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
Dawson James Securities, Inc, Albert James Poliak (Principal) and Douglas Fulton Kaiser (Principal)
OS/2009016158501/December 2011
The Firm entered into a de facto commission recapture agreement with a firm customer without meeting the minimum required net capital of $250,000 and without filing an application for amendment of the firmís FINRA membership agreement

The Firm and a customer entered into a consulting agreement whereby the customer was to provide research and advisory services. However, the firm did not request, nor did the customer provide, research reports or advisory services or any of the other services set forth in the consulting agreement. Moreover, the Firm paid the customer a total of $1,215,000, which exceeded by $885,000 the payments due to the customer per the contractual requirements under the consulting agreement. The payments exceeded the contractual requirements of the consulting agreement because the agreement was a de facto commission recapture arrangement through which the customer was paid larger amounts based upon the level of security transactions the customer was executing in its brokerage account at the firm. 

Dawson's CEO Poliak was responsible for the creation of the consulting agreement and approved each wire transfer payment to the customer, including the payments that were in excess of amounts due to the customer under the consulting agreement. 

Kaiser (who acted at times as both the firmís head of trading and the Financial and Operations Principal (FINOP)) was responsible for calculating the payments owed to the customer and he pulled research concerning the customerís trades in an effort to document the consulting agreement, but the Firm was unable to document its use of the purported research or other financial benefit arising from the consulting agreement. 

Poliak and Kaiser acted unethically in that they facilitated the improper commission recapture arrangement between the firm and customer, and caused the firm to fail to comply with the requirement of NASD Rule 1017.

Acting through Poliak and Kaiser, the Firm violated the Customer Protection Rule in several ways:
  1. in connection with the commission recapture agreement described above, the firm held, or was in control of, customer funds without establishing a special reserve bank account for the exclusive benefit of the customer in violation of Securities Exchange Act Rule 15c3-3, By holding customer funds and failing to forward the funds to its clearing firm, the firm became a broker or dealer that receives and holds funds for customers, which required it to increase its net capital and establish a reserve bank account for customer protection;
  2. after a commission recapture agreement was ultimately established for the customer by the firmís clearing firm, the firm deposited into its own checking account a check from the clearing firm which included at least $136,700 in commission rebates due to the customer. Rather than record a liability to the customer, the firm made a journal entry to reduce the commission receivable. The firmís receipt of customer funds increased its minimum net capital to $250,000, a level that the firm did not meet;
  3. the firm held and segregated security positions in its proprietary account for the benefit of two customers in order to satisfy the obligation of promissory notes and a confidential private placement memorandum (PPM); 
  4. the firm acted in the capacity of a noteholderís agent to facilitate the repayment to firm customers of $2,715,000 of principal plus interest on defaulted notes and warrants issued by an unaffiliated issuer. By doing so, the firm acted in a carrying, transferring and safekeeping capacity for customers, which required the firm to maintain a minimum net capital of at least $250,000. The firmís net capital was below that required minimum, and as a result the Financial and Operational Combined Uniform Single (FOCUS) reports it filed, and its books and records, were inaccurate. The firm also failed to timely file Securities and Exchange Commission (SEC) Rule 17a-11 notices when notified by its designated examining authority that the broker-dealerís net capital was, or had been, below its minimum requirement. 
When acting in the capacity as the firmís FINOP, Kaiser was responsible for supervision and/or performance of the firmís compliance under all financial responsibility rules promulgated pursuant to provisions of the Securities Exchange Act of 1934. Kaiser failed to adequately perform his FINOP responsibilities in that he failed to take adequate steps to ensure the accuracy of the firmís net capital calculations. 

As Poliak participated in the firmís holding of customer funds in violation of Rule 15c3-3, Poliak caused the firmís net capital and books and records violations. The firmís compensation committee did not document the basis upon which a research analystís compensation was established, thus failing to establish a written record of whether specific factors required by NASD Rule 2711 were properly considered, and whether research analyst compensation was tied to any investment banking activities. 

FINRA found that a senior officer at the firm inaccurately represented in required attestations submitted to FINRA that the compensation committee documented the basis upon which each research analystís compensation was established. The senior officer should have known that each attestation submitted contained false information. Furthermore, the Firm sold securities for customer accounts that were not registered pursuant to Section 5 of the Securities Act of 1933, nor exempt from registration; the sales constituted an unregistered distribution by the firm. 

Dawson James Securities, Inc: Censured; FIned $90,000
Albert James Poliak: Fined $30,000; Suspended 1 year
Douglas Fulton Kaiser: Fined $30,000; Suspended 1 year
Tags:  Commissions    Membership Agreement    Customer Protection Rule        FINOP     |    In: Cases of Note : FINRA
November 2011
J.P. Turner & Company, LLC and James Edward McGrath (Principal)
OS/2009016612701/November 2011

McGrath failed to reasonably supervise a registered representative who recommended and effected unsuitable and excessive trading in a customerís account. McGrath had supervisory responsibility over the registered representative and was responsible for reviewing his securities recommendations to ensure compliance with member firm procedures and applicable securities rules. McGrath failed to reasonably supervise the registered representative by, among other things, failing to enforce firm account procedures and failing to respond to red flags regarding the registered representativeís trading activity in the customerís account.

The firmís supervisory procedures required McGrath to review account transactions, such as the registered representativeís recommended transactions in the customerís account, on a daily and monthly basis for, among other things, general suitability, excessive trading and churning, in-and-out trading and excessive commissions and fees; the firmís procedures also required that McGrath review all exception reports related to the individuals who he supervised and take appropriate measures as necessary. Through these required reviews, McGrath was aware of red flags of possible misconduct in the customerís account, including frequent short-term trading, excessive commission and margin charges, high turnover and cost-to-equity ratios, and substantial trading losses, and the account frequently appeared on the firmís exception reports; McGrath failed to reasonably respond to and address the red flags in the customerís account.

McGrath never spoke with the customer despite the fact that the firmís compliance department sent several emails to McGrath advising him that the customerís account needed customer contact as required by the firmís WSPs; McGrath never spoke with the customer directly to confirm that he was aware of the activity level in his account or that such activity was appropriate in light of his financial circumstances and investment objectives.

McGrath failed to ensure that an Active Account Suitability Supplement and Questionnaire was sent to the customer within the time frame the firmís WSPs required. Moreover, months after the registered representative began trading in the customerís account, McGrath instructed the registered representative to curtail the short-term trading in the account and hold positions for a longer period; that was the only time McGrath spoke to the registered representative about the customerís account. Furthermore, McGrath reduced the registered representativeís commissions for purchases in the customerís account, but this measure did not have the desired impact; the registered representative actually increased the number of purchases and frequency of short-term trading to offset the effects of the commission reduction until the customer closed the account after suffering losses of approximately $120,000.

McGrath failed to take any action against the registered representative based on his failure to comply with his instructions; among other things, McGrath never restricted the trading in the customerís account, spoke to the customer, placed the registered representative on heightened supervision, recommended disciplinary measures against him to address these concerns, or spoke with the firmís compliance department regarding the supervision of the registered representative. The firm allowed the registered representative to effect transactions in the customerís account for months without obtaining a signed and completed new account form from the customer, and failed to enforce its review of active accounts as the WSPs required. The firm failed to send a required suitability questionnaire to the customer until almost a year after the account had been opened and suffered significant losses, failed to qualify his account as suitable for active trading and failed to perform a timely quarterly review of the account.

J.P. Turner & Company, LLC: Censured; Fined $20,000

James Edward McGrath (Principal): Fined $5,000; Suspended 10 business days in Principal capacity only

Tags:  Suitability    Supervision    Commissions     |    In: Cases of Note : FINRA
Bill Singer's Comment

What really stopped me in my tracks was the allegation that McGrath cut the RR's commissions for purchases but this resulted in the RR's increasing buy orders and the frequency of short-term trades. Frankly, if a supervisor even thinks that it's necessary to cut commissions in order to promote better compliance practices by an RR, it might simply be a good time to fire the RR rather than keep your fingers' crossed -- particularly if you're not reaching out to the customers for insight. 

A very generous settlement offer from FINRA to McGrath given the widespread nature of the allegations.

October 2011
Frank Bianculli
AWC/2009016911202/October 2011

Bianculli entered into an informal agreement with brokers at his member firm to share in commissions relating to undisclosed private securities transactions in an entity, which purported to advance cash to merchants in exchange for the merchantsí future credit card receivable; the entity promised returns of 4 percent or more per month, but it was a Ponzi scheme.

Bianculli helped brokers with servicing a customerís investment but failed to provide his firm with written notice of his involvement in an unapproved private securities transaction. Bianculli provided false and misleading information to FINRA during sworn on-the-record testimony.

Also, Bianculli provided false and misleading statements to his firm in response to a compliance questionnaire distributed by the firm inquiring into the scheme. Bianculli denied meeting any of the owners or principals of the entity and failed to disclose his participation in the customerís investment.

Frank Bianculli : Barred
Tags:  Commissions    Ponzi     |    In: Cases of Note : FINRA
Yaman Huseyin Sencan (Principal)
AWC/2009016323801/October 2011

Sencan  failed to reasonably supervise the activities of member firm personnel engaged in the charging of excessive commissions, sharing commissions with a non-member and misusing funds on deposit with the firm.

Acting through its head trader, Sencan's firm improperly shared about $4 million in commissions with one of the firmís hedge fund clients and charged excessive commissions totaling over $580,000 in transactions.

Sencan was the head traderís direct supervisor and was aware that the firm had entered into a commission sharing arrangement with the hedge fund client, and he was responsible for reviewing that arrangement and the head traderís trading activities. The firmís procedures required the chief compliance officer (CCO) to periodically review emails firm personnel sent and received. Sencan failed to perform periodic reviews of the head traderís electronic correspondence or otherwise take reasonable steps to supervise his activities.

Acting through its FINOP, the firm misused at least $61,000 in funds on deposit with the firm. 

Sencan was the FINOPís direct supervisor but failed to monitor the firmís financial records, perform periodic reviews of the FINOPís electronic correspondence or otherwise take reasonable steps to supervise the FINOPís activities.

Sencan became the firmís AMLCO, and in this position, he was responsible for ensuring that the firmís AML compliance procedures (AMLCP) were enforced but failed to do so. The CIP portion of the firmís AMLCP required the firm, prior to opening an account, to obtain identifying information such as the customerís passport number and country of origin; but acting through Sencan, the firm failed to obtain the identifying information the CIP required for some of its customers (a portion of whom were located outside of the United States). In addition, the firmís AMLCP required the firm to maintain transmittal orders for wire transfers of more than $3,000, and those orders had to contain at least the name and address of the transmitter and recipient, the amount of the transmittal order, the identity of the recipientís financial institution and the recipientís account number; on numerous occasions, a firm customer account wired out funds in excess of $3,000. Sencan did not take steps to ensure that the firm retained information regarding those wires, including the recipientís name, address and account number and the identity of the recipientís financial information. Furthermore, acting through Sencan, the firm failed to provide AML training to its registered personnel.

Sencan was attempting to find transactional business for the firm in medium-term notes (MTNs).  As part of an effort to purchase MTNs for resale to its clients, the firm entered into an agreement with a Switzerland-based entity. Sencan signed the agreement on the firmís behalf, and the agreement called for the entity to provide the firm with the opportunity to purchase $100 million (face value) in specified MTNs; however, the agreement included clauses containing material misrepresentations about the firmís ability to purchase MTNs.

The first clause represented that the firm was the actual legal and beneficial owner of cash funds in excess of $100 million on deposit at a major bank. In addition, the second clause was a representation that these funds were free and clear of liens, had been legally earned and could immediately be utilized for the purchase of financial instruments; neither of these clauses was true, as the firm never had $100 million on deposit at any bank at any time.

Yaman Huseyin Sencan (Principal): Fined $20,000; Barred in Principal capacity only; Suspended 6 months in all capacities.
Tags:  Commissions    Correspondence    Trading    AML    CCO    CIP    FINOP     |    In: Cases of Note : FINRA
September 2011
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.
May 2011
Dale Allen Eppler
AWC/2009018149601/May 2011

Eppler disclosed his outside business activities to his member firm as part of a branch office review and reported that he was engaged in the sale of new and renewal sales of a particular companyís insurance products that his firm did not approve for sale. In response to the disclosure, Eppler was informed, orally and in writing, that he should discontinue selling those products and he could only receive renewals on prior sales.

Eppler was sent an email reminding him of deficiencies found in the branch examination, which included his sale of the particular insurance products, and that he was to discontinue selling the insurance products. Eppler responded to the email by advising the firm that all of the deficiencies had been corrected, which was untrue because Eppler continued to sell the non-approved insurance products and received $967.79 as commissions from the sales.

Epplerís branch office was again reviewed, and as part of that review, Eppler reported his outside business activities and reported that he was receiving commissions only for renewals of the non-approved insurance products, which was false, in that Eppler continued to sell new non-approved insurance policies, for which he received compensation. Eppler engaged in these activities without giving prompt written notice to his firm that he was continuing to sell new non-approved insurance policies.

Dale Allen Eppler : Fined $7,500; Suspended 6 months
Tags:  Commissions    Insurance     |    In: Cases of Note : FINRA
Bill Singer's Comment

Okay, so Eppler gets some credit for initially disclosing his OBA involving the disfavored insurance products. And, yeah, the firm tells him to stop. So, at that point, maybe you could argue that Eppler sort of got off with a warning.

However, once the email goes out, he then seems to blow-off the firm with a false assurance of compliance and proceedst to sell non-approved product to the tune of nearly a thousand dollars of commissions. Of course, when he gets caught during the next branch review, he tries to fudge it by saying that the commissions were only for renewals and not new business. 

Putting the adequacy of the fine aside -- only a six-month suspension?  Wow. Must be some incredible lawyering or maybe FINRA has over-stated the seriousness of the evasive conduct.

Registered Rep
AWC/2010021348101/May 2011

RR falsely prepared a letter on the letterhead of one of his member firmís institutional customers without the customerís or firmís knowledge or authorization. RR addressed the letter to the customerís plan vendor, directing the plan vendor to change the commission split on the customerís 457 plan to reflect that RR would receive a 100 percent commission; originally, the customerís plan revenue reflected a commission split of 96 percent to RR and 4 percent to another registered representative.

RRís member firm agreed to have commission revenues flow solely to him in the short term after the other registered representative resigned, but advised him that he needed to obtain a letter from the customer acknowledging his role as the sole broker of record due to the other registered representativeís resignation. The letter purportedly authorized RR to receive 100 percent of the commission from the plan revenue, and RR forged the signature of the customerís plan controller without her knowledge or authorization. RRís firm policy prohibits a registered representative from signing a customerís signature to any paperwork, regardless of whether the customer has given permission to do so, and prohibits a registered representative from signing a clientís name on any form, with or without the clientís authorization.

Registered Rep: Fined $5,000; Suspended 5 months
Tags:  Forgery    Commissions     |    In: Cases of Note : FINRA
Bill Singer's Comment
I mean, seriously -- really?  Boy, is this guy lucky that he's only sitting down for 5 months.
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