Approximately three months after the firm entered into the trading agreement with the owner, it terminated its relationship. The firm informed the customers that the owner would no longer be able to exercise discretion in their accounts, and the customers transferred their accounts to another firm. The customers were not able to avail themselves of the full services they paid the firm upfront because their accounts were transferred to another firm before their positions expired. The firm’s service charges were greater than the amount warranted by market conditions, the cost of executing the transactions, the value of services the firm rendered and other pertinent factors; the total overcharges were $41,593.23.  

The firm’s WSPs in effect at the time were inadequate because they stated that no special review was performed of commission activity in accounts with third party authorization. By maintaining a written procedure that abdicated responsibility to review commission charges or in customer accounts where a third party had trading authority, the firm failed to ensure compliance with all applicable rules including NASD Rule 2440. 

Delp was a shareholder and employee of an independent insurance agency who brokered fixed-term or whole life settlements for his insurance customers, and his insurance agency received a commission for most of the life settlement transactions it brokered. 

Many years after Delp joined the firm and disclosed his outside business activity, the firm revised its WSPs to prohibit its registered representatives from participating in life settlements unless processed through the firm and limited to products the firm offered through approved firm sponsors. 

Delp’s outside business insurance company facilitated insurance company customers’ sales of fixed-term or whole life insurance policies to third-party companies. The life settlements were not brokered through the firm and most were not brokered with approved firm sponsors as required by the firm’s revised procedures.

Delp formed a company in which he owned a half-interest. The company’s business was to negotiate, on behalf of Delp and other participating individual insurance brokers, commission rates from life insurance companies for insurance policies that they brokered.

Delp’s administrative assistant completed online Firm Element continuing education (CE) training courses for him. FINRA also found that Delp used, or directed his staff to use, copies of signature transparencies for customers to generate third-party checks, wire transfers and to journal money from related customer accounts although the customers had orally authorized the transactions. 

When Katz borrowed the money, the customer was 75 years old and retired. At the time Katz borrowed the money, his firm’s WSPs did not allow the borrowing and lending of money between registered persons and firm customers unless the customer was the registered person’s relative. Katz did not request or obtain the firm’s permission to borrow money from the customer and was not related to the customer. Katz was aware of the firm’s procedures and certified that he had received and read the firm’s written policies and procedures regarding financial arrangements with clients. Katz did not disclose to his firm that he had obtained loans from the customer.Since the firm’s procedures did not permit borrowing, Katz could not borrow money from the customer in compliance with NASD Rule 2370, and the loans were not in conformance with conditions set forth in NASD Rule 2370(a)(2)(A)-(E) for permissible loans. 

Delp was a shareholder and employee of an independent insurance agency and he disclosed his outside life insurance business activity to his firm when he joined. As part of his outside life insurance business, Delp brokered fixed-term or whole life settlements for his insurance customers, and his insurance agency received a commission for most of the life settlement transactions it brokered. 

Many years after Delp joined the firm and disclosed his outside business activity, the firm revised its WSPs to prohibit its registered representatives from participating in life settlements unless processed through the firm and limited to products the firm offered through approved firm sponsors. Delp’s outside business insurance company facilitated insurance company customers’ sales of fixed-term or whole life insurance policies to third-party companies. The life settlements were not brokered through the firm and most were not brokered with approved firm sponsors, as required by the firm’s revised procedures.

Delp formed a company in which he owned a half-interest. The company’s business was to negotiate, on behalf of Delp and other participating individual insurance brokers, commission rates from life insurance companies for insurance policies that they brokered. Delp failed to reasonably enforce his firm’s WSPs prohibiting its registered representatives from participating in life settlements, except with certain limitations. Delp’s supervisory failure allowed another registered representative in the branch office that Delp supervised to also broker life settlement transactions for several years.

Allison failed to adequately supervise another registered representative when he learned that her business had borrowed money from a customer. The firm’s WSPs prohibit registered representatives from borrowing from customers. Allison did not properly follow up on this information; he did not ensure that the customer was repaid or examine the business’sbank statements to determine whether the representative had borrowed from additional customers. Even when Allison placed the representativeon heightened supervision, after learning of the loan from the customer, he did not begin conducting the quarterly audits the plan mandated until months later.

Tolley failed to timely amend his Form U4 to disclose a material fact.

In contravention of its WSPs, the firm permitted Conyers, its president and CCO, to use a personal email address, through his handheld communication device, to send and receive business-related electronic communications, which were not captured by the firm’s system and thus were not retained nor reviewed by the firm, unless they were sent to or from a firm-provided email address. The firm failed to evidence its review of its business-related electronic communications, in violation of its WSPs. 

Through Conyers, the Firm permitted non-registered persons to act in a capacity requiring registration as a principal; and permitted non-registered persons to accept or approve a total of more than 300 new customer accounts. As a result, the firm failed to maintain records signed by a principal who had accepted or approved new customer accounts. 

The representative exploited the firm’s check handling procedures by taking control of customer checks totaling approximately $850,000 and depositing the customer funds into his own bank accounts, without the checks being logged in the firm’s tracking system.

By and through Coleman, its CCO, the Firm failed to establish and maintain adequate WSPs addressing the circumstances under which it would contact and communicate with a customer following receipt of a complaint. The firm’s lack of adequate WSPs describing circumstances under which complaining customers would be contacted contributed to its failure to discover the representative’s scheme after a customer sent a written complaint to a variable annuity company, which was subsequently forwarded to the firm, asserting that recent distributions from variable annuity policies were unauthorized and seeking reinstatement of the funds. The complaint also alleged that the customer had sent the firm money and was unable to ascertain what assets were purchased with the money. Although the firm interviewed the representative, the customer was never contacted and the representative’s illegal activities continued for approximately another 10 months. After the representative’s death, the firm undertook a forensic audit of the representative’s transactions, which led to identification of numerous customers whose funds had been embezzled; the results were shared with FINRA and were instrumental in exposing how the funds were embezzled and the extent of the customer harm. In addition, the firm voluntarily provided more than $2 million in restitution to customers.

Ahmann participated in private securities transactions and sold bonded life settlement securities to

customers pursuant to those transactions after his member firm specifically denied him permission to do so. Ahmann’s customers invested $1,750,000 in seven bonded life settlements and in total, the bonded life settlement company paid approximately $120,475.90 in commissions related to Ahmann’s sales. 

Ahmann lacked a reasonable basis to recommend the purchase of the bonded life settlements to his customers given his failure to perform a reasonable investigation concerning the life settlement product. Although Ahmann inquired about the manner in which the company that offered the life settlements procured life insurance policies for its offerings, he took no further action when the company’s principals pointedly refused to share that information with him. Ahmann failed to obtain adequate information regarding the qualifications of the company principals to issue life settlements and to examine reports of the company’s financial status in order to assess the company’s economic well-being. Ahmann failed to adequately inquire about the companies that assessed the life expectancies of the underlying insureds and re-insured the underlying life insurance policies prior to recommending and selling the bonded life settlements.

Ahmann’s firm’s CEO asked Ahmann whether a sale of stock and subsequent withdrawal of funds in a customer’s account was in any way related to his suspected participation in private securities transactions involving the bonded life settlements. Ahmann told the CEO that he was not participating in the sale of life settlements and had not recommended them to investors, which was not true. In fact,prior to the date of Ahmann’s misrepresentation, Ahmann had solicited the customer

to purchase a bonded life settlement and had signed transaction paperwork related to that purchase. 

The language in sales materials for the bonded life settlements Ahmann provided to a customer was oversimplified and did not contain any description of risk or extenuating factors that could impact the investment’s performance, thereby failing to provide the reader with a sound basis for evaluating the merits of the investment. The statement in the sales material that it was intended to serve as “layman’s

description” was misleading given the complex nature of the product and the risks involved. Ahmann did not present the sales material for review to a registered principal of his firm prior to using them in connection with his sales of the bonded life settlement to a customer.

In addition, Ahmann lacked a reasonable basis to recommend the purchase of installment plan contracts offered by a non-profit corporation that represented itself to the public as a charitable organization to three customers, given his failure to perform a reasonable investigation concerning the product. The installment plan contracts,which were securities, promised a tax deduction, as well as fixed deferred payments at an unspecified rate of return, in exchange for each customer’s transfer of ownership of existing annuities to the non-profit. Ahmann’s customers exchanged existing annuities

Ahmann failed to adequately ascertain which charities, if any, the non-profit supported, the manner in which the non-profit invested customer funds,and the existence of a cease and desist order issued by a state against the non-profit which was publicly available on the internet and preceded Ahmann’s installment plan contracts sales. Furthermore, Ahmann learned that the non-profit’s application for

status as a 501 (c)(3) organization was pending and had not yet been granted by the U.S. Internal Revenue Service (IRS), and that investors would not be entitled to a tax benefit if the non-profit’s application was ultimately denied. Ahmann failed to inform his customers that the non-profit’s application remained pending and that they would not receive a tax benefit if the application was ultimately denied. A predominate feature of the non-profit’s product was the reported tax savings an investor would enjoy through the purchase of an installment plan contract. Issues concerning the tax-deductibility of the product were clearly material as it was a key feature of the product and, together with the non-profit’s status as a charitable organization, a factor that distinguished it from other similarly

structured products. Its tax-deductibility was also prominently advertised by the non-profit and, in many instances, a key factor in investors’ choice over alternative products. The findings also stated that in connection with his sale of the installment plan contract to a customer, Ahmann presented the customer with illustrations the non-profit prepared,which included a cover page, a flow chart graphically depicting the terms of the proposed installment plan contract and a 1099 Statement detailing the amount of the scheduled payments and listing that portion of the annual payment that was to be reported as taxfree and the portion that was to be reported as ordinary income. The flow chart failed to reflect that the total payout amount included a return of principal and did not specify the

rate of return. Such omissions provided an oversimplified and exaggerated presentation of investment returns. The descriptions concerning tax deductions and tax savings were oversimplified, incomplete and misleading. In addition, the flow chart provided no explanation as to how the tax figures were derived. The 1099 Statement description heading for the principal column, entitled “reported as tax-free,” provided the false impression that this column represented tax-free income. Ahmann did not present the flow chart and 1099 Statement for review to a registered principal of his firm prior to using them in connection with his sales of the installment plan contract to a customer.

Ahmann did not provide written notice to his firms of his additional employment with another company and his association with the individual who ran the company, nor did he provide written notice of his receipt of compensation from that individual. Both Ahmann and the individual held insurance licenses and in some instances,Ahmann and the individual shared commission on the sales of fixed annuities. Ahmann routinely used stationery and fax cover sheets bearing the name of the company, his business card identified him as being associated with the company, and Ahmann and the individual shared all expenses associated with the maintenance of the company’s office. Documents related to the sales of the bonded life settlements identified the individual as the sales agent, though Ahmann clearly solicited and arranged for the sales. Although the commission payments associated with the bonded life settlements were issued to the individual, the latter paid the commission monies to Ahmann. The company subsequently issued Ahmann an IRS 1099 Form reflecting these commission payments.  Ahmann held Series 6 and 63 licenses but never held a Series 7 license that would permit him to engage in the sale of securities but nevertheless, he engaged in the sale of bonded life settlements and installment plan contracts, each of which are securities.

Davidson began creating Internet advertisements, which were not related to the securities industry or investments. In exchange for a fee, Davidson offered to create advertisements, arrange for the postings, with pictures, on various Internet sites, and assist the advertisers in replying to emails from potential customers. Davidson earned approximately $6,000 for his outside business activities. 

Davidson completed his firm’s annual compliance questionnaires, on which he falsely represented that he had not engaged in any undisclosed outside business activity.

Kauffmann failed to provide FINRA with requested information and documents, and failed to appear to testify. 

Contrary to the firm’s written WSPs, client information was left unattended and unsecured, visitors were in areas where client information was accessible and an appropriate number of onsite shredders were not maintained on the premises. The findings also stated that the confidential information in the firm records included customer names, addresses, policy numbers, social security numbers, income tax bracket and driver’s license numbers. 

Lichtenstein willfully failed to timely disclose material facts on his Form U4. 

Acting through Bozora, his firm failed to maintain subscription agreements for investors in the entity’s private placement who invested through the firm. 

Bozora participated in the offer and sale of limited partnership units of an entity he co-founded. Among other things, Bozora provided information about the entity to other broker-dealers for the purpose of facilitating the offer and sale of the entity by those firms; and, in connection with this activity, he distributed, or caused the distribution of, a PPM that contained material misrepresentations and omitted to disclose material facts regarding the entity’s operations and financial condition. The PPM failed to disclose the foreclosure by a company, the company’s default on its obligations to the entity and the subsequent foreclosure by the entity on the properties that secured those obligations. Bozora knew, or should have known, that his entity was using new investor proceeds in part to pay the monthly interest obligations to the entity’s current investors and preferred note holders and not for new investments as represented in the entity’s offering documents. Bozora failed to disclose this material information to those who invested in the entity.Bozora knew, or should have known, that his entity lacked sufficient revenue from operations to pay its monthly distributions to existing investors, and was funding such payments at least in part with capital raised from new investors. Because new investor funds were being applied to pay earlier investors, Bozora did not have a reasonable basis for believing that the recommendation to invest in the entity’s preferred notes was suitable for any customer.

In addition, Bozora failed to establish and maintain a supervisory system, and to establish, maintain and enforce WSPs reasonably designed to cause the firm to conduct due diligence for new offerings. Moreover,Bozora failed to supervise the activity of its registered representatives selling his entity’s preferred notes. Furthermore, Bozora failed to document ongoing due diligence of his entity and also failed to establish, maintain and enforce procedures regarding the firm’s due diligence review.

The firm’s failure to comply with its reporting obligations may have hampered the investing public’s ability to assess the background of certain brokers through FINRA’s public disclosure program, rendered certain information unavailable to member firms making hiring determinations, may have reduced the ability of state securities regulators to review applications by brokers to transfer firms, and hindered FINRA from promptly investigating certain disclosure items.

The firm’s supervisory system and procedures were not reasonably designed to achieve compliance with the reporting requirements of Article V of FINRA’s By-Laws. The firm failed to enforce the written procedures it had adopted to prevent late disclosures to FINRA. The firm did not enforce a sanctions policy for late filings of Forms U4 and U5 that it had implemented. That firm policy was updated to strengthen the sanctions for late disclosures to the firm. There were numerous instances of late filings in which the firm either failed to issue a letter of warning to the representative or failed to fine the representative as called for by its procedures. Although the firm’s procedures called for the termination of any representative who failed to timely disclose three reportable events to the firm, it did not terminate at least two such representatives. There were also instances in which the firm failed to sanction supervisors as called for by its procedures. 

Collantes was responsible for reviewing certain reports designed to highlight mismatches between new account information and information kept in a third-party database. The individual wrote an explanation on the hard copy of the report that failed to address mismatches and Collantes accepted the individual’s explanation without further review.

Collantes was responsible for reviewing LOAs, which authorized the firm to make transfers of funds, disbursements and changes to account information, including address changes. Review of LOAs at the branch was typically limited to reviewing a particular LOA for completeness without reference to prior LOAs or account statements involving the same account. In following this approach, Collantes failed to ensure an adequate response to suspicious activity in customer accounts as reflected in LOAs. The findings also included that the individual used a series of LOAs to channel money from customer accounts to herself. The individual changed the residential account address on a fraudulent account the individual created in her relative’s name to reflect the individual’s residential address. Transfers were made from unrelated trust accounts to the fraudulent account totaling $32,364.78. At the same time, a check-writing feature was added to the fraudulent account and a checkbook was sent to the individual’s residential address. The transferred funds were then disbursed using the newly-issued checks. The individual again changed the address for the fraudulent account in her relative’s name. Collantes’ failure to ensure an adequate response to suspicious activity in these accounts enabled the individual to continue to defraud firm customers. 

When the new OSJ manager raised concerns about the private-placement business in the branch offices, Borup declined to take steps to address those concerns and conform the conduct of that business to all applicable laws, rules and regulations.As the firm’s chief executive, owner and the person who directed the firm’s business, Borup remained responsible for the private-placement business the representatives in the branch offices conducted on the firm’s behalf.

The branch offices participated in transactions involving the sale of several different private placements to investors who invested approximately $1,727,000. The representatives employed a general solicitation to obtain these investors.The firm received selling compensation for each of the private placement transactions. As the firm’s owner and CEO, Borup benefitted financially from the firm’s receipt of selling compensation. The general solicitation caused the transactions to be ineligible for the Rule 506 exemption and, therefore, the transactions constituted the sale of unregistered securities in contravention of Section 5 of theSecurities Act of 1933. Borup was the firm principal responsible for the offer and sale of the private-placement securities and by permitting these transactions to occur in contravention of the registration provisions of the Securities Act of 1933, he engaged in conduct that was inconsistent with high standards of commercial honor and just and equitable principlesof trade. In addition, 

Borup was responsible, directly or indirectly,for the supervision of firm personnel in the branch offices and the business activities in which they engaged on the firm’s behalf. Borup appointed another firm principal, as OSJ manager, although the principal did not have supervisory experience and was unfamiliar with the laws, rules and regulations applicable to the private-placement business; Borup did not undertake to provide the principal with opportunities to develop the knowledgeneeded to supervise the private-placement business effectively, nor did he revise, or instruct the principal to revise, the firm’s systems and procedures for supervising thatbusiness although he knew, or should have known, that they were inadequate. Moreover, Borup failed to supervise in a manner reasonably designed to prevent the sale of unregistered securities by firm registered representatives in the branch offices who offered and sold securities purportedly exempt from registration.

Borup was responsible, directly or indirectly, for the supervision of firm personnel in the branch offices and the business activities in which they engaged on the firm’s behalf, including the supervision of their use and distribution of sales literature on the firm’s behalf. The representatives provided potential investors with various written materials in addition to the issuers’ confidential PPMs. Borup was aware that the firm’s representatives were providing potential investors with these various written materials. With the exception of a brochure, the sales literature materials included projections for which neither the items of sales literature nor the PPM(s) provided a basis. The items of sales literature presented rates of return and investment performance in a manner that implied past performance would recur, failed to reflect the uncertainty of rates of return and yield, and allowed the rates of return and investment performance toconstitute predictions and/or projections of investment performance. The items of sales literature also included statements and claims that were incomplete and oversimplified,unwarranted or exaggerated. By permitting the branches to distribute sales literature, Borup did not establish and maintain a system to supervise the activities of the firm’s associated personnel that was reasonably designed to achievecompliance. In addition to the failure to supervise in a manner reasonably designed to achieve compliance with the content standards applicable to sales literature, Borup also failed to maintain a record of what was reviewed and/or approved for representatives to disseminate, and did not take steps to ensure that the registered representatives disseminated only sales literature the firm approved. 

Borup authorized and permitted registered representatives of the firm’s branch offices to provide cash compensation in the form of referral fee payments to non-registered individuals who provided information about persons to whom the representatives intended to offer and sell private placements. The firm’s registered representatives paid approximately $159,650 to non-registered individuals for these referrals.

The firm failed 

• to ensure that its registered representatives received AML training,
• to ensure that new account files contained evidence that the firm had verified clients’ identities,
• to conduct an independent test of its AMLCP, and
• to maintain its required minimum net capital while conducting a securities business. 

The findings also included that the firm’s procedures required its designated principal to conduct inspections of the firm’s Office of Supervisory Jurisdiction (OSJ) each year and of its branch locations every two years. The procedures also required annual compliance meetings with registered persons. For almost two years, the designated principal did not ensure that the firm held an annual compliance meeting and the principal did not perform any inspections of the firm’s OSJ or branch offices during that time period.

Pierce failed to timely amend his Form U4 to disclose that he had received written complaints from a customer.

Through Arceci, the Firm designated an individual to conduct the marketing review for the offering. The individual created a summary page by cutting and pasting language directly from the private placement memorandum (PPM), including a statement about the unblemished payment history of the offering’s affiliates. The individual then completed, signed and dated the requisite 18-question review checklist.

Through Arceci, the Firm designated an associated person of the firm to conduct the due-diligence review of the offering. The person had not heard of the issuer prior to receiving the PPM and the other individual’s summary report, so he used the summary report and the PPM to conduct the due diligence review, including his assessment of the risks of the offering, and completed, signed and dated the requisite 14-question due diligence review checklist. Acting through Arceci, the Firm approved the offering for sale based on the PPM, the checklists and the summary report. 

Acting through Arceci, the Firm failed to adequately supervise its due-diligence review,in that it failed to obtain or review financial statements for the issuer which would have informed it in more detail of the liquidity issues of the offering’s affiliates; failed to research background information on the offering’s officers, which would have informed it that the chief executive officer (CEO) had been barred from the insurance industry by a state and later charged with fraud; and failed to use the services of third-party due-diligence providers that conducted due diligence research and drafted reports that would have identified material risks of the later offerings. The firm’s due diligence review, completed in less than three days, was based solely on the self-serving representations the issuer made in the PPM.

Acting through Arceci, the Firm ignored red flags and failed to adequately supervise the sale of the offering after learning about liquidity issues, and failed to suspend sales based on a PPM containing false statements.No one at the firm conducted an investigation or due diligence to determine whether customers who invested were in danger of incurring loss of principal and interest given that affiliates had delayed making payments to note holders.

Also the firm continued to leave its customers in the dark regarding the issuer’s financial problems and to sell the offering using a PPM that contained a material misrepresentation, without disclosing missed payments on securities, and failed to provide customers with copies of correspondence from the issuer describing problems with making payments on previously issued notes. The firm’s decision to continue selling the offering constitutes a failure to observe high standards of commercial honor and just and equitable principles of trade.