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.
September 2011
Ayre Investments, Inc. and Timothy Tilton Ayre (Principal)
OS/2009016252601/September 2011

Acting through Ayre, its CCO, Ayre Investments failed to establish and maintain a supervisory system and establish, maintain and enforce WSPs to supervise the activities of each registered person that were reasonably designed to achieve compliance with the applicable rules and regulations related to

  • CRD pre-registration checks,
  • exception report maintenance and review,
  • supervisory branch office inspections,
  • approval of transactions by a registered securities principal,
  • annual compliance meeting,
  • financial and operations principal (FINOP) review of checks received and disbursements blotter,
  • NASD Rule 3012 annual report to senior management,
  • review and retention of correspondence, Regulation S-P and outsourcing arrangements.

The Firm's WSPs were purchased from a third-party vendor and were intended to meet the needs of any broker-dealer, regardless of the firmís size or business. Acting through Ayre, the Firm failed to tailor the template WSPs to address the firmís particular business activities. With respect to the areas identified above, the firmís WSPs failed to describe with reasonable specificity the identity of the person who would perform the relevant supervisory reviews and how and when those reviews would be conducted; and with respect to the maintenance of electronic communications, the firm completely failed to establish, maintain and enforce any supervisory system and/or WSPs reasonably designed to ensure that all business-related emails were retained.

Acting through Ayre, the Firm violated the terms of a Letter of Acceptance, Waiver and Consent (AWC) by failing to file a required written certification with FINRA regarding the firmís WSPs within 90 days of the issuance of the AWC. Despite being given multiple reminders and opportunities by FINRA staff during a routine examination to file the certification, the firm and Ayre have yet to file the certification the AWC required.

The Firm only had one registered options principal (ROP) who was required to review and approve all of the firmís option trades; for more than half a year, however, the ROP resided in another state and did not work in the firmís main office. Furthermore, the firmís WSPs did not address or explain how the ROP, given his remote location, was to accomplish and document the contemporaneous review and approval of all options trades firm customers placed; the firm executed approximately 450 options transactions, none of which the ROP approved.

The firm failed to maintain and preserve all of its business-related electronic communications, and therefore willfully violated Securities Exchange Act Rule 17a-4.

The Firm permitted its registered representatives to use email to conduct business when the firm did not have a system for email surveillance or archiving. Each firm representative maintained electronic communications on his or her personal computer or arranged for the retention of electronic communications in some other fashion, and the firm relied on representatives to forward or copy their businessrelated emails to the firmís home office for retention. Not all of the representativesí business-related emails were forwarded to the home office, and the firm did not retain the electronic communications that were not forwarded or copied to the firmís home office; as a result, the firm failed to maintain and preserve at least 10,000 business-related electronic communications representatives sent to or received.

Ayre Investments, Inc.: Censured; Fined $10,000  (note: FINRA states that it imposed a lower fine against the firm after it considered, among other things, the firmís revenues and financial resources); Undertakes to review its supervisory systems and WSPs for compliance with FINRA rules and federal securities laws and regulations, including those laws, regulations and rules concerning the preservation of electronic mail communications, and certify in writing to FINRA, within 90 days, that the firm has in place systems and procedures to achieve compliance with those rules, laws and regulations.

Timothy Tilton Ayre: Fined $10,000; Suspended 2 months in Principal capacity only.

Tags:  Email    Electronic Communications    Annual Compliance Meeting    FINOP    Regulation S-P    Options     |    In: Cases of Note : FINRA
Bill Singer's Comment

A well-presented and well-documented FINRA report -- compliments on that!  The alleged violations clearly indicate lapses and the issue of the failed follow-up on the AWC is as inexcusable a compliance miscue as there is. 

The one quibble I have is with the WSP, and it's an old issue for me.  When a firm is admitted to FINRA membership, it must submit its proposed WSP for approval.  It absolutely drives me nuts when a specific WSP was approved as part of the firm's initial membership or a continued membership application and then, miraculously, a year or so later that same document is suddenly deemed to be non-compliant.  I would argue that it is incumbent upon FINRA to meaningful eyeball a member's WSP and to put the firm on prompt notice of any deficiencies -- in contrast to playing gotcha after no examiner cited any shortcomings during a prior review.  Whether these circumstance apply in this case, I do not know -- nonetheless, I will argue until my last breath that regulators need to play fair with this issue.

H. Beck, Inc.
AWC/2009016150001/September 2011

H. Beck Inc. failed to maintain and preserve certain of its business-related electronic and written communications.

Most of the firmís registered representatives are independent contractors operating from ďone-manĒ branch office locations throughout the country; the firmís representatives were allowed to maintain written correspondence at their branch offices; and the firm permitted representatives to send emails from their personal computers. The firm did not have an electronic system to capture emails, but instead required representatives to print and make copies of their emails, which along with their written correspondence were reviewed during annual branch inspections; representatives were required to send emails and written correspondence involving the solicitation of products to compliance for pre-approval. The firm did not have prior system or procedures in place to retain all other emails and written correspondence after the representatives terminated from the firm. and, as a result, the firm did not subsequently retain most of the emails and written correspondence for representatives who terminated from the firm.

Also, the firm did not establish and implement policies and procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions. In addition, the firmís WSPs relating to the reporting of suspicious activity failed to provide reasonable detail, such as the specific reports and documents to be reviewed, the timing and frequency of such reviews, the specific persons to conduct the reviews, and a description of how the reviews would be conducted and evidenced. Moreover, the firmís supervisory procedures did not provide adequate guidelines regarding the reporting of suspicious activity, including when a suspicious activity report should be filed and what documentation should be maintained. Furthermore, although the firm had 140,000 active accounts, it used only a minimal number of exception reports, relying instead on its clearing firms to assist in the review of suspicious activity. The firm failed to conduct adequate independent tests of its AML compliance program (AMLCP), failed to sufficiently test topics and failed to adequately memorialize what was reviewed. The findings also included that with respect to a sample of corporate bond transactions and municipal securities transactions the firm executed, it failed to accurately disclose the receipt time on the majority of the order tickets.

H. Beck, Inc. : Censured; Fined $150,000; Firm's President required to certify to FINRA in writing within 30 days of the issuance of the AWC that the firm currently has in place systems and procedures reasonably designed to achieve compliance with the laws, regulations and rules concerning the preservation of electronic mail communications.
Tags:  AML    SAR    Electronic Communications    Email     |    In: Cases of Note : FINRA
August 2011
Indiana Merchant Banking and Brokerage Co., Inc.
AWC/2009016067901/August 2011

The Firm failed to evidence any review of incoming or outgoing written and electronic correspondence; failed to review the incoming and outgoing electronic correspondence of its CCOís personal email account that he used to conduct securities related business, and the CCO had business cards with his personal email address included.

The firm failed to maintain its electronic correspondence (email) and electronic internal communications (email) for almost two years, and failed to maintain the incoming and outgoing electronic communications of an individualís personal email account used to conduct business. The firm failed to notify FINRA prior to employing electronic storage media.

The Firm failed to file an attestation by at least one third party who has access and the ability to download information from its electronic storage media to an acceptable media for such records that are exclusively stored electronically. The firmís electronic storage media failed to have in place an audit system providing for accountability regarding inputting of records required to be maintained and preserved, and inputting of any changes to every original and duplicate record maintained and preserved.

The firm failed to evidence the disclosure of its privacy notice upon account opening and annually thereafter; although the firm produced a privacy policy and procedures, it failed to provide initial, annual and revised privacy notices.

Indiana Merchant Banking and Brokerage Co., Inc. : Censured; Fined $20,000. FINRA imposed a lower fine after it considered, among other things, the firmís size, revenues and financial resources.
Trustmont Financial Group, Inc. and Peter Daniel Dochinez (Principal)
AWC/2009016311801/August 2011

The Firm failed to develop and enforce written procedures reasonably designed to achieve compliance with NASDģ Rule 3010(d)(2) regarding the review of electronic correspondence. Although the firm had certain relevant procedures in place, it did not have a satisfactory system for providing designated principals with access to such correspondence for review; instead, the firm relied on registered representatives to forward any emails involving customers to a central email address, which was accessible to the firmís president and chief compliance officer (CCO), for review.

The firm did not have effective procedures to monitor its representativesí compliance with the email forwarding requirement; instead the firm relied on branch inspections to monitor compliance, but, because the firmís branch offices were non-Office of Supervisory Jurisdictionís (OSJs), they were inspected infrequentlyóonce every three years.

During the infrequent branch office inspections, the firm generally failed to conduct adequate reviews of representativesí personal computers to determine if they were complying with the email forwarding requirement; other than some very limited reviews during the inspections, the firm failed to provide for surveillance and follow-up to ensure that email correspondence review procedures were implemented and adhered to.

The firm failed to enforce its written procedures requiring a designated principal to conduct a daily review of business-related electronic correspondence and to evidence that review by initialing the correspondence.

Acting through Dochinez, the firmís president, chief executive officer (CEO) and a firm principal, failed to establish, maintain and enforce an adequate 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 the need was identified by such testing and verification. In addition, The firmís supervisory control policies and procedures failed to address the requirements of designating a principal responsible for the firmís supervisory control policies and procedures; testing and verification to ensure reasonably-designed supervisory procedures; updating the firmís written supervisory procedures (WSPs) to address deficiencies noted during testing; designating a principal responsible for the annual report to senior management on the firmís system of supervisory controls procedures, summary of test results, significant identified exceptions, and any additional or amended procedures; identifying producing managers and assigning qualified principals to supervise such managers; using the ďlimited size and resourcesĒ exception for producing managersí supervision, including documenting the factors relied on in determining that the exception is necessary; electronically notifying FINRA of its reliance on the limited size and resources exception; reviewing and monitoring all transmittals of customer funds and securities; reviewing, monitoring and validating customer changes of address and customer changes of investment objectives; and providing heightened supervision over each producing managerís activities. Moreover,acting through Dochinez, the firm failed to conduct independent tests of its AMLCP.

Trustmont Financial Group, Inc.: Censured; Fined $10,000 joint/several; Fined additional $20,000

Peter Daniel Dochinez: Censured; Fined $10,000 joint/several

Tags:  Electronic Communications    Email    Inspections    OSJ     |    In: Cases of Note : FINRA
Bill Singer's Comment
A growing area of focus for FINRA is the diligence of a member's policies/procedures for reviewing electronic communications -- and if you're relying upon the honor system, the regulator is just not going to be happy. 
July 2011
Brown Associates, Inc.
AWC/2009016207701/July 2011

The Firm failed to properly archive its business-related electronic communications for individual users in some of its Offices of Supervisory Jurisdiction (OSJs).

The Firm stored these emails on stand-alone servers or individual machines only, which theoretically permitted individual users to delete incoming or outgoing emails, and thereby failed to properly preserve its business-related electronic correspondence.

The firm failed to

  • review business-related electronic communications for the individuals and an additional user;
  • evidence its review of individualsí business-related electronic communications as the firmís WSPs required; and
  • provide notification and thirdĖparty attestation to FINRA regarding the use of electronic storage media 90 days prior to employing such media.
Brown Associates, Inc. : Censure; Fined $50,000; Required to certify to FINRA in writing within 90 days of issuance of the AWC that the firm currently has in place systems and procedures reasonably designed to achieve compliance with the laws, regulations and rules concerning the preservation of electronic correspondence.
Tags:  Email    Electronic Storage    Electronic Communications     |    In: Cases of Note : FINRA
Bill Singer's Comment

Nice tight case and well presented by FINRA.  Two separate issues that you should consider. 

First, email archiving is not accomplished in accordance with FINRA's rules if you simply store the data on a standalone server or on some PC/laptop in the office. That's not the back-up and retention contemplated by the rules. Such a protocol does little to deter or prevent someone from simply logging on to a given machine and wiping clean any troubling communications.

Second, you need to undertake prior notice when retaining a third-party storage system.

Prestige Financial Center, Inc. and Lawrence Gary Kirshbaum (Principal)
AWC/2009016405902/July 2011

Prestige, acting through Kirshbaum and at least one other firm principal, were involved in a fraudulent trading scheme through which the then-Chief Compliance Officer (CCO) and head trader for the firm concealed improper markups and denied customers best execution.

As part of this scheme, the CCO falsified order tickets and created inaccurate trade confirmations, and the hidden profits were captured in a firm account Kirshbaum and another firm principal controlled; some of the profits were then shared with the CCO and another individual.

The trading scheme took advantage of customers placing large orders to buy or sell equities. Rather than effecting the trades in the customersí accounts, the CCO placed the order in a firm proprietary account where he would increase or decrease the price per share for the securities purchased or sold before allocating the shares or proceeds to the customersí accounts; this improper price change was not disclosed to, or authorized by, the customers, and this fraudulent trading scheme generated approximately $1.3 million in profits for the firmís proprietary accounts. Kirshbaum was aware of and permitted the trading. In an account that Kirshbaum and another firm principal controlled. 47 percent of the profits from the scheme were retained. In furtherance of the fraudulent trading scheme, the CCO entered false information on the corresponding order tickets regarding the share price and the time the customer order ticket was received, entered and executed; the corresponding trade confirmations inaccurately reflected the price, markup and/or commission charged and the order capacity.

In addition, acting through Kirshbaum, Prestige entered into an agreement to sell the personal, confidential and non-public information of thousands of customers to an unaffiliated member firm in exchange for transaction-based compensation from any future trading activity in those accounts. In connection with that agreement, Kirshbaum provided the unaffiliated member firm with the name, account number, value and holdings on spreadsheets via electronic mail. Furthermore, Kirshbaum granted certain representatives of that firm live access to the firmís computer systems, including access to systems provided by the firmís clearing firm, which provided access to other non-public confidential customer information such as Social Security numbers, dates of birth and home addresses. Prestige and Kirshbaum did not provide any of the customers with the required notice or opportunity to opt out of such disclosure before the firm disclosed the information, as Securities and Exchange Commission (SEC) Regulation S-P requires.

Acting through Kirshbaum, Prestige failed to establish and maintain a supervisory system, and establish, maintain and enforce written supervisory procedures to supervise each registered personís activities that are reasonably designed to achieve compliance with the applicable rules and regulations regarding interpositioning, front-running, supervisory branch office inspections, supervisory controls, annual compliance meeting, maintenance and periodic review of electronic communications, NASD Rule 3012 annual report to senior management, review and retention of electronic and other correspondence, SEC Regulation S-P, anti-money laundering (AML), Uniform Application for Securities Industry Registration or Transfer (Form U4) and Uniform Termination Notice for Securities Industry Registration (Form U5) amendments, and NASD Rule 3070 reporting. FINRA found that the firm failed to enforce its procedures requiring review of its registered representativesí written and electronic correspondence relating to the firmís securities business. In addition, 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 and its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where testing and verification identified such a need. Moreover, the firm failed to enforce the written supervisory control policies and procedures it has with respect to review and supervision of the customer account activity conducted by the firmís branch office managers, review and monitoring of customer changes of address and the validation of such changes, and review and monitoring of customer changes of investment objectives and the validation of such changes. Furthermore, firm failed to establish written supervisory control policies and procedures reasonably designed to provide heightened supervision over the activities of each producing manager responsible for generating 20 percent or more of the revenue of the business units supervised by that producing managerís supervisor; as a result, the firm did not determine whether it had any such producing managers and, to the extent that it did, subject those managers to heightened supervision.

Acting through one of its designated principals, Prestige falsely certified that it had the requisite processes in place and that those processes were evidenced in a report review by its Chief Executive Officer (CEO), CCO and other officers,and the firm failed to file an annual certification one year. The findings also included that the firm failed to implement a reasonably designed AML compliance program (AMLCP). Although the firm had developed an AMLCP, it failed to implement policies and procedures to detect and cause the reporting of suspicious activity and transactions; implement policies, procedures and internal controls reasonably designed to obtain and verify necessary customer information through its Customer Identification Program (CIP); and provide relevant training for firm employeesóthe firm failed to conduct independent tests of its AMLCP for several years. Acting through Kirshbaum and another firm principal, the firm failed to implement policies and procedures reasonably designed to ensure compliance with the Bank Secrecy Act by failing to enforce its procedures requiring the firm to review all Section 314(a) requests it received from the U.S. Department of the Treasuryís Financial Crimes Enforcement Network (FinCEN); as a result, the firm failed to review such requests. In addition, Kirshbaum and another principal were responsible for accessing the system to review the FinCEN messages but failed to do so. Moreover, FINRA found that the firm permitted certain registered representatives to use personal email accounts for business-related communications, but failed to retain those messages.

Furthermore, the firm failed to maintain and preserve all of its business-related electronic communications as required by Rule 17a-4 of the Securities Exchange Act of 1934, and failed to maintain copies of all of its registered representativesí written business communications. The  firm failed to file summary and statistical information for customer complaints by the 15th day of the month following the calendar quarter in which the firm received them. The findings also included that the customer complaints were not disclosed, or not timely disclosed, on the subject registered representativeís Form U4 or U5, as applicable.The Firm failed to provide some of the information FINRA requested concerning trading and other matters.

Prestige Financial Center, Inc. : Expelled

Lawrence Gary Kirshbaum (Principal): Barred

Bill Singer's Comment

Whoa -- one of the all-time, most comprehensive FINRA disciplinary actions. Frankly, not much that could be done wrong wasn't, according to the terms of the settlement. One of the few times when a FINRA member firm is expelled. Also, one of the few times when a CCO is barred. A powerful case. Well written and presented.

Keep in mind that registered persons from this firm may trip your Taping Rule threshold.

June 2011
Geoffrey Richards Securities Corp.
AWC/2009015971101/June 2011

The Firm failed to preserve all of its business-related electronic communications. The Firm attempted to preserve such communications by burning them to a non-rewriteable, non-erasable disc on a monthly basis, but the process was deficient because it did not result in all such communications being saved to the disc. The Firm did not identify this deficiency in its audit of its electronic communications preservation system.

In contravention of its written supervisory procedures, permitted registered representatives to use outside or non-firm-sponsored email accounts to send and receive securities business-related emails. The firmís preservation process did not capture these emails that were sent to or from those accounts; therefore, the firm did not retain and review them.

The firm relied exclusively on electronic storage media to preserve its business-related electronic communications but did not retain a third party who had the access or ability to download information from its electronic storage media.

Geoffrey Richards Securities Corp.: Censured; Fined $25,000
Tags:  Electronic Communications    Email    Electronic Storage     |    In: Cases of Note : FINRA
Bill Singer's Comment
While I appreciate FINRA's concern, $25,000 strikes me as a bit steep for a fine that involves a Firm attempting to archive emails but largely doing so in what turned out to be an incomplete manner.  It's not as if the Firm failed to undertake good-faith efforts here. The use of outside email accounts is an entirely different consideration and must be supervised in a more aggressive manner.
Portfolio Advisors Alliance, Inc. and Marcelle Long (Principal)
OS/2008011640602/June 2011

Respondents failed to put any heightened supervisory measures in place for a branch manager or to follow up on ďred flags.Ē Notwithstanding the branch managerís remote location, prior disciplinary history, outside business disclosures or his disclosure that he was potentially under financial stress and unable to meet financial obligations, the Firm and Long failed to put any heightened supervisory measures in place or to follow up on the red flags after he disclosed information on a compliance questionnaire, for which the affirmative answer required that he attach a separate sheet providing complete details about the disclosed activities, which Long did not complete or enforce. Also, the firmís and Longís heightened supervision of the branch manager was inadequate in that it consisted only of inspecting his office annually and speaking on the phone on a fairly regular basis. Long inspected the branch managerís branch office, and although she was aware that the manager was involved in certain outside business activities, based on the disclosures that he made on his Uniform Application for Securities Industry Registration or Transfer (Form U4), she admitted that she did not inspect any files or financial records associated with his disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.During a subsequent inspection, Long again did not review documentation regarding the branch managerís disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.

Additionally, the branch manager had participated in private securities transactions wherein he had raised more than $1.5 million from investors, many of whom were firm customers.

In addition, the firm and Long failed to review or retain email communications on the branch managerís outside email account, and Long did not review his outside email account during her inspections of his branch office. Moreover, FINRA found that the firm did not have any supervisory procedures regarding the review and retention of email communications on outside email accounts.

Portfolio Advisors Alliance, Inc.: Censured; Fined $35,000

Marcelle Long: Fined $7,500; Suspended in Principal/Supervisory capacity only for 30 days

Bill Singer's Comment

At first blush, the sanctions appear a bit harsh but after it all sinks in -- nah, FINRA seems to have had the punishment about right.  Given the history of the subject branch manager and the apparent supervisory lapses, the Principal is lucky that she got off with only a 30-day Principal/Supervisory suspension. The sanctions against her could have been far worse and, frankly, with some justification.

Either I'm getting mellow in my old age or FINRA is starting to get some things right.  Whoa -- did I really write that?

May 2011
Pyramid Financial Corp. and John Hsu a/k/a Juan Hsu (Principal)
2008011600501/May 2011

The Firm and Hsu failed to preserve electronic communications related to the firmís business when Hsu and another registered representative of the firm sent and received electronic communications related to the firmís business using personal email accounts that were not linked to the firmís email preservation system; the firmís failure to preserve electronic communications was considered willful.

Hsu and the firm failed to comply with AML rules and regulations in that they failed to access the Financial Crimes Enforcement Network (FINCEN) and review records, failed to develop and implement a written AML program reasonably designed to achieve compliance with the BSA and implementing regulations, and failed to properly conduct annual independent tests of its AML program for several years. Hsu signed and submitted certifications to FINRA that contained inaccurate information regarding preservation of emails in compliance with SEC Rule 17a-4. Hsu willfully failed to amend his Form U4, to disclose material information.

Pyramid Financial Corp.: Fined $55,000 jointly and severally with Hsu

John Hsu a/k/a Juan Hsu (Principal): Fined $55,000 jointly and severally with Pyramid; Fined an additional $10,000; Suspended 45 business days in all capacities; Barred as a Principal only.

Tags:  Electronic Communications    Email    Willfully    AML     |    In: Cases of Note : FINRA
Bill Singer's Comment
Can't remember seeing a FINRA finding that the failure to preserve emails was "willful," so this must have struck the regulator as a particularly egregious case.
April 2011
Earnest Flowers III
OS/2009016956601/April 2011

In connection with the sale of investments in a film production company, Flowers made fraudulent misrepresentations and omitted to disclose material information. Flowers collected at least $92,000 from investors, falsely representing that he would use their funds to finance a film production business and promising exorbitant, guaranteed returns. Instead of investing the funds, Flowers misused $30,498 to repay other investors and pay for personal expenses without the investorsí knowledge, consent or authorization.

Flowers made recommendations to a customer to invest in private placement offerings that were unsuitable in light of the customerís financial situation, investment objective and financial needs.

Flowers attempted to settle away customersí complaints without his member firmís knowledge or consent.

Flowers signed an attestation form for a firm acknowledging that email communications with the public must be sent through the firmís email address and copied to the compliance department, but Flowers communicated with customers via unapproved, outside email accounts without his member firmsí knowledge or consent, and as a result of his outside communications, his member firms were unable to review his emails to firm customers. In addition, Flowers engaged in private securities transactions without providing prior written notice to, and receiving prior written approval from, his member firms.

Earnest Flowers III : Barred
Bill Singer's Comment
A succinct, well-presented case. Kudos to FINRA on this one.
Workman Securities Corporation
AWC/2009018818401/April 2011

The Firm failed to:

  • have reasonable grounds to believe that a private placement an entity offered pursuant to Regulation D was suitable for any customer, after it received red flags that the entity had financial issues and was not timely making interest payments, but continued to sell the offering to customers;
  • enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of private placements;
  • conduct adequate due diligence of the private placements or confirm that its representatives were doing their own due diligence;
  • conduct adequate due diligence of private placements other entities offered; and
  • enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of the private placements the entities offered pursuant to Regulation D.

The Firm reviewed cursory private placement memoranda (PPMs) for the offerings but failed to investigate red flags or analyze third-party sources of information or take affirmative steps to ensure the information in the offering documents was accurate.

The Firm failed to preserve electronic communications in a non-rewritable, non-erasable or ďWORMĒ format that complied with books and records requirements, and the firm used third-party software for storing and retaining electronic communications that did not comply with the requirements of SEC Rule 17a-4(f). Although the Firm was informed that its electronic storage medium was non-compliant but did not take adequate remedial action to retain email properly.

Workman Securities Corporation : Censured; Ordered to pay $700,000 as partial restitution to investors; Ordered to certify in writing to FINRA that it has established and implemented a system and procedures reasonably designed to achieve compliance with recordkeeping requirements related to electronic communications, and provide a written report to FINRA describing the policies, procedures and controls it has established and implemented related to the integrity of the retention and retrieval process for electronic communications, and the supervisory system it has implemented to oversee the preservation of electronic communications.
Bill Singer's Comment
In 2011 we see a continuation of FINRA's enforcement focus on private placements, with an emphasis on members' responses to "red flags" and the sincerity of the firm's due diligence efforts.  The day's of taking a piece of a private placement and sleepwalking through your obligations to your clients is a vestige of the past.  There's no easy money in Reg D. You have to do your homework and put your money where your mouth is.
March 2011
Canaccord Genuity Inc. fka Canaccord Adams, Inc.
AWC/2008012243901/March 2011

As an active participant in the U.S. Private Investment in Private Equity (PIPE) market, Canaccord failed to have in place reasonable information barrier procedures with respect to its PIPE business. The firm failed to have a reasonable system in place to track employees who were brought ďover the wallĒ on specific PIPE transactions, and while the firm had a procedure in place requiring the maintenance of a ďwall-crossing log,Ē it did not maintain such a log. The firm stored information about over-the-wall employees in a computer file that was not readily accessible to persons with responsibilities to monitor trading and review emails of employees brought over the wall on investment banking matters.

The firm failed to maintain a specific log of employee transactions in securities on the firmís grey list and/or restricted list, and the firm was unable to provide documentation evidencing that it had investigated employee trading in grey list securities to determine whether employees had misused material, non-public information.

The Firm failed to have a reasonable system in place to monitor the flow of information concerning PIPE transactions to potential investors, and while the firmís procedures required sales persons to obtain verbal agreements from potential investors to keep information concerning PIPE transactions confidential and refrain from trading on such information, the firm did not reasonably ensure that the procedure was followed or document that such verbal agreements were obtained. The information that was maintained concerning the disclosure of information on PIPE transactions was not used for supervisory or compliance purposes.

In addition, the firmís system for review of email correspondence was unreasonable; while the firmís procedures required the review of a sample of email communications, the sample included mail boxes for users no longer employed at the firm and permitted Compliance Department employees, at their discretion, to mark emails as reviewed based solely on a review of the senderís name, recipientís name and subject line of an email; stated differently, the firm permitted ďbulk reviewĒ of emails without any written guidelines informing compliance staff of the parameters for such review.

Moreover, the Firm also utilized an Internet chat room system that allowed members of its business units, including but not limited to, the investment banking and research departments, to communicate and/or review each otherís communications. Furthermore, the firm did not have in place any written procedures relevant to monitoring internal communications between its business units on the internal chat room system and could not document that it actively monitored such communication.

Canaccord Genuity Inc. fka Canaccord Adams, Inc. : Censured; Fined $40,000
Tags:  PIPE    Electronic Communications    Email    Internet     |    In: Cases of Note : FINRA
Bill Singer's Comment

An interesting case on a few levels.  First, my long antagonism to PIPEs is noted -- I tend to absolutely hate these transactions as among the most pernicious evils of Wall Street that are often little more than battering rams used against smaller issuers.

The bulk review aspect of this case warrants attention.  The apparent failure to age-out the database and to include within samples inactive mail accounts is a practice that compliance departments should now note is within FINRA's cross-hairs.  Similarly, if your firm provides an internal chat facility, make sure that you have documented procedures for monitoring that communication system.

First New York Securities L.L.C.
AWC/2006005271003/March 2011

The Firm failed to preserve for a period of not less than three years, the first two in an accessible place, copies of instant messages sent and received between several of the firmís traders and an external party on certain days within a total of approximately 10 weeks, and the new account form and clearing agreement for one of the firmís accounts at another broker-dealer. The firmís supervisory system did not provide for supervision reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules concerning retention and review of electronic communications.

In response to an NASD Rule 8210 request, a firm principal orally asked the associated person originally responsible for the firmís reviews of such electronic communications to gather and deliver the evidence of such reviews but the associated person realized he had misplaced the file and was directed by his supervisor to duplicate past reviews. Instead of duplicating such reviews using the same parameters as were in effect during the review period, the associated person re-conducted such reviews using changed and expanded parameters, signed and hand-wrote in dates of when he estimated the reviews took place, and delivered them to the secretary of the firm principal who was responding to the inquiry on the firmís behalf. Without conducting any review of the newly created reports, the firmís principal submitted them to FINRA as evidence of the past reviews and the firm failed to take reasonable steps to confirm that the subject reports represented authentic and contemporaneous evidence of supervisory reviews that were actually conducted during the review period.

First New York Securities L.L.C. : Censured; Fined $65,000; Required to revise its written supervisory procedures concerning retention and review of electronic communications.
Bill Singer's Comment
FINRA advises that its sanctions in this case "reflect some mitigating factors."  U:nfortunately, those factors aren't actually spelled out in the monthly report.  As best I can infer, the mitigation is that the associated person likely thought that he/she was merely reconstructing missing documents rather than fabricating them. 
LPL Financial Corporation nka LPL Financial LLC
AWC/2009016570001/March 2011
LPL failed to enforce its supervisory system and written supervisory procedures relating to the review of electronic communications in certain branch locations. Approximately 3 million emails firm financial advisors transmitted and received from numerous bank branch locations related to one bank program were not processed through the Office of Supervisory Jurisdiction Review Tool (ORT) due to a technology problem concerning the interface between one bank programís email system and the firmís ORT; therefore, those emails were not subject to supervisory review by firm managers and principals. The firmís ORT flagged for supervisory review emails financial advisors in a branch office transmitted and received, but a branch manager or principal never reviewed them.
LPL Financial Corporation nka LPL Financial LLC : Censured; Fined $100,000
Tags:  Electronic Communications    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
Wow!  Three million unprocessed emails. That's a load. On top of it, flagged emails were sent and received by the Firm's review program but inexplicably never reviewed by a manager/principal -- which sort of rendered the whole flagging thing sort of useless.
Puritan Securities Inc. aka First Union Securities, Inc.
AWC/2008012927503/March 2011

The Firm entered into an agreement with an entity to sell a private placement for which the firmís brokers sold $1,415,940 of the private placement interests to customers, and the firm failed to create and maintain a reasonable supervisory system to detect and prevent sales practice violations in these transactions. The firm did not collect financial and other relevant information for the customers who purchased the private placement, and did not review these transactions to determine if the recommendations for the purchases were suitable for these customers.

Also, the firm failed to implement a supervisory system reasonably designed to review and retain electronic correspondence. The firm did not establish an email retention system that captured all of its brokersí emails. The firmís brokers were allowed to use email addresses using external domains, and the firm did not have the capability to review, capture and retain these emails.

Puritan Securities Inc. aka First Union Securities, Inc.: Censured; Fined $10,000 (in light of the firm's revenues and financial resources, a "lower fine" was imposed)
Tags:  Private Placement    Suitability    Due Diligence    Electronic Communications    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
As I've noted over the years, permitting registered persons to use email addresses that are off the firm's platform poses significant supervisory issues.  Here, brokers were permitted to use external domains but the firm did not have the ability to review, capture, and retain the subject communications. That's going to be a problem for FINRA.
February 2011
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
Pinnacle Financial Group, LLC
AWC/2009015974501/February 2011

The Firm used an external server to preserve its business-related electronic communications but the server only preserved the firmís business-related electronic communications for a period of 30 days.

The Firm conducted a securities business while it failed to maintain its required minimum net capital. The net capital deficiencies stemmed from its failure to take security haircuts and undue concentration deductions, its improper classification of a note receivable as an allowable asset, its improper classification of fixed annuity commissions and private placement receivables as allowable assets and double-counting a commission receivable. The firm maintained inaccurate books and records, and also filed inaccurate FOCUS reports.

Pinnacle Financial Group, LLC: Censured; In light of firm's financial status it was Fined $15,000
Tags:  Electronic Communications    FOCUS    Net Capital     |    In: Cases of Note : FINRA
January 2011
Jenny Quyen Ta (Principal)
AWC/2010021538701/January 2011

Ta engaged in outside business activities and failed to give prompt written notice to her member firm. Ta failed to disclose that she had financial interests and/or discretionary authority in multiple brokerage accounts at other broker-dealers and failed to give her firm prompt written notice of these accounts; on account applications, she falsely indicated that she was not affiliated with a securities firm. On a firm securities annual attestation form, Ta falsely stated that she did not have a personal securities account.

Ta created websites which included representations about her career accomplishments but never obtained a registered firm principalís approval for those sites. One of the websites stated that Ta founded a full-service broker-dealer that was a FINRA member when, in fact, it was not; although that entity had a new member application pending with FINRA, it was not an actual broker-dealer and never became a FINRA member.

Ta failed to inform a registered firm principal that she had a Twitter account which, on occasion, she used to tout a particular stock. In addition, Taís ďtweetsĒ were unbalanced, overwhelmingly positive and frequently predicted an imminent price rise, and Ta did not disclose that she and her family members held a substantial position in the stock.

Jenny Quyen Ta (Principal): Fined $10,000; Suspended 1 year.
Tags:  Away Accounts    Website    Internet    Electronic Communications     |    In: Cases of Note : FINRA
Jupiter Distribution Partners, Inc.
AWC/2009015972701)/January 2011
The Firm failed to preserve and maintain electronic communication in a non-rewriteable and non-erasable format, and failed to preserve and maintain electronic communication received by and sent to a hand-held electronic device one of its registered representatives operated. The firm failed to have adequate procedures that addressed the retention of electronic communication arising from the use of a hand-held electronic device. The firm failed to prepare accurate net capital computations by erroneously treating revenue received from a customer as being immediately earned, and as a consequence, the firm failed to file an accurate Financial Operational & Combined Uniform Single (FOCUS) Report.
Jupiter Distribution Partners, Inc.: Censured; Fined $20,000
Tags:  Electronic Communications     |    In: Cases of Note : FINRA
Bill Singer's Comment
Has it finally gotten so complicated that we can't state what type of device it is beyond "hand held"? Is it an iPad, a smartphone, a net book -- I mean, seriously, what the hell was it?
Enforcement Actions
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