed to enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information by the firm or any person associated with it. 

David A. Noyes & Company: Censured; Fined $22,500; Required to revise its supervisory system regarding 

• the misuse of material, nonpublic information by the firm or any person associated with it; 
• maintaining separation between its sales and investment banking departments to prevent communication of material, non-public information; and
• establishing “Grey List” and “Restricted List” procedures.

Noyes is as close to a perfect self-regulatory case as I could hope for!  First, FINRA is truly on the side of the Angels with this one because it goes to the heart of what regulation needs to do.  Few things undermine the public's confidence more than the appearance of insider trading or the leaking of inside information.  As such, this case touches on two important regulatory concerns.  On the other hand, since there is no allegation of any insider trading or misuse of inside information, it seems that FINRA was largely citing lapses in the member's supervisory system--which perfectly plays into the need for proactive regulation.  Finally, while FINRA could have imposed a six-figure fine, the outcome here seems fair and balanced: a relatively modest fine and an even more important effort to deal with the problem in the most direct and effective means, e.g., rewrite the offending written supervisory policies/procedures.

Now if you folks would just stay the course here, maybe I could continue to send you these laudatory comments.  We'll see.

The Firm 

• did not adequately retain and archive back-up tapes, 
• permitted representatives to change their desktop computer settings to stop outgoing emails from being retained automatically, and 
• did not prevent representatives from deleting emails or moving incoming emails to their desktops prior to daily backups so that emails would not be retained automatically. 
• utilized an email system that overwrote email back-up tapes that contained emails employees sent or received every three or four weeks. 
• permitted representatives to use, or failed to prevent them from being able to use, public instant messaging and other means of electronic communications without retaining the communications. 
• implemented a new email retention system, but the system malfunctioned and the firm did not have adequate systems and procedures in place to detect and prevent the malfunctions. 

"FINRA found that the deficiencies did not result in the firm’s failure to produce emails that were material to any regulatory investigation or legal proceeding."

AXA Advisors, LLC: Censured; Fined $350,000

Separately, and "no" I can't resist taking this shot, I hope that FINRA and the SEC both note that AXA was charged with using a supervisory system that "malfunctioned" and prevented the organization from having "adequate systems and procedures in place to detect and prevent the malfunctions."  Perhaps when the Madoff affair and other fraud cases are finally over, some independent prosecutor will investigate apparent lapses by Wall Street's regulators and similarly conclude and charge that those regulators implemented malfunctioning regulatory policies and procedures that failed to detect and prevent fraud.  Of course, unlike FINRA's conclusion in the AXA case, I would likely argue that such "deficiencies" did result in harm to the public.

Acting through Orr, the Firm participated in private placements that were contingent upon receiving a minimum and/or a maximum of investor funds and during the offering periods, the firm failed to transmit investor funds to a bank that had agreed, in writing, to hold such funds in escrow for the investors until the offering contingency was met but, instead, investor funds were held in an account over which Orr had control as escrow agent. As a result of the firm’s control over the funds held in connection with the private placements, it was deemed to be in control of customer funds, which resulted in an increase in its net capital requirement, but the firm was found to be deficient in its net capital while conducting a securities business. 

On the firm’s behalf, Orr failed to maintain a Cash/Checks Received and Forwarded Blotter, or an equivalent record to reflect the receipt and/or forwarding of funds as required by SEC Rule 17a-3. The Firm did not have an adequate email retention system and therefore failed to adequately preserve emails as required. The Firm failed to establish and maintain a supervisory system reasonably designed to ensure compliance with applicable laws, rules and regulations in connection with the private placements conducted by the firm, and the firm failed to retain a written record of the dates upon which reviews and branch office inspections were conducted. 

G.C. Andersen Partners Capital, LLC: Censured; Fined $65,000

Bruce Neal Orr (Principal): Censured: Fined $15,000

Acting through Chachkes, Edelman and others, the Firm sold securities short during the five business days before the pricing of public offerings and then engaged in covering transactions with shares from public offerings in violation of SEC Rule 105: Short selling in connection with a public offering. 

The Firm’s supervisory system 

• failed to provide for adequate and reasonable supervision of the individual representatives’ activities, and its supervisory system and written procedures did not provide for supervision reasonably designed to achieve compliance with and prevent violations of SEC Rule 105. 
• did not include written supervisory procedures providing for a statement of the steps to be taken by the responsible person in connection with SEC Rule 105 supervision. 

The Firm 

• provided inaccurate information in response to a FINRA inquiry, which was caused by its failure to have in place adequate supervisory procedures reasonably designed to ensure that the firm provided responsive information to regulatory inquiries;
• failed to make and preserve books and records, in conformity with SEC and FINRA rules; 
• order tickets did not reflect the correct price, lacked time stamps or contained inaccurate time stamps; and
• failed to preserve brokerage order memoranda for a period of not less than three years, the first two in an accessible place. 

First NewYork Securities, L.L.C.: Censured; Fined $170,000; Ordered to disgorge $171,504.44 in unlawful profits; Required to revise its written supervisory procedures to achieve compliance with, and prevent violations of, Securities and Exchange Commission (SEC) Rule 105, and to include the supervisory steps to be taken by the responsible person in connection with SEC Rule 105 supervision.

Larry Chachkes:Censured; Fined $30,000

Joseph Eric Edelman: Censured; Fined $50,000

Acting through Davenport and other individuals, the Firm 

• failed to obtain written consent to conduct Web CRD searches pertaining to individuals not seeking registration or assignment with the firm, and 
• falsely certified that written consent had been obtained fromthe individuals whose CRD records were searched.

The Firm failed to establish and maintain adequate written procedures to supervise the use of Web CRD, and failed to adequately train and supervise all of the employees who were permitted access to Web CRD to ensure that the requisite written consents were obtained prior to conducting all Web CRD searches. 

Fifth Third Securities, Inc.: Censured; Fined $20,000 ($5,000 jt/sev with Davenport)

Cynthia Lynn Davenport (Principal): Fined $5,000 jt/sev with Firm; Suspended 2 months in all capacities

Without permission or authorization from his member firm, he paid $29,000 to public customers in an attempt to prevent them from filing a complaint against him with his firm. 

Lance Jeffrey Ziesemer: Fined $5,000; Suspended 20 business days in all capacities

Wacik borrowed $45,000 from a public customer, contrary to his member firm’s policy prohibiting registered representatives from borrowing froma customer, and concealed the loan from his member firm by falsifying a response on an annual compliance questionnaire, and failed to repay $40,000 of the loan. Wacik willfully failed to disclose material information on his FormU4. (FINRA Case #)

Brian Mark Wacik: Ordered to pay $40,842.78, plus interest, in restitution to a public customer; Barred

Tipton engaged in an outside business activity, for compensation, without prompt written notice to his member firm. Also, he loaned $600 to a public customer in breach of his firm’s procedures that prohibited borrowing and lending transactions with customers. Tipton failed to appear for a FINRA on-the-record interview. 

Jeffrey Eugene Tipton: Barred

Stebbins engaged in his member firm’s investment banking and securities business in capacities requiring registration as a representative and principal, but he was not registered in those capacities. Stebbins engaged in an outside business activity, for compensation, without prior written notice to his member firm. Stebbins had a beneficial interest in securities accounts maintained at other member firms and failed to disclose to the carrying broker-dealers that he was associated with FINRAmembers, and also failed to give his member firms written notification that he had a financial interest in securities accounts with the carrying broker-dealers. 

Stebbins knowingly provided false and/or misleading information in response to FINRA requests for information; and failed to respond to FINRA requests to appear for an on-the-record interview and to provide information and documents. 

Jeffrey Michael Stebbins: Barred

Without his member firm’s knowledge or consent, Mispel borrowed $20,000 from a public customer in contravention of his firm’s procedures prohibiting the borrowing and lending money between a registered person and the firm’s customers. 

Shane David Mispel: Fined $5,000; Suspended 30 days in all capacities

Marshall engaged in a private securities transaction despite his member firm’s denial of authorization because the size of the investment would concentrate too much of a trust’s assets in a single investment. Marshall requested his firm to wire the transaction amount to an outside bank account where it was invested in the hedge fund through Marshall’s partner, knowing it was an unapproved private securities transaction. Marshall failed to provide an accurate and complete response to his firm when asked why the trust was moving funds out of the firm. 

John Gilbert Marshall Jr.: Fined $7,500; Suspended 6 months in all capacities

See the Private Securities Transactions page for more details

Contrary to the instructions given her, Langlois left the testing center during the course of the Series 66 examination, reviewed written notes that contained material relevant to the examination, returned to the testing center and completed the examination. 

Madeline Marie Langlois: Fined $5,000; Suspended 2 years in all capacities; Required to retake and pass the Series 66 prior to resuming registered activity

NAC Decision

SEC Remand Decision

This matter was remanded from the SEC to redetermine the sanctions that should be imposed on Richard F. Kresge ("Kresge"), formerly the president of Yankee Financial Group, Inc. ("Yankee Financial" or "the Firm"), for supervision, reporting, and registration violations. Kresge's violations occurred during a period when new representatives of the Firm engaged in fraudulent sales practices and unsuitable recommendations that caused substantial harm to customers. 

NASD barred Kresge in all capacities, ordered restitution to the customers at issue in the amount of $3,866,426, plus interest, and assessed costs of $9,519.61. NASD stated, “[W]e aggregate respondents’ misconduct for purposes of imposing sanctions because such misconduct emanated from a single, underlying problem: respondents’ addition of, and failure to monitor, the Brooklyn office.” 

The SEC sustained NASD’s findings that Kresge violated Conduct Rules 2110, 3010, and 3070(c) and Membership and Registration Rules 1021(a), 1031(a), IM-1000-1, and IM-1000-3. However, the SEC set aside NASD’s findings that Kresge was liable for violations by certain registered representatives of Yankee Financial of Exchange Act Section 10(b), Exchange Act Rule 10b-5, and Conduct Rules 2120, 2310, and IM-2310-2. The SEC set aside FINRA's earlier findings that Kresge had secondary liability for such fraudulent and unsuitable recommendations. Accordingly, the SEC remanded this proceeding to NASD for a redetermination of the sanctions to be imposed upon Kresge. 

Kresge failed to 

• establish or maintain a system of supervision reasonably designed to achieve compliance with applicable securities laws;
• register an individual, either as a principal or a representative, who was actively engaged in the management of the firm’s securities business as either a principal or representative of his member firm; and
• report customer complaints to FINRA.

The NAC considered Kresge’s violations as a whole and imposed the sanction of a bar in response to the totality of the misconduct. The NAC weighed each violation, in addition to Kresge’s “highly troubling” disciplinary history, and found a bar necessary “to protect investors.” 

Richard Francis Kresge: Barred

Jordan failed to 

• establish, maintain and enforce an adequate supervisory system and written supervisory procedures with respect to the business conducted in a branch office; 
• establish, maintain and enforce written supervisory procedures reasonably designed to achieve compliance with the recordkeeping requirements of SEC Rule 17a-4 as it pertains to preserving electronic communications; 
• develop and implement adequate AML procedures to achieve and monitor its obligations under the Bank Secrecy Act and related U.S. Treasury regulations; and 
• report customer complaints to FINRA. 

Dennis Jordan: Fined $60,000; Barred in Principal capacities only.

Jacobs failed to properly supervise the private securities transactions of registered representatives at his member firm and failed to ensure that the transactions were recorded on the firm’s books and records. 

Alan Lawrence Jacobs: Fined $10,000; Suspended 30 business days in Principal capacities only.

Harris falsified an annuity distribution request form by cutting signatures from another document and taping them to the form, then transmitting or causing it ot be transmitted to the insurance company for payment. Harris forged a customer’s initials without his knowledge, authorization or consent on a Subscription Agreement that the customer had previously signed, and then submitted it to the issuer. Harris failed to respond to FINRA requests for information and to appear for an on-the-record interview. 

Stephen Colley Harris: Barred

While associated with a member firm, Chiappetta loaned $14,222.45 to unrelated public customers in violation of the firm’s written procedures that prohibited its registered representatives from borrowing or lending to customers unless the customer is an immediate family member of the representative. 

Gino Nick Chiappetta:  Fined $5,000; Suspended 5 business days in all capacities

Cagan failed to inform his member firm of securities accounts he maintained at other member firms; and failed to provide written notice of his association with a member firm to the member firms where he maintained accounts. 

Laird Quincy Cagan (Principal): Fined $5,000; Suspended 10 business days in all capacities

The Firm failed to comply with the Taping Rule, in that it 

• provided certain representatives with access to unrecorded telephone lines;
• allowed representatives to accept customer orders on unrecorded telephone lines when the representatives were out of the office; and 
• failed to catalog tape recordings that registered persons had made. 

During a later period, the Firm installed a new system that recorded telephone calls to the hard drives of the computers on representatives’ desks, which was not password protected and was backed up by the firm only once a year, and which allowed representatives access to erase recorded telephone calls. 

Carlton Capital, Inc.: Censured; Fined $40,000; Required to Comply with the NASD Rule 3010(b)(2) (the Taping Rule) for an additional three years until February 17, 2012 and to Retain an independent consultant to conduct a comprehensive review of the adequacy of its policies, systems and procedures (written and otherwise) and training related to compliance with the Taping Rule, and adopt and implement the consultant’s recommendations

The Firm permitted Marshall 

• and another individual to execute trades in covered securities during a period beginning 30 calendar days prior to and ending five calendar days after publishing research reports concerning the subject companies; 
• to trade in a manner that was inconsistent with his recommendation, as reflected in the most recent research report the firm published. 

The Firm and Marshall provided a subject company with a draft copy of a research report that contained prohibited information before the report was published. 

Acting through Marshall, the Firm issued research reports that failed to disclose that Marshall and/or a member of his household had a financial interest in the securities of the subject company and the nature of the financial interest. 

The Firm failed to 

• affirmatively disclose in one research report that an affiliate owned more than one percent of a subject company’s common equity securities, and failed to disclose in research reports the risks that may have impeded achievement of the price target stated in each report;
• develop and implement adequate written supervisory procedures reasonably designed to ensure that the firm and its employees complied with the provisions of NASD Rule 2711; 
• provide an attestation to FINRA for a year that it had adopted and implemented procedures regarding compliance with NASD Rule 2711, and failed to develop and implement any written supervisory procedures concerning watch or restriction lists; and
• develop and implement a Firm Element Continuing Education program, specifically, to develop a written training plan for its covered registered persons. 

The Firm's research reports did not include clear, comprehensive and prominent disclosures regarding whether it or any of its affiliates, officers or employees held interests in the subject companies’ securities.

First Dallas Securities: Censured and fined $50,000 ($10,000 of which was jointly and severally with Marshall)

Eric Jay Marshall: Fined $10,000 jt/sev with Firm and an additional $5,428.07 (includes $428.07 in disgorged trading profits; Suspended 15 days as a research analyst

Acting through Associated Person Cotto, the Firm 

• permitted Cotto to manage and control its securities business and otherwise engage in activities and functions that required registration with FINRA as a general securities principal, even though he was not registered with FINRA, and while he was suspended by FINRA for six months in any capacity;
• failed to respond fully and completely to additional FINRA requests for information; and
• willfully filed false or inaccurate amendments to its Uniform Application for Broker-Dealer Registration (Form BD)

Cotto failed to produce certain documents at a FINRA on-the-record interview, and willfully failed to amend his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose material information.

Harvest Capital Investments, LLC: Expelled

Dennis Cotto: Barred