Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2010
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.
November 2010
OFG Financial Services, Inc.
AWC/2008011625301/November 2010

The Firm failed to maintain and preserve all of its business-related electronic communications for some of its registered representatives. The Firmís registered representatives at some of its offices had non-firm email addresses to conduct non-securities business, and upon receiving emails from securities customers at their non-firm email addresses, several of the representatives, in certain instances, would reply using that same email address. The Firmís email system did not capture the emails from the non-firm email addresses, and a registered representative erroneously believed that his non-firm emails were going to the firmís server for retention, which did not occur.

 

OFG Financial Services, Inc. : Censured; Fined $20,000
Tags:  Electronic Communications    Email     |    In: Cases of Note : NYSE Rules
Bill Singer's Comment
Maybe it's me but, you know, $20,000 just ain't chicken feed these days and I'm not sure why the seemingly inadvertent error -- admittedly a violation -- required such a large fine.  After all, let's be clear, that money is going to FINRA.  I'm thinking that there could be a much better use of such sanctions than to line the pockets of a private regulatory organization.   For example, how about the firm agrees to immediately retain an independent consultant to review its electronic communications policies and to implement all suggested changes?  Why isn't that a far better "sanction" than cash?
Seton Securities Group, Inc.
AWC/2009016215601/November 2010
The Firm failed to maintain and preserve all of its business-related electronic communications transmitted by or to individuals affiliated with a branch office. The Firm relied on individuals affiliated with the branch office to forward or copy those communications to the firmís home office for retention, but not all of the branch officeís business-related emails were forwarded to the home office. The electronic communications that were not forwarded or copied to the firmís home office were not retained. The Firm did not establish, maintain and enforce a supervisory system and written procedures reasonably designed to achieve compliance with the rules and regulations applicable to the retention of businessrelated electronic communications because, among other things, the system relied on the firmís registered representatives to forward communications to the home office. The Firm's procedures did not provide for any reasonable follow-up or review to ensure that copies of all email communications were, in fact, being captured and maintained.
Seton Securities Group, Inc.: Censured; Fined $65,000; Aagreed to review its supervisory system and procedures concerning the preservation of electronic communications for compliance with FINRA rules and federal securities laws and regulations, and to certify in writing to FINRA that it has completed its review and has in place systems and procedures reasonably designed to achieve compliance with the laws, regulations and rules concerning the preservation of electronic communications.
Tags:  Electronic Communications    Email     |    In: Cases of Note : FINRA
October 2010
Intermountain Financial Services, Inc. and Kent Duane Sweat (Principal)
OS/2008011579401/October 2010

Acting through Sweat, the Firm failed to

  • enforce its written supervisory procedures pertaining to its annual compliance meeting, branch office inspections, outside business activities, outside securities accounts, Regulation SP, hiring practices and the use of personal computers; and
  • maintain records of its Firm Element Continuing Education Needs Analysis and Written Training Plan for multiple years, and
  • maintain continuing education (CE) records to evidence that the firmís representatives participated in the Firm Element CE program during one year.

Sweat and the firm failed to maintain copies of registered representativesí incoming and outgoing correspondence with the public relating to its securities business, and failed to maintain evidence of review as NASD rules and firm procedures required.

The Firm failed to implement

  • procedures concerning the capturing, preservation, maintenance and storage of all original and copied communications the firm received and sent;
  • a written anti-money laundering (AML) compliance program reasonably designed to achieve the firmís compliance with the laws, rules and regulations to which it was subject; and 
  • its AML procedures by failing to provide AML training in a manner specified in its written AML program, and did not properly update its AML compliance officer contact information as required.

Intermountain Financial Services, Inc.:  Censured; Fined $12,750

Kent Duane Sweat: Fined $7,500; Suspended in Principal Capacity only for 5 business days 

Tags:  WSP    Electronic Communications    Email    AML     |    In: Continuing Education
Kevin Bradley Martin (Principal)
AWC/2008012444203/October 2010

Martin was supervisor of his member firmís sales and trading operations and direct supervisor of a registered representative who effected pre-arranged and fictitious trades in collateralized mortgage obligations through the firmís proprietary trading account.

The transactions appeared to terminate the firmís ownership of the securities and to generate profits for the firm and the trader, but they were sham transactions because the firm remained the beneficial owner of the securities and the purported transaction profits concealed actual and substantial losses.

The registered representative was able to accomplish and maintain his scheme because Martin reviewed his activity on a daily basis rather than in a manner that would evidence trading patterns over time and expose the firmís losses and risk. Martin was responsible for the firmís overall compliance with applicable laws, rules and regulations and for implementing the firmís supervisory policies, practices and procedures, and Martin failed to supervise the registered representative in a manner reasonably designed to achieve compliance with applicable laws, rules and regulations.

Martin failed to cause the firm to preserve electronic communications.

Kevin Bradley Martin (Principal): Fined $20,000; Suspended 6 months in Principal capacity only
Bill Singer's Comment

According to FINRA, Martin erred because:

The registered representative was able to accomplish and maintain his scheme because Martin reviewed his activity on a daily basis rather than in a manner that would evidence trading patterns over time and expose the firmís losses and risk.

I suspect that FINRA wanted to say -- meant to say -- something a bit different than how this came out.  If you take the statement as written, the Supervisor is being chastized for doing a daily review of his subordinate's trading.  And that's wrong, why?  If FINRA suggests that the daily review was improper, then the regulator owes its members a far more cogent explanation (if not warning), than to merely note that the the review should have been undertaken "in a manner that would evidence trading patterns over time and expose the firm's losses and risk."  Just exactly what is the regulator suggesting would have been preferable -- and not just for the sake of debate but for the pointed reason of eliminating Martin's liability for failing to review prop trading activity over a given period of time. Moreover, assuming that Martin was victimized by the fraud of the subject trader (which FINRA oddly doesn't note pro or con), is there any proof that a different frame of review would have elicited the patterns that, in hindsight, FINRA now concludes are so apparent?

 

September 2010
Coady Diemar Partners, LLC
AWC/2008011683801/September 2010
The Firm failed to maintain and preserve all of its business-related electronic communications. The Firm engaged a third-party vendor to preserve such communications, but the vendor did not properly retain the electronic communications and ultimately purged virtually all of the electronic communications it had initially captured for the firm. The Firm did not otherwise preserve all of its business-related electronic communications and emails deleted from the firmís computers were not retained.
Coady Diemar Partners, LLC : Censured; Fined $35,000; Ordered to comply with an undertaking that the firmís chief executive officer will certify to FINRA in writing that the firm has systems and procedures in place reasonably designed to achieve compliance with those laws, regulations and rules concerning the preservation of electronic mail communications.
Tags:  Electronic Communications     |    In: Cases of Note : FINRA
First London Securities Corporation
AWC/2008011589801/September 2010
The Firm failed to establish and maintain a system to retain all electronic communications, including emails, relating to its securities business for at least three years, as required by SEC and FINRA rules. The firmís third-party vendor only retained the firmís electronic communications for 45 days. The Firm failed to maintain a record of supervisory review of its electronic communications for production to FINRA.
First London Securities Corporation: Censured; Fined $20,000
Tags:  Electronic Communications     |    In: Cases of Note : FINRA
KDC Merger Arbitrage Fund, LP
AWC/2007010580901/September 2010

Employees of the firm's securities lending department knowingly made false entries into the firmís system indicating that finders had been used to locate securities or counterparties when in fact the finders had performed no legitimate services. The Firm made payments to those purported finders and the finders subsequently paid a portion of their ill-gotten payments directly to the firm employees who made the finder entries into the firmís system. These employees were indicted for their activities and pled guilty to charges of conspiracy to commit wire fraud, and another firm employee also caused the firm to pay finders in transactions for which he knew or should have known that the finders performed no services, but he was not criminally charged.

The Firmís written procedures and guidelines addressing the firmís use of finders were inadequate and that, while the firmís procedures required a supervisor to review securities lending transactions on a daily basis, the procedures did not provide guidance to supervisors who assumed that responsibility; the procedures did not instruct the stock loan supervisors as to what they were to look for in reviewing transaction reports, how to determine what stock loan activity, including rates, was to be flagged as suspicious, how they were to review documents, how to maintain documentation of the reviews, or how they were to follow up on any suspicious activity they discovered. The Firm kept insufficient documentary evidence to establish that a supervisor adequately reviewed the firmís securities lending activities.

Also, the Firm had no written procedures requiring supervisory review of electronic communications or addressing how the supervisor of the securities lending department should review employeesí communications with other employees, counterparties or finders.

In addition, the Firm created and maintained books and records that inaccurately reflected that finders had participated in stock loan transactions and were paid for services rendered when, in certain instances, finders had not performed any function relating to the transactions and had not rendered services to justify the payments. Moreover, the Firm failed to retain, as required, email sent and received via its primary corporate email system and an additional email system and failed to retain, as required, electronic communications using an instant messaging system.

KDC Merger Arbitrage Fund, LP : Censured; Fined $350,000
Tags:  Finder Fees        Electronic Communications    Email     |    In: Cases of Note : FINRA
July 2010
Investscape, Inc. and Richard Michael Lim (Principal)
AWC/2008011737101/July 2010

Acting through Lim, the Firm failed to

  • preserve emails in nonrewritable, non-erasable format;

  • failed to provide FINRA with notifications of its use of electronic storage media;

  • provide FINRA with a letter from a third party describing the third partyís undertakings regarding the firm's electronic storage media as specified by Securities and Exchange Commission (SEC) Rule 17a-4; and

  • evidence the review of all incoming and outgoing email communications with customers.

  • inspect branch offices even though it had been previously warned in a Letter of Caution that branch offices needed to be inspected on a regular basis.

The firm's written procedures failed to identify locations that regularly conducted the business of effecting securities transactions by soliciting new accounts as branch offices, and failed to address the firm's requirement to conduct internal inspections of these offices.

Investscape, Inc.: Censured, Fined $7,000; and Fined $17,500, jointly and severally with Lim

Richard Michael Lim: Fined $17,500, jointly and severally with Investscape and Suspended 1 year in Supervisory capacity only 

Bill Singer's Comment
That's a hefty 1-year supervisory suspension imposed on top of a $17,500 joint/several fine upon the individual principal Lim.  FINRA is really honing in on electronic communications retention practices.
Marsco Investment Corporation and Mark E. Kadison (Principal)
AWC2009016078101/July 2010

Acting through Kadison, the Firm failed to

  • maintain and preserve all business-related electronic communications;
  • establish and maintain a supervisory system,
  • establish, maintain and enforce written supervisory procedures, reasonably designed to achieve compliance with the rules and regulations applicable to the retention of electronic communications;
  • implement a customer identification program in compliance with its written anti-money laundering (AML) compliance procedures for verifying customer identity for accounts opened with the firm.

Marsco Investment Corporation:  Censured; Fined $25,000; Within 90 days of the issuance of the AWC, the firmís Chief Executive Officer must certify in writing to FINRA that the firm has systems and procedures in place that are reasonably designed to achieve compliance with the laws, regulations and rules concerning the preservation of electronic mail communications.  

Mark E. Kadison: Censured; Fined $10,000.

Tags:  Electronic Communications    AML     |    In: Cases of Note : FINRA
April 2010
Healthcare Community Securities Corporation
AWC/2008011702001/April 2010
From 2004 through 2008, the firm did not maintain and preserve all electronic communications relating to the firmís business and did not establish, maintain and enforce a supervisory system and/or written supervisory procedures that were reasonably designed to achieve compliance with the rules and regulations applicable to the retention of such communications.
Healthcare Community Securities Corporation : Censured; Fined $35,000; Required to review its supervisory system and procedures concerning preservation of electronic communications for compliance with FINRA rules and the federal securities laws and regulations and to certify the review.
Tags:  Electronic Communications     |    In: Cases of Note : FINRA
March 2010
Foreside Distribution Services, L.P.
AWC/2008011737901/March 2010
The Firm failed to maintain and preserve all of its business-related electronic communications. The Firm did not have custody or control over records of business-related electronic communications that its investment adviser clients sent or received, and could not easily access them without first requesting them from, and having such records subject to review by, each investment adviser client. The Firm did not have an adequate system or agreement in place to ensure that the business-related electronic communications were retained and made easily accessible to the firm. The Firm failed to establish and maintain a supervisory system and failed to establish, maintain and enforce written supervisory procedures (WSPs) reasonably designed to maintain and preserve all business-related electronic communications, including emails, in an easily accessible place, in that the firmís WSPs did not address the retention of electronic communications that non-firm employed registered representatives send and receive. The Firm amended itsWSPs to specifically address the retention of these records, but they were deficient because they relied on the firmís investment adviser clients to retain the communications on their systems and did not ensure that the firm had easy access to the records.
Foreside Distribution Services, L.P. : Censured; Fined $100,000; Required to certify in writing to FINRA within 90 days of issuance of this AWC that it has in place systems and procedures reasonably designed to achieve compliance with laws,regulations and rules concerning the preservation of electronic mail communications.
Tags:  Email    Electronic Communications    WSP     |    In: Cases of Note : FINRA
Bill Singer's Comment
In this case, the FINRA member could not easily access certain business electronic communications without first requesting them from  each investment adviser client -- and, worse, prior to obtaining said records, those clients apparently had a prior right of review. 
February 2010
Richard Louis Galterio (Principal)
AWC/2008011736102/February 2010
Acting through Galterio, his firm failed to retain all business-related electronic communications. Galterio used and permitted at least one of the firmís registered representatives to use an electronic instant messaging service in conducting the firmís business, although the firm did not maintain and preserve instant messaging communications.
Richard Louis Galterio (Principal): Fined $5,000; Suspended 45 business days in Principal capacity only
January 2010
Cutler Group L.P.
OS/09-ARCA-12/January 2010

Cutler Group L.P., an NYSE Arca Options trading permit holder, failed to

  • preserve certain electronic communications in the required format;
  • maintain a complete and accurate list of accounts in which its employees had a direct or indirect financial interest;
  • obtain, maintain and review monthly account statements for accounts in which its employees had a direct or indirect financial interest;
  • file a complete and accurate annual acknowledgment attestation with the exchange;
  • appropriately conduct background checks of its associated persons; and
  • establish, maintain, and/or enforce appropriate written policies and procedures for supervision and control, including a separate system of follow-up and review, with respect to certain of the foregoing areas.

The NYSE found the following violations:

  • Section 17(a)(1) of Exchange Act, and Rules 17a-4(b)(4) and 17a-4(f) thereunder, and NYSE Arca Options Rule 11.16(a) by failing to preserve business-related e-mail and instant messages in non-rewriteable, non-erasable format, and by failing to preserve business-related fax communications
  • NYSE Arca Options Rule 11.3óCommentary .03 by failing to maintain complete and accurate list of accounts in which employees had direct or indirect financial interest, and by failing to obtain, maintain and review monthly account statements for accounts in which employees had direct or indirect financial interest;
  • NYSE Arca Options Rule 11.3(a) by failing to establish, maintain, or enforce adequate written policies and procedures reasonably designed to prevent misuse of material, non-public information by employees;
  • Section 17(a)(1) of Exchange Act, and Rule 17a-3(a)(12) thereunder, and NYSE Arca Options Rule 11.16(a), by failing to appropriately conduct and document background checks of employees prior to employment, and by failing to properly retain and preserve manually signed Forms U-4;
  • NYSE Arca Options Rule 11.18 by failing to establish, maintain, and/or enforce appropriate written policies and procedures for supervision and control, including separate system of follow-up and review, in following areas:
    • (a) conducting and documenting background checks of employees prior to employment, including maintaining complete and accurate signed Forms U-4;
    • (b) retention in proper format and review of business-related e-mails, instant messages and faxes sent or received by employees; and
    • (c) prevention of misuse of material, non-public information by employees .
Cutler Group L.P.: Censure; $20,000 Fine
Tags:  Electronic Communications    Outside Accounts    Email    Background     |    In: U4, U5, RE-3, Rule 3070
Bill Singer's Comment

To read the full decision, visit http://www.nyse.com/pdfs/09-ARCA-12.pdf

Enforcement Actions
Tags
Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+