Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
NOTE: Stipulations of Fact and Consent to Penalty (SFC); 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 & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
December 2011
Alan Stuart Pattee
AWC/2010023232101/December 2011
Patel forged homeowner signatures on uniform mitigation verification inspection forms (UMVI forms) in connection with inspections performed by a qualified inspector regarding construction information; the form is submitted to the homeownerís insurance company in connection with insurance pricing.Pattee forged the signatures to accommodate his clients, who were either not at home at the time of the inspection or were his longtime clients

Pattee acted as an officer for a company formed to conduct inspections to determine homeowner policy premiums, for compensation, without providing prompt written notice to his member firm for this outside business activity

Pattee completed securities annual compliance online certifications for his firm representing that he had complied with the requirements of NASD Rule 3030 and for the certifications, certified that no changes were needed to his Form U4 or that he had requested appropriate changes to the Form U4 regarding outside business activities.
Alan Stuart Pattee: Barred
Alternative Wealth Strategies, Inc.
AWC/2010021058401/December 2011
The Firm negligently omitted material facts in connection with its sale of promissory notes, issued by an entity that a real estate developer controlled. The firm negligently failed to disclose to investors that the entity had been experiencing cash flow problems and that the entity and other companies affiliated with the real estate developer had failed to make required interest payments to investors. The firm negligently failed to disclose that it was unlikely that the entityís affiliated company would be able to make its scheduled principal payments totaling $10 million that were due to its note-holders. 

The firm distributed a document called ďInvestor LetterĒ for a company; the Investor Letter constituted a research report, but it failed to disclose a firm representativeís ownership interest in the company and his receipt of compensation from the company

The firm permitted its registered persons to use presentations regarding the company to solicit potential investors at seminars; the presentations contained statements and projections that were without basis; were false, exaggerated, unwarranted and/or misleading; and failed to provide a balanced presentation by omitting material information regarding the significant risks associated with investing in the company. The firm failed to establish, maintain and enforce a system of supervisory control policies and procedures that tested and verified that its supervisory procedures were reasonably designed with respect to the activities of the firm, its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where such testing and verification identified a need. The firmís supervisory control policies and procedures failed to identify producing managers and assign qualified principals to supervise such managers, and the firm failed to electronically notify FINRA of its reliance on the limited size and resources exception. 

In addition, F for one year-end, the firm failed to prepare an annual certification from its CEO or equivalent officer, that it had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations, and that the CEO had conducted one or more meetings with the firmís CCO in the preceding 12 months to discuss such processes. For another year-end, the firm filed an annual certification that did not fully comply with FINRA Rule 3130(c). Moreover, the firm failed to establish, maintain and/or enforce WSPs reasonably designed to achieve compliance with the laws and regulations applicable to its business in conducting private placement offerings (including training representatives regarding the risks for these offerings and establishing standards for determining the suitability of these offerings for investors), the review of electronic correspondence and the review and approval of advertising materials. 
Alternative Wealth Strategies, Inc.: Censured; Fined $75,000 (includes $40,000 disgorgement of commissions)
David Alan Schams
OS/2009018293201/December 2011
Schams accepted appointment as an alternative agent attorney-in-fact over a customer account, without his member firmís express written consent
Schams was to receive approximately $90,000 from the customersí estate. Schams accepted two $20,000 interest-free loans on the anticipated inheritance, without signing a promissory note evidencing the loan, contrary to the firmís compliance policies that prohibited registered representatives from exercising or maintaining discretionary authority or power of attorney over customer accounts and borrowing money, accepting loans, issuing or transacting promissory notes or other similar forms of debt for customers without the express written consent of the firmís compliance department. 

Schams made material misstatements to his firm in a compliance questionnaire regarding borrowing money or accepting a loan from a client, holding any securities, stock powers, money or property belonging to a client, accepting client checks made payable to him, or endorsed to him personally or in the name of an entity, and managing or handling, in any way, the affairs of any client account on a discretionary basis. 
David Alan Schams: Barred
Tags:  Borrowed    Estate        Annual Compliance Certification     |    In: Cases of Note : FINRA
Howard Sang Lee
AWC/2009019154301/December 2011
Lee borrowed $20,000 from his customer and repaid the loan in full, plus interest. During the time of the loan transaction, the firmís procedures specifically prohibited registered representatives from borrowing money from customers. 
Leeís conduct was aggravated by the fact that he failed to disclose the loan when completing the firmís annual compliance inspection forms for two years, when he answered ďyesĒ to the question, ďDo you understand and comply with the rule that you cannot loan money to, or borrow money from your clients?Ē  
Howard Sang Lee: Fined $5,000; Suspended 3 months
Internet Securities and Michael Wayne Beardsley (Principal)
AWC/2009020930302/December 2011
Beardsley was a registered representativeís direct supervisor who was responsible for reviewing and approving the representativeís securities transactions, but failed to exercise reasonable supervision over the representativeís recommendations of exchange-traded funds (ETFs) in customersí accounts, thereby allowing the representative to conduct numerous unsuitable transactions. 

As the firmís chief compliance officer (CCO), Beardsley was responsible for ensuring that the firm filed all necessary Uniform Applications for Securities Industry Registration or Transfer (Forms U4), Uniform Termination Notices for Securities Industry Registration (Forms U5) and Rule 3070 reports. The Firm and Beardsley failed to timely amend Beardsleyís Form U4 to disclose the settlement of an arbitration against him, the firm and the registered representative; the firm failed to timely amend a registered representativeís Form U5 to disclose settlement of the arbitration; and the firm and Beardsley failed to timely report the settlement to FINRAís 3070 system

The Firm and Beardsley failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules as they pertain to private placements. The firm and Beardsley failed to conduct investigations of offerings for suitability but relied on information the registered representative who proposed selling the offering provided; never reviewed issuersí financials, nor attempted to obtain information about the issuers from any third parties; failed to maintain documentation of their investigations; allowed a registered representative to draft selling agreements with offerings which allowed the issuer to make direct payment to an entity the representative, not the firm, owned,; failed to implement supervisory procedures to ensure compliance with SEC Exchange Act Rule 15c2-4(b); and failed to implement supervisory procedures to prevent general solicitation of investments in connection with offerings made pursuant to Regulation D. 

The Firmís written procedures required Beardsley to obtain and review, on at least an annual basis, a written statement from each registered representative about his or her outside business activities; despite the fact that several registered representatives were actively engaged in outside business activities, Beardsley failed to obtain any such written statements. 

For almost a three-year period, Beardsley did not request any duplicate statements of outside securities accounts firm employees held; he neither requested nor obtained any written notifications from firm employees concerning their actual or anticipated outside securities activities. In addition, the Firm and Beardsley failed to implement an adequate system of supervisory control policies and procedures regarding testing supervisory procedures for compliance, erroneous criteria for identifying and supervising producing managers, including Beardsley, review and monitoring transmittal of funds or securities, customer changes of address, customer changes of investment objectives, and concomitant documentation for its limited size and resources exception in FINRA Rule 3012. Moreover,he firm and Beardsley completed an annual certification in which Beardsley certified that he had reviewed a report evidencing the firmís processes for establishing, maintaining and reviewing policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, Municipal Securities and Rulemaking Board (MSRB) rules and federal securities laws and regulations; modifying such policies and procedures as business, regulatory and legislative changes and events dictate; and testing the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with FINRA rules, MSRB rules and federal securities laws and regulations. In fact, the report did not evidence any processes for testing the effectiveness of such policies, and no such testing was done.

Furthermore, on the firmís behalf, Beardsley executed an engagement letter committing the firm to serve as a placement agent for an issuer of limited partnership units. The letter, which a registered representative of the firm drafted, falsely represented that the firm was not a registered broker-dealer. 

The Firm and Beardsley failed to enforce the firmís Customer Identification Program (CIP) in that they completely failed to verify four customersí identities. The Firm and Beardsley failed to conduct a test of the firmís anti-money laundering (AML) compliance program for a calendar year. FINRA found that the firm conducted a securities business while failing to maintain its required minimum net capital.

Internet Securities: Censured; Fined $12,500; Required to retain an outside consultant to review and prepare a report concerning the adequacy of the firmís supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firmís size, including, among other things, the firmís revenues and financial resources. 

Michael Beardsley: No fine in light of financial status: Suspended 1 year in Principal capacity only
Tags:  ETF    Private Placement    Suitability    Annual Compliance Certification    Away Accounts    AML    CIP     |    In: Cases of Note : FINRA
James Carl Gaul (Principal)
AWC/2010021058402/December 2011
Acting through Gaul and another firm principal, his firm negligently omitted material facts in connection with its sales of promissory notes. 

The notes were issued by an entity that a real estate developer controlled. Acting through Gaul and another firm principal,the firm negligently failed to disclose to investors that the entity had been experiencing cash flow problems and that the entity and other companies affiliated with the real estate developer failed to make required interest payments to investors.

Acting through Gaul and another firm principal, the firm  negligently failed to disclose that it was unlikely that the entityís affiliated company would be able to make its scheduled principal payments totaling $10 million that were due to its note holders. 

Acting through Gaul, the firm failed to establish, maintain and enforce a system of supervisory control policies and procedures that tested and verified that its supervisory procedures were reasonably designed with respect to the activities of the firm, its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where such testing and verification identified a need. The firmís supervisory control policies and procedures failed to identify producing managers and assign qualified principals to supervise such managers

The firm also failed to notify FINRA electronically of its reliance on the limited size and resources exception. For a year-end, the firm, acting through Gaul, failed to prepare an annual certification from its CEO, or equivalent officer, that it had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations, and that the CEO had conducted one or more meetings with the firmís CCO in the preceding 12 months to discuss such processes. For another year-end, the firm, acting through Gaul, filed an annual certification that did not fully comply with FINRA Rule 3130(c).

Acting through Gaul, the Firm failed to establish, maintain and/or enforce WSPs reasonably designed to achieve compliance with the laws and regulations applicable to its business in conducting private placement offerings (including training representatives regarding the risks for these offerings and establishing standards for determining the suitability of these offerings for investors), the review of electronic correspondence, and the review and approval of advertising materials.
James Carl Gaul (Principal): Fined $10,000; Suspended 30 business days in all capacities; Suspended 18 months in Principal capacity only
Johnnie Kelsey Pope (Principal)
AWC/2009019408802/December 2011
Pope willfully failed to timely disclose material facts on his Form U4. Pope failed to disclose the material facts in an annual compliance questionnaire for his member firm; and failed to timely respond to FINRA requests for information.
Johnnie Kelsey Pope (Principal): Fiend $5,000; Suspended 6 months
Ronak C. Patel
2010024540401/December 2011
Patel failed to respond to FINRA requests for information and to appear for testimony regarding loans from a firm customer. 

Patel failed to make appropriate disclosure of an outside securities account after he became associated with his member firm and failed to notify the firm that held his securities account that he had become associated with a firm.Patel made a false statement on an annual compliance certification to his firm that he completed after he signed and filed his initial Form U4 subjecting himself to FINRAís jurisdiction. Patel acknowledged receipt of and adherence to the firmís policies, including obligations to comply with the firmís policies and to adhere to the applicable federal, state and selfregulatory organization laws and rules. Patel falsely stated that he did not have a securities account when, in fact, he did.
Ronak C. Patel : Barred
Ronald John Garabed Sr.
AWC/2010024175501/December 2011
Garabed borrowed $15,000 from his customer at his firm contrary to his firmís procedures, which did not permit loans between registered representatives and their customers under any circumstances. Garabed agreed to  repay the customer the principal loan amount plus an additional $5,000, he ultimately repaid a total of approximately $15,200. Garabed denied on a compliance questionnaire that he had ever solicited or accepted a loan from a client. 
Garabed willfully failed to update his Form U4 to disclose material information. 
Ronald John Garabed Sr.: Fined $10,000; Suspended 6 months
Ronald William Cheney
AWC/2010022535201/December 2011
Cheney borrowed $10,000 from his customers without his member firmís written authorization.  Although his firmís WSPs require review and written approval before a registered representative may borrow from a customer , Cheney did not request or receive the firmís permission to borrow money from the customers.  Cheney incorporated this loan into another loan from the customers, for a total sum borrowed of $23,000.  Cheney completed his firmís annual certification questionnaire in which he was asked if he had borrowed from, or loaned money to, any customers, and responded that he had not. 

While registered with another member firm, Cheney was paid $5,187 for work he performed on behalf of the beneficiaries of a trust account. That firmís procedures required that a representative submit a written request for approval to the designated supervisory principal prior to engaging in any outside employment or business activity. ICheney submitted outside business activity forms and an internal questionnaire to the firm in which he responded that he had not engaged in any outside business activity without prior written approval. 

Ronald William Cheney : Fined$10,000; Suspended 60 business days.
November 2011
Dennis Lee Grossman (Principal)
OS/2008011672301/November 2011

As the AMLCO and president of his member firm,  Grossman failed to demonstrate that he implemented and followed sufficient AML procedures to adequately detect and investigate potentially suspicious activity

Grossman did not consider the AML procedures and rules to be applicable to the type of accounts held at the firm and therefore did not adequately utilize, monitor or review for red flags listed in the firmís procedures. His daily review of trades executed at the firm and all outgoing cash journals and wires, Grossman did not identify any activity of unusual size, volume or pattern as an AML concern. The firmís registered representatives, who were also assigned responsibility for monitoring their own accounts, failed to report any suspicious activity to Grossman. Until the SEC and/or FINRA alerted Grossman to red flags of suspicious conduct, Grossman did not file any SARs.

Grossman failed to implement adequate procedures reasonably designed to detect and cause the reporting of suspicious transactions and, even with those minimal procedures that he had in place at the firm, he still failed to adequately implement or enforce the firmís own AML program. For example, accounts were opened at the firm within a short period of each other that engaged in similar activity in many of the same penny stocks, and several red flags existed in connection with these accounts that should have triggered Grossmanís obligations to undertake scrutiny of the accounts, as set out in the firmís procedures, including possibly filing a SAR.  Additionally,individuals associated with the accounts had prior disciplinary histories, including securities fraud and/or money laundering. Because of Grossmanís failure to effectively identify and investigate suspicious activity,he often failed to identify transactions potentially meriting reporting through the filing of SARs. Moreover, Grossman failed to implement an adequate AML training program for appropriate personnel; the AML training conducted was not provided to all of the registered representatives at the firm. 

Furthermore, Grossman failed to establish and maintain a supervisory system at the firm to address the firmís responsibilities for determining whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act of 1933 (Securities Act) and, as a result, Grossman failed to take steps, including conducting a searching inquiry, to ascertain whether these securities were freely tradeable or subject to an exemption from registration and not in contravention of Section 5 of the Securities Act. The firm did not have a system in place, written or unwritten, to determine whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act; Grossman relied solely upon the clearing firm, assuming that if the stocks were permitted to be sold by the clearing firm, then his firm was compliant with Section 5 of the Securities Act. 

Grossman failed to designate a principal to test and verify the reasonableness of the firmís supervisory system, and failed to establish, maintain and enforce written supervisory control policies and procedures at the firm and failed to designate and specifically identify to FINRA at least one principal to test and verify that the firmís supervisory system was reasonable to establish, maintain and enforce a system of supervisory control policies and procedures.

The firm created a report, which was deficient in several areas, including in its details of the firmís system of supervisory controls, procedures for conducting tests and gaps analysis, and identities of responsible persons or departments for required tests and gaps analysis. Grossman made annual CEO certifications, certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and registrations; the certifications were deficient in that they failed to include certain information, including whether the firm has in place processes to establish, maintain and review policies and procedures designed to achieve compliance with applicable laws and regulations and whether the firm has in place processes to modify such policies and procedures as business, regulatory and legislative events dictate. 

Grossman failed to ensure that the firmís heightened supervisory procedures placed on a registered representative were reasonably designed and implemented to address the conduct cited within SECís allegations; the additional supervisory steps imposed by Grossman to be taken for the registered representative were no different than ordinary supervisory requirements. Moreover, there was a conflict of interest between the registered representative and the principal assigned to monitor the registered representativeís actions at the firm;namely, the principal had a financial interest in not reprimanding or otherwise hindering the registered representativeís actions. Furthermore,Grossman was aware of this conflict, yet nonetheless assigned the principal to conduct heightened supervision over the registered representative. 

The heightened supervisory procedures Grossman implemented did not contain any explanation of how the supervision was to be evidenced, and the firm failed to provide any evidence that heightened supervision was being conducted on the registered representative. Also, Grossman entered into rebate arrangements with customers without maintaining the firmís required minimum net capital. Similarly, he caused the firm to engage in a securities business when the firmís net capital was below the required minimum and without establishing a reserve bank account or qualifying for an exemption. Grossman was required to perform monthly reserve computations and to make deposits into a special reserve bank account for the exclusive benefit of customers, but failed to do so.

Dennis Lee Grossman (Principal): Fined $75,000; Suspended 4 months in Principal capacity only
Bill Singer's Comment
A concise rendition by FINRA.  Assuming that the allegations are not over-blown, the sanctions here are fair and responsive to the cited misconduct.  With year-end upon us, it would be a worthwhile exercise for many of you to read this case and use it as a checklist -- how do you measure up?
Donald Anthony Duarte Jr.
2009018133802/November 2011

Duarte borrowed $50,000 in the form of a promissory note from a customer to start a business buying up distressed properties, and in order to do this, he needed money to establish a credit line. hen Duarte received the loan, his member firmís written procedures prohibited employees from accepting or soliciting loans from firm customers/ He has not fully repaid the loan.

Also, Duarte engaged in an outside business activity without providing his firm with written notice of the activity; Duarte failed to disclose or obtain his firmís written permission of his outside business activity of purchasing distressed properties. Duarte made misrepresentations to his firm in an annual compliance certification that he had not accepted any loans from customers and was not engaged in any outside business activities when, in fact, he had already obtained a loan from the customer and was engaged in an outside business activity.

Donald Anthony Duarte Jr.: Barred; Ordered to pay $25,000 plus interest in restitution to a customer
September 2011
Richard Thomas Morrison (Principal) and Kimberly Ann Morrison
2008013683902/September 2011

Kimberly and Richard Morrison engaged in outside business activities without providing their member firm with written notice of their outside business activities. For nearly three years, Richard Morrison was the agent for transactions in annuities, which his firm had not approved for sale, that he sold through an insurance agency. In connection with these transactions, Richard Morrison met with customers, recommended that the customers purchase the annuities, completed and signed transaction paperwork and earned approximately $425,000 in commissions.

Richard Morrison failed to disclose the outside activities to his firm on annual questionnaires and actively concealed his outside business activities from his firm.

Richard Morrison had employees of the insurance agency sign paperwork effecting the exchanges; in each of these instances, he signed and was identified as the agent of record on the application that was sent to the insurance company that issued the new policy that was purchased. The insurance agency employees signed the exchange request forms that were sent to Richard Morrisonís firm instructing it to surrender a policy and forward the proceeds for the purchase of a new policy; as a result, his firm did not see that he had recommended and was the agent for the transactions.

In addition, for nearly two years, Kimberly Morrison was listed as the agent for transactions in annuities that took place away from her firm. Moreover, in connection with these transactions, Kimberly Morrison telephoned customers to solicit them to meet with Richard Morrison and/or herself, accompanied Richard Morrison to some meetings with customers, and completed and signed transaction paperwork as the agent of record. Furthermore, the insurance agency paid Kimberly Morrison $7,483.53 in commissions on the transactions; she did not notify her firm of her involvement in any of the transactions, and did not disclose them in her firmís annual broker questionnaire. 

Richard Thomas Morrison (Principal): Barred

Kimberly Ann Morrison: Fined $10,000; Suspended 1 year

Thomas Michael Aretz
2009017764301/September 2011

Aretz established an outside business activity and never made a written request to, or received permission from, his member firm to engage in the outside business activity.

In connection with the outside business, Aretz borrowed approximately $242,800 from firm customers without requesting or obtaining permission from his firm, and has yet to repay the loans. Aretzí firm prohibited its registered representatives from borrowing funds from customers without the express written consent of the firmís chief compliance officer or a member of the firmís senior management. Aretz failed to disclose the loans on several annual firm compliance questionnaires and that he failed to respond to FINRA requests for information.

Thomas Michael Aretz : Barred; Ordered to pay $251,907, plus interest, in restitution to customers.
Veritrust Financial, LLC
AWC/2008011640802/September 2011

The Firm failed to establish and maintain a supervisory system or WSPs reasonably designed to detect and prevent the charging of excessive commissions on mutual fund liquidation transactions.

The Firm failed to put in place any supervisory systems or procedures to ensure that customers were not inadvertently charged commissions, in addition to the various fees disclosed in the mutual fund prospectus, on their mutual fund liquidation transactions. The firmís failure to take such action resulted in commissions being charged on transactions in customer accounts that generated approximately $64,110 in commissions for the firm.

The firm had inadequate supervisory systems and procedures to ensure that a firm principal reviewed, and the firm retained, all email correspondence for the requisite time period; the firm failed to review and retain securities-related email correspondence sent and received on at least one registered representativeís outside email account, and the firm did not have a system or procedures in place to prevent or detect non-compliance.

The firm failed to conduct an annual inspection of all of its Offices of Supervisory Jurisdiction (OSJ) branch offices.

The Firm failed to comply with various FINRA advertising provisions in connection with certain public communications, including websites, one billboard and one newsletter, in that a registered principal had not approved websites prior to use; websites did not contain a hyperlink to FINRAís or Securities Investor Protection Corporation (SIPC)ís website; one website, the billboard and the newsletter failed to maintain a copy of the communication beginning on the first date of use; and sections of websites that concerned registered investment companies were either not filed, or timely filed, with FINRAís Advertising Regulation Department. In addition, websites contained information that was not fair and balanced, did not provide a sound basis for evaluating the facts represented, or omitted material facts regarding equity indexed annuities, fixed annuities and variable annuities. Moreover, websites contained false, exaggerated, unwarranted or misleading statements concerning mutual B shares; the firmís websites and the billboard did not prominently disclose the firmís name, and a website, in connection with a discussion of mutual funds, failed to disclose standardized performance data, failed to disclose the maximum sales charge or maximum deferred sales charge and failed to identify the total annual fund operating expense ratio, and a website, in a comparison between exchange-traded funds (ETFs) and mutual funds failed to disclose all material differences between the two products.

Furthermore,the firm failed to report, or to timely report, certain customer complaints as required; the firm also failed to timely update a registered representativeís Uniform Termination Notice for Securities Industry Registration (Form U5) to disclose required information. The firm failed to create and maintain a record of a customer complaint and related records that included the complainantís name, address, account number, date the complaint was received, name of each associated person identified in the complaint, description of the nature of the complaint, disposition of the complaint or, alternatively, failed to maintain a separate file that contained this information.

The firm failed to ensure that all covered persons, including the firmís president and CEO, completed the Firm Element of Continuing Education (CE). The firmís 3012 and 3013 reports were inadequate, in that the 3012 report for one year was inadequate because it failed to provide a rationale for the areas that would be tested, failed to detail the manner and method for testing and verifying that the firmís system of supervisory policies and procedures were designed to achieve compliance with applicable rules and laws, did not provide a summary of the test results and gaps found, failed to detect repeat violations including failure to conduct annual OSJ branch office inspections, advertising violations, customer complaint reporting, and ensuring that all covered persons participated in the Firm Element of CE. FINRA also found that the firmís 3013 report for that year did not document the processes for establishing, maintaining, reviewing, testing and modifying compliance policies to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws, and the manner and frequency with which the processes are administered. In addition, the firm also failed to enforce its 3013 procedures regarding notification from customers regarding address changes.

Veritrust Financial, LLC : Censured; Fined $90,000; Ordered pay $34,105.40, plus interest, in restitution to customers
Tags:  Email    WSPs    Commissions    Annual Compliance Certification    OSJ     |    In: Cases of Note : FINRA
Bill Singer's Comment
If this case were a pinball machine, I think it likely would have hit the all-time highest score.  The scope of these violations are impressive.
Vision Securities Inc. and Daniel James Gallagher
2008011701203/September 2011

Gallagher acted as a principal of his member firm without being registered as such and the firm allowed Gallagher to act in an unregistered capacity.

Gallagher failed to adhere to the heightened supervisory requirements FINRA imposed and the agreements he entered into with three states; because of his controlling role at the firm and the transitory nature of supervision at the firm, he was able to sidestep the heightened supervision requirements. The firm failed to ensure that Gallagherís heightened supervisory requirements from the states and FINRA were being followed, and failed to have a system to adequately monitor Gallagherís compliance.

Gallagher was responsible for the firm adhering to the requirements to establish, maintain and enforce written supervisory control policies and ensuring the completion of an annual certification certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations. The firm failed to conduct the analysis required to determine whether, as a producing manager, Gallagher should have been subjected to the heightened supervision requirements.

The firm failed to establish, maintain and enforce written supervisory control policies and procedures and failed to identify at least one principal who would establish, maintain and enforce written supervisory control policies and procedures. In addition, through Gallagher, the firm, failed to ensure that an annual certification was complete, certifying it had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations.

Moreover, FINRA found that the firm failed to report customer complaints against Gallagher and one customer-initiated lawsuit in which he was listed as a defendant.

Furthermore, the firm failed to make the necessary and required updates to Forms U4 and U5 for representatives to reflect customer complaints, arbitrations and lawsuits within the required 30 days.

Thefirm failed to conduct and evidence an independent test of its AML program, and failed to conduct and evidence an annual training program of its CE program for its covered registered persons.

While testifying at a FINRA on-the-record interview, Gallagher failed to respond to questions.

Gallagher willfully failed to timely amend his Form U4 with material facts. Gallagher appealed the decision to the NAC and the sanction is not in effect pending the appeal.

Vision Securities Inc.: Censured; Fined $60,000

Daniel James Gallagher: Barred

Bill Singer's Comment

Gallagher willfully failed to timely amend his Form U4 with material facts. Gallagher appealed the decision to the NAC and the sanction is not in effect pending the appeal.

July 2011
Bart Chad Christensen
AWC/2009018990002/July 2011

Christensen sold approximately $650,000 in a companyís promissory notes to customers without providing his member firm with written notice of the promissory note transactions and receiving the firmís approval to engage in these transactions.

Based upon expected interest payments from the promissory notes, some of the customers also purchased life insurance policies from Christensen and another registered representative the firm employed. These customers expected to use the promissory note interest payments to pay for the life insurance premiums.

Christensen received direct commissions from the company related to the sale of the promissory notes to customers and received commissions from the sale of life insurance products to the customers, who intended to fund those policies with the interest payments from the promissory notes.

The company defaulted on its obligations and the customers lost their entire investment. The customers who also purchased life insurance based upon the expectation that they would receive interest payments from their investment relinquished their policies and the firm compensated them for the premiums paid, but the customers did not receive any reimbursement for the investments in the company that sold the promissory notes.

Christensen completed a firm annual compliance questionnaire, in which he falsely stated that he had not been engaged in any capital raising activities for any person or entity; had not received fees for recommending or directing a client to other financial professionals; had not been personally involved in securities transactions, including promissory notes, that the firm had not approved; and had not assisted a client with an application for investments not available through the firm or contracted or otherwise acted as an intermediary between a client and a sponsor of such investments without the firmís prior approval.

Finally, Christensen failed to respond to FINRA requests for documents and testimony.

Bart Chad Christensen : Barred
Bill Singer's Comment
A cascade of calamity.  Under the circumstances, I have no problem with the Bar.
Edward Philip Gelb (Principal)
AWC/2009019466601/July 2011

Gelb solicited individuals, including customers at his member firm, to invest in entities that were purportedly engaged in the export and import business with a manufacturer based in China.

Gelb raised approximately $1.8 million from investors and received approximately $79,500 from the entities as compensation derived from his solicitation of, and directing investors to, the entities.

Private Securities Transaction

Gelb was aware of his firmís policies and procedures, which specifically prohibited its registered representatives from participating in any manner in the solicitation of any securities transaction outside the regular scope of their employment without approval. Gelb signed annual certifications attesting to this knowledge and failed to notify his firm about his solicitation of investors for the entities because he did not expect the firmís approval of the product.

Due Diligence

Gelb failed to obtain adequate information about the investment and instead relied upon unfounded representations, including guarantees that the investorsí principal would be protected despite the fact that, at no time, had Gelb seen any financial documentation for the entities. The information available on the Internet about the entities was limited to the companiesí own website.

Risk Disclosures

FINRA determined that despite the highly risky nature of the investment, Gelb led the customers to believe that the investment he was recommending was a safe and secure investment and, in some cases, Gelb was aware that customers were taking out home equity lines of credit on their homes to fund their investments in the entities. Customers who invested in the entities Gelb recommended had low risk tolerances and had investment objectives of growth and/or income, and Gelb did not have a reasonable basis for recommending the entities to the customers.

Outside email

Gelb utilized an outside email account, without his firmís knowledge or consent, to conduct securities business.Although the firm was aware of the outside email account, Gelb had not been approved to utilize that email address to conduct securitiesrelated business and by operating an outside email account for securities-related business without the firmís knowledge and consent, Gelb prevented his firm from reviewing his emails pursuant to NASD Rule 3010(d).

Edward Philip Gelb (Principal): Barred
Tags:  Email    Annual Compliance Certification    Due Diligence     |    In: Cases of Note : FINRA
Frederick Xavier Veile III
AWC/2009020153401/July 2011

Veile borrowed $800 from one of his customers at his member firm. The loan was not reduced to writing and had no repayment terms, and Veile did not disclose this loan to his firm and the firm had a policy prohibiting representatives from borrowing money from customers.

Veile paid back the customer after FINRA began its investigation. Veile completed an annual compliance statement for the firm in which he falsely stated that he had not engaged in any prohibited practices, including borrowing from or lending to a client.

Frederick Xavier Veile III : Fined $5,000; Suspended 1 month
June 2011
David Elijah McKee (Principal)
AWC/2008011640801/June 2011

In his capacity as the vice president of compliance, McKee failed to supervise certain aspects of his member firmís securities business

Acting on his firmís behalf, McKee failed to

  • establish and maintain a supervisory system or written supervisory procedures reasonably designed to detect and prevent the firm from charging excessive commissions on mutual fund liquidation transactions;
  • adequately supervise the firmís communications with the public;
  • adequately supervise the firmís compliance with NASD Rule 3070 and Uniform Termination Notice for Securities Industry Registration (Form U5) reporting provisions and customer complaint recordkeeping requirements; and
  • comply with NASD Rules 3012 and 3013, in that the Rule 3012 and 3013 reports that he prepared on his firmís behalf were inadequate.

Thee firmís 3012 report for one year was inadequate because it failed to provide a rationale for the areas that would be tested, failed to detail the manner and method for testing and verifying that the firmís system of supervisory policies and procedures were designed to achieve compliance with applicable rules and laws, and did not provide a summary of the test results and gaps found. The 3012 report also failed to detect repeat violations including, the failure to conduct annual Office of Supervisory Jurisdiction (OSJ) branch office inspections, advertising violations, customer complaint reporting and ensuring that all covered persons participated in the Firm Element of Continuing Education.

The firm's 3013 report for one year did not document the processes for establishing, maintaining, reviewing, testing and modifying compliance policies to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws, and the manner and frequency with which the processes are administered. In addition, the firm failed to enforce its 3013 procedures regarding notification from customers regarding address changes.

David Elijah McKee (Principal): Fined $15,000; Suspended 30 business days in Principal/Supervisory capacities only
Tags:  Annual Compliance Certification    Supervision    WSPs     |    In: Cases of Note : FINRA
Bill Singer's Comment

These types of cases always strike me as "sloppy" because they largely have to do with failures to document actions that have usually been taken.  Pardon my cynicism but, hey, even the preparation of an insincere report is better than simply failing to prepare any report.

May 2011
Gary Scot Cohen (Principal)
AWC/2009020792101/May 2011

Cohen sold equity indexed annuities (EIAs), issued by an insurance company that was not a FINRA member, outside the scope of his employment with a member firm, and without providing the firm prompt written notice of the business activity. Cohen effected undisclosed EIA sales totaling over $1.5 million and received compensation totaling about $176,000 from the transactions. Cohen effected the sales directly with the insurance company that issued the EIAs rather than through the insurance company affiliated with his firm.

Cohen completed an outside business activities questionnaire for the firm in which he falsely represented that he was not licensed as an insurance agent for the purpose of selling fixed insurance with any entity other then the insurance company affiliated with the firm and its approved programs, and that he had not engaged in any outside business activity.

Gary Scot Cohen (Principal): Fined $5,000; Suspended 4 months
Tags:  Annual Compliance Certification    EIA     |    In: Cases of Note : FINRA
John Godfried Croes Jr.
AWC/2009017291201/May 2011
Croes sold EIAs outside the scope of his employment relationship with his member firm and received approximately $84,917.14 in compensation. Croes did not provide prompt written notice to his firm of his outside business activity, and represented on annual certification statements and/or outside business activity forms that he was either not engaged in outside business activity or that he had previously disclosed such activity; these representations were false. Despite a specific verbal warning by his firm to discontinue selling EIAs outside the firmís agency, Croes continued to do so, despite the firmís specific prohibition against doing so in its WSPs.
John Godfried Croes Jr.: Fined $5,000; Suspended 8 months
Tags:  Annual Compliance Certification    EIA     |    In: Cases of Note : FINRA
Bill Singer's Comment

Not sure that I fully agree with the sanction. Frankly, it strikes me as a bit on the light end of thing -- given that Croes was pointedly told to cease and desist the outside EIA sales and he disregarded that warning.  It's a rare event when I'm complaining that a sanction is too light but this one doesn't sit well with me.

Michael Steven Jacobson
AWC/2009017282401/May 2011
Jacobson sold Equity Indexed Annuties ("EIA") outside the scope of his employment relationship with a member firm, and received approximately $488,266.41 in compensation. Jacobson failed to give prompt written notice to his firm of his outside business activity and represented on annual certification statements and/or outside business activity forms that he was either not engaged in outside business activity or had previously disclosed such activity; these representations were false. Despite a specific verbal warning from his firm to discontinue selling EIAs outside his firmís agency, he continued to do so despite the firmís specific prohibition against doing so in its WSPs.
Michael Steven Jacobson : Fined $5,000; Suspended 18 months
Tags:  Annual Compliance Certification    EIA     |    In: Cases of Note : FINRA
Bill Singer's Comment
These cases still mystify me. I mean, you know, I sort of understand that an RR might argue that he/she was unaware of the OBA Rule. Okay, as far as that goes. I also understand how some folks might figure that sales of an EIA were okay. Again, I'll give you that much. However, when you're told -- point blank -- to cut the crap out and despite that, you go ahead . . . well, that likely explains why Jacobson got walloped with an 18-month sit down.
April 2011
Gary Chew
AWC/2008014479002/April 2011

Chew engaged in a

  • private securities transaction, by purchasing shares of stock via subscription agreement, outside the regular scope of his employment with his member firm and without providing prior written notice of this private securities transaction to the firm; and
  • outside business activity, as the president and sole owner of an entity, without providing prompt written notice to his firm.

Chew made false statements and attestations to his firm when he completed compliance questionnaires and annual attestations on which he declared to the firm that he had not personally invested in any private security transaction outside of the firm, that he was not ďengaged in any outside activity either as a proprietor, partner, officer, director, trustee, employee, agent or otherwise,Ē and that he did not participate in any outside business activities except for those previously disclosed to, and approved in writing by, the firm.

Gary Chew: Fiend $10,000; Suspended 3 months
Gifford Keith Jordon
AWC/2010024417101/April 2011
Jordon participated in private securities transactions for which he received approximately $48,585 in commissions and failed to provide prior written notice to his member firm. Jordon concealed his participation because he did not believe his firm would approve the activity and completed the firmís compliance questionnaires without disclosing the private securities transactions.
Gifford Keith Jordon: Barred
Bill Singer's Comment

I won't tell you because if I do, you probably won't approve it. Of course, if you find out about it, which you probably will because that's how this crap always winds up, then I'm going to lose my job and career. 

Lemme see, does that make any sense?

James Gabor Doering (Principal)
AWC/2009018661401/April 2011
Doering willfully failed to disclose material information on his Form U4. Doering completed annual certifications for his member firm in which he falsely answered ďnoĒ to whether he had been the subject of a Form U4 reportable event.
James Gabor Doering (Principal): Fined $5,000; Suspended 4 months
March 2011
James Robert Riolo (Principal)
AWC/2010022499001/March 2011

Riolo referred customers of his member firm to entities controlled by his relative, who was purportedly engaging in trading off-exchange foreign currency (forex) contracts, but in fact was running a fraudulent scheme. The customers invested more than $3.3 million with one entity, and for referring these customers, Riolo received more than $960,000 from his relative. Both entities were fraudulent schemes and Rioloís relative was subsequently convicted and sentenced in court for his fraudulent activities.

Customers that Riolo referred lost a combined amount of over $120,000. In referring these customers to his cousin and receiving compensation, Riolo engaged in an outside business activity, but did not provide written notice or receive approval from his firm. Riolo falsely stated in signed monthly compliance questionnaires that he was not engaging in any outside business activity. In addition, Riolo failed to respond to FINRA requests for information and documents.

James Robert Riolo (Principal): Barred
Tags:  FOREX    Annual Compliance Certification     |    In: Cases of Note : FINRA
John Leslie White
AWC/2009016876801/March 2011

White borrowed $20,000 from a customer at his member firm, in order to purchase a house, without providing prior written notice to or obtaining prior written approval from, the firm. White borrowed the money, and the firmís written procedures prohibited borrowing from customers unless the customer was either an immediate family member, or a person or entity regularly engaged in the business of lending money, and Whiteís customer was neither.

White completed an annual firm compliance survey and answered falsely that he had not borrowed money from clients.

John Leslie White : Fined $5,000; Suspended 2 months
Robert John Griffin
AWC/2009020328201/March 2011
Griffin borrowed a total of $10,000 from a friend who was also a customer of his member firm through loans against the customerís life insurance policy, contrary to his firmís written supervisory procedures that required written approval from the firm before an employee could borrow money from any customer, including friends. Griffin supplied the customer with the necessary paperwork and asked the customer not to tell anyone at his firm about the loan. Griffin failed to obtain his firmís pre-approval in writing of the loans before accepting the loans. Also, Griffin provided false responses during firm face-to-face annual compliance interviews and on questionnaires regarding borrowing or lending money to clients.
Robert John Griffin : Fined $7,500; Suspended 7 months
Bill Singer's Comment
Once you start asking a client not to notify your firm, then you're really asking for trouble. Which is what the RR in this case got.
February 2011
Andrew Gregory McGrath
AWC/2009018123301/February 2011
McGrath engaged in an outside business activity and failed to provide prompt written notice to his member firm; McGrath sold EIAs and earned approximately $104,000 in commissions. McGrath completed and signed a firm annual questionnaire, on which he failed to disclose his outside business activity, and failed to update his Form U4 to disclose the outside business activity, and at no time did he provide written notice to his firm.
Andrew Gregory McGrath: Fined $5,000; Suspended 3 months
Tags:  Annual Compliance Certification        EIA     |    In: Cases of Note : FINRA
Clark Alexander Reinhard
AWC/2010021577101/February 2011

Reinhard participated in private securities transactions without providing prior written notice to, and/or obtaining prior written approval from, his member firm. The findings stated that Reinhard sold at least $869,000 in stock and warrants to investors, including firm customers, and sold the securities, which a publicly traded company issued, as part of a private securities offering by hedge funds. Reinhard falsely represented on annual compliance questionnaires that he had not engaged in private securities transactions.

Reinhard failed to respond to FINRA requests for documents.

Clark Alexander Reinhard : Barred
Dallas Ray Seagraves II (Principal)
2007009181101/February 2011
Seagraves willfully failed to amend his Form U4 with material information and to disclose the information on his member firmís annual compliance questionnaire. Seagraves failed to submit an invitation to his investment seminars for principal approval before sending it to the general public, and used unapproved slides at the seminars although he had previously submitted sales literature to his firm for advance approval and was therefore familiar with the requirement to do so. The seminar invitation and slides he used in connection with the seminars contained numerous exaggerated, misleading and promissory statements that contravened FINRA Rule 2210ís requirements for sales literature.
Dallas Ray Seagraves II (Principal): Fined $10,000; Suspended 9 months in all capacities; Barred in Principal capacity only
Tags:  Annual Compliance Certification         |    In: Cases of Note : FINRA
Jason Leekarl Beckett
AWC/2009016600001/February 2011

Beckett submitted an advertisement to a local newspaper, which listed an entity he owned as offering certain investments, including certificates of deposit (CDs) and fixed annuities, and that he did not submit the advertisement to his member firm for review and approval; moreover, the advertisement content included misleading statements regarding the offered investments.

Beckett maintained a website for an entity he owned, which was accessible to the investing public, and he failed to submit the website material to his firm for review until a later date. Beckett failed to obtain his firmís written approval of the website content prior to its use.

Beckett completed an annual certification, which he provided to his firm and he answered ďnoĒ to the question asking whether he anticipated using any type of electronic communication systems such as the Internet for soliciting business.

Jason Leekarl Beckett : Fiend $10,000; Suspended 2 months
Linda Mary Bakalis Schurr
AWC/2007009073002/February 2011

Schurr engaged in an outside business activity involving a company, which was a marketing and advertising business through which she sought to generate leads for registered representatives and insurance agents. The companyís primary form of marketing was mass mailings, usually employing postcards that contained false and misleading statements that Schurr sent and caused to be sent to thousands of prospective customers. Schurr developed and directed the use of multiple false and misleading telephone operator scripts that were used in the companyís call center to respond to potential investors.

As a result of the misleading marketing practices involving her company, Schurr became the subject of state regulatory actions and willfully failed to timely update and amend her Form U4 to disclose these actions to FINRA as required.

Schurr associated with a FINRA registered member firm and acted in a registered capacity while subject to statutory disqualification.

Schurr provided false information and failed to disclose material information to the firm on firm annual compliance and outside business activity questionnaires concerning her outside business activity and regulatory actions.

In addition, Schurr failed to provide prompt and complete written notice to the firm of her outside business activities involving another insurance marketing firm when the other company was closed.

Linda Mary Bakalis Schurr : Fined $35,000; Suspended 2 years
Bill Singer's Comment
Just out of curiousity, what does it take to get barred these days?
Mamoru Takeuchi aka Marr Takeuchi
AWC/2009017628301/February 2011

Takeuchi participated in private securities transactions by selling a viatical settlement companyís viaticals to outside investors while he was registered with his member firm. Takeuchi did not provide notice to, and receive approval from, the firm before participating in these private securities transactions; the firm also prohibited the sales of viaticals. Takeuchi earned approximately $4,400 as a result of his viatical sales and never gave the firm any notice, written or otherwise, that he had sold viaticals to outside investors.

Takeuchi repeatedly misrepresented and omitted material information to the firm concerning his sales of viaticals when he completed the firmís annual compliance meeting questionnaires and checked ďNo,Ē implying that he had not engaged in any activity involving viatical contracts.Takeuchi made false attestation to the firm when he executed a firm document that he had not participated in the sale or solicitation of viaticals. Takeuchi knew that his written statements to the firm regarding his viatical sales were inaccurate or incomplete.

Mamoru Takeuchi aka Marr Takeuchi : Fined $10,000; Suspended 1 year
Tags:  Viaticals    Insurance        Annual Compliance Certification     |    In: Cases of Note : FINRA
Peter Joseph Bonnell III (Principal)
AWC/2007009073001/February 2011

Bonnell engaged in an outside business activity involving a company he owned and operated, which was a marketing and advertising business through which he sought to generate leads for registered representatives and insurance agents. The companyís primary form of marketing was mass mailings, usually employing postcards that contained false and misleading statements that Bonnell sent and caused to be sent to thousands of prospective customers.

Bonnell developed and directed the use of multiple false and misleading telephone operator scripts that were used in the companyís call center to respond to potential investors. As a result of the misleading marketing practices involving his company, Bonnell became the subject of several state regulatory actions and willfully failed to timely amend his Form U4 to disclose these actions to FINRA as required.

Bonnell associated with a FINRA registered member firm and acted in a registered capacity while he was subject to statutory disqualification. Bonnell provided false information, failed to disclose material information, and misrepresented material information on the firmís annual compliance questionnaires concerning his outside business activity and regulatory actions.

In addition,Bonnell failed to provide prompt and complete written notice to the firm of his outside business activities involving another insurance marketing firm he operated after closing the other company. Moreover, Bonnell failed to adequately supervise certain representatives to ensure they filed accurate and timely updates disclosing state regulatory actions and outside business activity.

Peter Joseph Bonnell III (Principal): Fined $35,000; Suspended 2 years
January 2011
David William Reimers (Principal)
AWC/2010022393501/January 2011

Reimers borrowed approximately $75,768 from one of his customers at his member firm despite the fact that the firmís procedures prohibited representatives from borrowing money from a customer, unless the customer was a family member and written notice was provided to the firm. The customer was not a family member and Reimers did not inform the firm of the loan, which was repaid in full, together with interest totaling $11,259.

Reimers falsely represented on his firmís annual compliance questionnaire that he had not borrowed money from a customer.

David William Reimers (Principal): Fined $5,000; Suspended 3 months
Janney Montgomery Scott, LLC
AWC/2007009458001/January 2011

The Firm failed to

  • establish certain elements of an adequate AML program reasonably designed to achieve and monitor its compliance with the requirements of the Bank Secrecy Act and implementing regulations promulgated by the Department of Treasury;
  • establish policies and procedures reasonably expected to detect and cause the reporting of transactions required under 31 USC 5318(g) by failing to provide branch office managers with reports that contained adequate information to monitor for potential money-laundering and red flag activity; and for the firmís compliance department to perform periodic reviews of wire transfer activity, require either branch managers or the AML compliance officers to document reviews of AML alerts in accordance with firm procedures, identify the beneficial owners and/or agents for service of process for some foreign correspondent banks accounts, and establish adequate written policies and procedures that provided guidelines for suspicious activity that would require the filing of a Form SAR-SF;
  • establish policies and procedures that required ongoing AML training of appropriate personnel related to margin issues, entering new account information, verifying physical securities and handling wire activity;
  • ensure that its third-party vendor verified new customersí identities by using credit and other database cross-references, and after the firm determined that the vendorís lapse was resolved, it failed to retroactively verify customer information not previously subjected to the verification process;
  • establish procedures reasonably expected to detect and cause the reporting of suspicious transactions required under 31 USC 5318(g), in that it failed to include in its AML review the activity in retail accounts institutional account registered representatives serviced;
  • review accounts that a producing branch office manager serviced under joint production numbers;
  • evidence in certain instances timely review of letters of authorization, correspondence, account designation changes, trade blotters, branch manager weekly review forms and branch manager monthly reviews; failed to follow procedures intended to prevent producing branch office managers from approving their own errors;
  • follow procedures intended to prevent a branch office operations manager from approving transactions in her own account and an assistant branch office manager from reviewing transactions in accounts he serviced;
  • establish procedures for the approval and supervision related to employee use of personal computers and, during one year, permitted certain employees to use personal computers the firm did not approve or supervise,
  • include a question on thefirmís annual acknowledgement form for one year that required its registered representatives to disclose outside securities accounts and the firm could not determine how many remained unreported due to the supervisory lapse;
  • follow policies and procedures requiring the pre-approval and review of the content of employeesí radio broadcasts, television appearances, seminars and dinners, and materials distributed at the seminars and dinners; representatives conducted seminars that were not pre-approved by the firmís advertising principal as required by its written procedures; the firm failed to maintain in a separate file all advertisements, sales literature and independently prepared reprints for three years from date of last use; and a branch office manager failed to review a registered representativeís radio broadcast. A branch office manager failed to maintain a log of a registered representativeís radio broadcasts and failed to tape and/or maintain a transcript of the broadcasts and there was no evidence a qualified principal reviewed or approved the registered representativeís statements. Branch office managers did not retain documents reflecting the nature of seminars, materials distributed to attendees or supervisory pre-approval of the seminars; retain transcripts of a representativeís local radio program and TV appearances or document supervisory review or approval of materials used; and retain documents reflecting the nature of a dinner or seminar conducted by representatives or materials distributed;
  • record the identity of the person who accepted each customer order because it failed to update its order ticket form to reflect the identity of the person who accepted the order; and

  • to review Bloomberg emails and some firm employeesí instant messages

The Firm distributed a document, Characteristics and Risks of Standardized Options, that was not current, and the firm lacked procedures for advising customers with respect to changes to the document and failed to document the date on which it was sent to certain customers who had recently opened options accounts. Also, the firmís compliance registered options principal did not document weekly reviews of trading in discretionary options accounts.

Janney Montgomery Scott, LLC : Censured; Fined $175,000
Tags:  Annual Compliance Certification    Email    Instant Messaging    SAR    AML    Bank    Third Party Vendor    Away Accounts    Broadcast    Producing Manager     |    In: Cases of Note : FINRA
Bill Singer's Comment
What can I say -- even I'm impressed!
Joe Michael Kirk
AWC/2009017797201/January 2011

Kirk engaged in outside business activities without providing prompt written notice to his member firm. Kirk had a contract with an insurance company to sell EIAs, which was approved, but the firm subsequently informed Kirk in writing that the approval to sell EIAs through the insurance company had been cancelled. Despite receiving this notice, Kirk sold EIAs through the insurance company without providing prompt written notice to his firm, and received commissions of approximately $14,500.

Kirk incorrectly answered on his firmís required compliance questionnaire that he was not currently engaged in any outside business activities, when at the time, he maintained his contractual relationship with the same insurance company through which he sold the EIAs.

Joe Michael Kirk: Fined $5,000; Suspended 4 months
Torrey Pines Securities, Inc. and NAME REDACTED (Principal)
AWC/2007011125103/January 2011

Acting on the firmís behalf, NAME REDACTED 

  • failed to ensure that a firm principal completed his annual certification as the firmís procedure required,
  • did not follow up on the principalís failure to provide information regarding both his outside business activities and the accounts for which he served as a custodian or trustee, and
  • conducted an inspection of a firm branch office, and that inspection did not comport with the firmís written procedures and did not reasonably review the activities of that office.

NAME REDACTED did not review the transmittal of funds between the principalís customers and a third party as the firmís written supervisory procedures required, and failed to obtain details regarding the principalís outside business activities.

The firm failed to

  • reasonably supervise the principal by failing to take steps to inquire into ďred flagsĒ  indicating his possible misconduct;
  • follow up on the principal's outside business activities and excessive absences from the firm;
  • timely investigate allegations that he was participating in private securities transactions away from the firm; and when the firm confirmed his selling away activities, it did not take any steps to place him on heightened supervision.

The Firm's written supervisory procedures were not reasonably designed to ensure principal review of wires from customers to third parties, so it was unaware the principalís customers were transferring large sums to a third party and that he was executing Letters of Authorization (LOAs) on behalf of multiple customers.

Torrey Pines Securities, Inc.: Censured; Fined $17,500

NAME REDACTED: No Fine in light of financial status; Suspended from association with any FINRA member in any principal capacity, other than the capacity of municipal securities principal, for 10 business days.

Bill Singer's Comment
Possibly the first time that I have seen a firm sanctioned for not noting "excessive absences, " but, under the attendant circumstances, that's a fair shot by FINRA and it would be appropriate for compliance/supervisory staff to note that such an attendance issue could indicate that some outside activity is imposing a strain upon a registered person.
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