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.
December 2010
Jennifer Veronica Himes
AWC/2008015411501/December 2010

Registered Sales Assistant Himes violated her member firmís policies and procedures when she facilitated day-to-day interactions between a registered representativeís customers and a non-FINRA regulated investment group outside of her firm that operated as a commodity pool. Himes failed to disclose these activities to her member firm even though firm policies and procedures required her to do so. Himes failed to use the firmís email system on numerous occasions when communicating regarding the firmís business and customers as her firm required to meet its requirements under Section 17(a) of the Securities Exchange Act of 1934 and SEC Rule 17a-4.

At another registered representativeís direction, Himes communicated with the commodity pool using non-firm email addresses and relayed messages from the representative that specifically advised customers not to use firm email addresses for communications regarding the commodity pool.

Himes engaged in this conduct to prevent the firm from detecting that she and the representative were involved with the commodity pool, causing the firm to fail to retain certain email communications relating to its business.

Jennifer Veronica Himes : Fined $5,000; Suspended 2 months
Tags:  Commodity Futures    Commodity Pool    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
A very tempting situation, the referring of BD clients to commodity pool operators. Frankly, I've probably gotten more queries from clients this year about how to best arrange for those referrals than in any year that I've been practicing law. Bottom line: it's a tricky and difficult undertaking.  Exercise great care and caution before sending a client over the wall.
Kelvin Shaw (
AWC/2008015411502/December 2010

Shaw violated his member firmís policies and procedures when he recommended that certain customers invest in a non-FINRA regulated investment group outside of his firm that operated as a commodity pool, and facilitated the day-to-day interactions between certain customers and the commodity pool without providing his firm with written notice. Shaw used, and directed others in his office to use, unapproved email addresses that prevented the firm from reviewing communications regarding his activities.

The commodity pool was exposed as a Ponzi scheme and most of Shawís firm customers lost a total of approximately $660,000 of their investments. Shaw failed to use the firmís email system on numerous occasions when communicating regarding firm business, and its customers and the firm relied on his compliance to meet its requirements under SEC Rule 17a-4. Shaw directed certain of his staff to communicate with the commodity pool using non-firm email addresses and advised customers not to use firm email addresses for communications regarding the commodity pool in order to prevent the firm from detecting his involvement in the commodity pool. In addition, Shaw caused his firm to fail to retain certain email communications related to its business.

Shaw failed to fully and completely respond to a FINRA request for documents and information.

Kelvin Shaw (: Barred
Tags:  Email    Ponzi    Commodity Pool     |    In: Cases of Note : FINRA
November 2010
Eddie Wayne Sawyers
AWC/2008015712501/November 2010

Sawyers recommended to certain customers whose accounts he serviced at his member firm that they open online brokerage accounts at another broker-dealer, not affiliated with his firm, and that they give Sawyers discretionary authority over those accounts. The firmís customers opened online brokerage accounts, but they did not give Sawyers written authority to trade in the accounts.

Sawyers conducted transactions on his firmís customersí behalf in the online brokerage accounts without notifying his firm in writing or verbally that he intended to use discretionary authority in the online brokerage accounts, and did not notify the online broker-dealer, in writing, that he was associated with a member firm. Sawyers took steps to conceal these activities from his firm and from the online broker-dealer by not using his own name in connection with the accounts, using a computer that was not his firmís computer and a non-firm email address to set up the online-brokerage accounts and maintaining an exclusive email account to communicate about trade confirmations and monthly account statements with customers.

Sawyers falsely attested in his firmís compliance questionnaire that he had not maintained any outside brokerage accounts that the firm had not approved in writing, and that he had not participated in any outside business activities that the firm had not approved in writing. Sawyers failed to timely respond to FINRA requests for information and failed to timely appear for a FINRA on-the-record interview.

Eddie Wayne Sawyers : Barred
Tags:  Discretion    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
I mean, seriously, what part of this seemed like a good idea at the time?
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
Farmers Financial Solutions, LLC
AWC/2008015341602/October 2010
Farmers failed to have an adequate system or procedure in place that was reasonably designed to achieve compliance for the preservation and maintenance of emails or for the supervisory review of registered representativesí emails with the public. The firm allowed its registered representatives to use email to conduct business and it did not have an automated system for email surveillance or archiving, but instead, relied upon its registered representatives to electronically forward their emails to a dedicated internal email address for purposes of supervisory review by a principal and archiving, while having no effective system or procedure in place to monitor compliance of its registered representatives with the email-forwarding requirement. The Firm to preserve and maintain business-related emails.
Farmers Financial Solutions, LLC : Censured; Fined $75,000
Tags:  Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
A simple takeaway:  If you're going to allow the use of email for business purposes, then you cannot simply instruct your registered persons to forward all covered email to a specific internal server address.  The honor system might be okay for West Point and the Boy Scouts, but not on Wall Street.  If you're going to permit business-related emails, you better set up an automated system to caputre all incoming/outgoing messages.
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
September 2010
Cambridge Legacy Securities, L.L.C. Oran Ben Carroll (Principal), and Russell Kent Childs (Principal)
AWC/2007010684401/September 2010

Acting through Carroll, its president and registered principal, the Firm failed to adequately implement a supervisory system designed to achieve compliance with applicable securities laws and regulations; specifically, the firm and Carroll failed to implement an adequate system to supervise a branch officeís activities in light of deficiencies identified during branch audits, and failed to appoint a properly qualified principal to supervise the branch officeís activities.

The Firm allowed Carroll and Childs to accept, and they did accept, a gift and/or gratuity in excess of $100 from the president and general partner of an entity that offered an alternative investment product, and Childs sold almost $6 million of that product to customers at the firmís branch office.

The Firm failed to properly maintain its email communications and, acting through Carroll, failed to have a procedure in place to ensure that his own email, which was designated as legal and confidential, was properly maintained and reviewed. The Firm failed to establish and maintain an adequate supervisory system in the areas of internal communications and correspondence.

The Firm charged both commissions and advisory fees on transactions in alternative investment products whose offering documents specifically prohibited such activity.

Childs

  • charged customers commissions, in the amount of $434,589.03, and an annual percentage-based advisory fee on transactions in alternative investments; and
  • made unsuitable recommendations to customers and had no reasonable basis for believing that his recommendations of nonliquid alternative investments were suitable for the customers in light of their age, financial needs, annual income, liquid net worth and risk tolerance.

Cambridge Legacy Securities, L.L.C.: Censured, Fined $50,000; Ordered to pay $21,864.74, plus interest, in restitution to customers; If the firm fails to provide proof of restitution within 15 days, it shall be immediately suspended from FINRA membership until proof has been provided

Oran Ben Carroll (Principal): Fined $25,000; Suspended 3 months in Principal only capacity

Russell Kent Childs (Principal): Fined $25,000; Ordered to pay $412,724.28, plus interest, in restitution to customers;Suspended 9 months in all capacities; If Childs fails to provide proof of restitution within 15 days, he shall be immediately suspended from association with any member in any capacity until proof has been provided

Tags:  Supervision    Supervisory System    Gifts        Email     |    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
E*Trade Securities LLC
AWC/2007009471102/July 2010

E*Trade failed to adequately prepare for, and respond to, its acquisition of another member firm and, prior to the conversion, it identified approximately 88,000 converting customers whose login information was likely to be incompatible with the firmís systems. The Firm communicated with those customers and provided them with temporary login IDs and instructions, but an additional number of conversion customers who the firm had not initially identified also had login information that was incompatible with the firmís systems. The login problem led to higher-than-expected call volumes, which the firm was not equipped to handle, and the problem was not completely resolved for several months and the conversion customers continued to inquire about their passwords and access to their accounts. The Firm had over 17,000 unanswered emails from converting customers regarding conversion issues.

The Firm disclosed that a technological problem had prevented it from transmitting customer orders to various market centers on a particular day and, as a result, the firmís customers were unable to enter orders online or log on to the firmís website. The Firm's website experienced sporadic slowness and continued delays because requests had accumulated in excess of what the systems were normally able to process. In addition, the Firm failed to establish a system reasonably designed to supervise, and written procedures reasonably designed to ensure, customersí ability to log in to their accounts and contact customer service for assistance, ensure customersí ability to enter orders online on one particular day and to timely enter orders online.

E*Trade Securities LLC: Censured; Fined $100,000
Tags:  Log On IDs    Passwords    email     |    In: Cases of Note : FINRA
Bill Singer's Comment

See this story: E*Trade Baby Craps on Desk. Transfer Requests Lost. http://www.brokeandbroker.com/index.php?a=blog&id=394

Compliments to FINRA on a strong regulatory move here.  Online customer frustration is a growing industry problem and member firms must be able to scale-up their support services to handle any dramatic growth of customers and website access.  Also, customer complaints/queries must be timely answered.

If you build it, they will come -- if they come, you better be able to handle the volume. 

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.
James Michael Porrazzo
2007009436401/July 2010
Porrazzo engaged in an unreported outside business activity with a customer of his member firm, which his firm prohibited. Porrazzo failed to disclose his participation in a horse racing venture on his firm's questionnaires, which requested the disclosure of any outside business activities, because he knew the firm would not approve. Porrazzo used his personal email address to communicate with the customer about the outside business activity, contrary to the firmís written policies and procedures that required it to monitor incoming and outgoing correspondence to detect violations of firm policies.
James Michael Porrazzo : Fined $15,000; suspended for consecutive terms of 4 months and 15 business days
Tags:  Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
A perfect example of the so-called regulatory cascade effect.  Here we have an outside business activity violation compounded by the use of personal email communications.
Kevin John McPhee
AWC/2009016763601/July 2010
McPhee executed transactions in a customerís account without the customerís prior knowledge, authorization or consent. McPhee communicated with the customer via an outside email account without his member firmís knowledge or consent.
Kevin John McPhee : Fined $7,500; Suspended 5 months; Ordered to pay $17, 654.44 plus interest restitution to customer
Tags:  Email     |    In: Cases of Note : FINRA
June 2010
Louis Salerno
2008015360301/June 2010

Salerno exercised discretion in a customerís account without the customerís written authorization and his member firmís acceptance of the account as discretionary.

Salerno sent electronic mail to a firm customer from a personal, unapproved email address and failed to seek or obtain his firmís permission prior to doing so. Salernoís private email account, his firm was unable to review his emails to the customer and Salerno was able to shield his discretionary trading activity from his firm.

Salerno failed to appear to provide testimony at FINRA on-the-record interviews.

Louis Salerno : Barred
Tags:  Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
A fairly compelling explanation as to why regulator's disapprove of "private" email accounts when it comes to conducting one's securities business.  Compliance Departments might want to print this one hand and make multiple copies -- simply hand it to the angry registered rep who is complaining that you are being an unreasonable idiot when you won't permit the use of a non-firm email address or posting on a social network site.
Wall Street Money Center Corp.
AWC/2008011725601/June 2010
The Firm failed to preserve emails exchanged between the firm and one of its clearing firms. Prior to employing electronic storage media, the firm failed to notify FINRA of its decision to use such media. The Firm failed to establish, maintain and enforce written procedures that addressed the use and retention of electronic communication.
Wall Street Money Center Corp.: Censured; Fined $20,000
Tags:  Email     |    In: Cases of Note : FINRA
April 2010
Michael Scott Heslep
AWC/2008011629602/April 2010
Heslap engaged in an email marketing campaign through which he distributed correspondence and/or sales literature to prospective customers via unsolicited emails. Many of the emails failed to provide a sound basis for evaluating the facts, provided exaggerated or unwarranted claims that are prohibited and/or contained performance claims that imply that past performance will recur.
Michael Scott Heslep: Censured; Suspended 10 business days
Tags:  Email    Correspondence         |    In: Cases of Note : FINRA
Ramius Securities LLC
AWC/2007010580701/April 2010
The Firm lacked supervisory systems and written procedures reasonably designed to prevent and detect improper use of, and payment to, finders used in stock loan transactions. The Firm failed to download instant messages and emails the firmís employees sent or received via Bloomberg into its internal systems; therefore, the firm did not archive them.
Ramius Securities LLC: Censured; Fined $200,000
Tags:  Finder\\\'s Fees    Instant Messaging    Email     |    In: Cases of Note : FINRA
Stephen George Condos and Chuck A. Roberts
AWC/2007010398801/April 2010

Condos and Roberts had knowledge that a sales assistant and possibly others replaced customer email addresses with the sales assistantís firm email address to facilitate the opening of online accounts and to lessen the amount of communications the customers received; therefore, trade confirmations were sent to the sales assistant rather than the customers, although the customers continued to receive their monthly account statements, prospectuses and 1099 federal tax forms by mail.

Robertsí relative opened several accounts at his member firm; Roberts serviced those accounts but failed to disclose to the firm that the individual who owned the accounts was a relative. Had Roberts made such disclosure, the account numbers assigned to the accounts would contain a prefix identifying them as being employee-related.

Stephen George Condos: Censured; Fined $15,000; Suspended 3 weeks in all capacities

Chuck A. Roberts: Censured; Fined $40,000 and Suspended 4 weeks in all capacities

Tags:  Email         |    In: Cases of Note : FINRA
March 2010
Brockington Securities, Inc.
AWC/2008011660901/March 2010
The Firm failed to develop and implement an AML program reasonably designed to achieve and monitor compliance with Bank Secrecy Act (BSA) requirements. The firmís AML program had inadequate procedures regarding the detection and reporting of suspicious activity, and the firm did not receive Financial Crimes Enforcement Network (FinCEN) requests pursuant to the BSA. The firm failed to timely detect, investigate and report multiple instances of suspicious activity in customer accounts. The Firm failed to conduct an independent AML test one year, failed to satisfy its supervisory control system requirements under NASD Rule 3012 and failed to prepare an adequate NASD Rule 3012 report detailing its system of supervisory controls and the summary of test results, which made its statement that ďno other modification of the written supervisory procedure (WSP) was deemed necessaryĒ baseless. The firm failed to properly supervise the transmittal of customer funds and/or securities.

The firmís employees utilized their personal email accounts to conduct business contrary to firm policy, but the firm did not have a system in place to review the emails.
Brockington Securities, Inc. : Censured; Fined $24,000; Required to conduct eight hours of Anti-Money Laundering (AML) training for all employees within six months after issuance of this AWC.
Tags:  AML    Email     |    In: Cases of Note : FINRA
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
Dome Securities Corp.
AWC/2009016131601/February 2010
The Firm contracted with a third-party vendor for purposes of email retention, but did not implement an audit system regarding email storage and was therefore unaware that the vendor did not adequately retain certain emails. As a result, the firm failed to retain emails during that period.
Dome Securities Corp. : Censured; Fined $30,000
Tags:  Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
Okay. . . on the one hand, I get it.  The member firm hired a third-party provider and that third party should have retained emails in some more compliant manner.  I wish that FINRA fleshed this out a bit so that we knew whether there was a failure to retain any, some, or all emails for a given period of time.  However, the gist here seems to be that the member firm also failed to monitor what its third-party provider was or wasn't doing. That latter lapse is likely more the point.

On the other hand (yeah, now we're here), if the third-party provider marketed itself as savvy on email retention matters and had other industry clients and this omission was an oversight by the provider or a system glitch, then $30,000 is a pretty large number.

All of which brings me back to a long-standing quibble that I have with many regulatory sanctions.  There has to be serious consideration given to intentional and inadvertent violations, and just because a settling respondent has the bucks to pay $X in fines, doesn't mean that a regulator should be happy to get the dollars.  The problem is that the next firm down the line may not be so flush with cash and FINRA will point to the $X settlement as some precedent.
Eric Lowell Small (Principal)
AWC/2007007345601/February 2010
While associated with his former member firm as a registered principal but not registered as a research analyst or a research principal, Small supervised the conduct of the firmís research analysts, including approving research reports they prepared and that his firm issued.

Small failed to establish and maintain adequate supervisory procedures concerning the review of
  • email correspondence,
  • incoming and outgoing hard copy correspondence at the firmís branch offices that he was in charge of, and
  • outside investment activity of registered representatives at the firm.
The Firm's procedures indicated that a supervisory principal must review all correspondence, but these procedures were not reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules. The procedures were inadequate in that they contained insufficient detail concerning how and when such reviews were to occur, and the firm had no written supervisory procedures addressing the review of outside brokerage accounts. Small failed to establish, maintain and enforce adequate written supervisory control procedures relating to
  • NASD Rule 3012(a)(2)(B) and its requirement that members establish, maintain and enforce procedures reasonably designed to review and monitor transmittals of funds or securities between customers and registered representatives, and
  • NASD Rule 3012(a)(2)(C) and its requirement of an analysis and determination of whether producing branch office managers should have been subjected to heightened supervision.
Eric Lowell Small (Principal): Fined $17,500; Suspended 10 business days in Principal capacity only
Tags:  Unregistered Principal    Supervision    Supervisory System    Email    Correspondence    WSP    Producing Manager     |    In: Cases of Note : FINRA
Bill Singer's Comment
A well-presented case and a timely warning.  First off, many firms simply patched together a supervisory system because some veteran left or someone was supposed to implement more specific policies (or hire another Principal) and, well, you know how those things tend to dribble away and get forgotten.  Next thing you know, FINRA comes in and -- OMG!, we forgot to take care of this!!

I urge all my clients to pick at least an annual date when they give their policies and procedures a "cold review;" i.e., you take a rule and literally go line by line through your WSPs, memos, and other policies and confirm that what's written is what is in effect.  Concurrent with that run-through, you should also confirm that you are up-to-date with any new or amended rules.  Similarly, confirm that all folks who require a specific registration are duly registered (you would be surprised how often it's "assumed" that a registration application went through only to learn the FINRA shows no record of the filing -- or that someone was supposed to sit for an exam but postponed it and never satisfied the requirement.

All of which leads to another punchlist item:  If you have set forth policies and procedures in writing, are they being observed?  It's bad enough to run afoul of a FINRA rule, but to impose upon yourself a given task (which FINRA staff will note in your WSPs) and then to not properly implement that task is idiotic.  Similarly, as so many in-house Compliance folks love to spend hours on the computer drawing up all sorts of fancy organizational charts showing who reports to whom, it's probably a good idea to actually look at those charts once in a while and make sure that everyone so listed is still working at your firm and still supervising or reporting to those designated.
Investment Distributors, Inc.
AWC/2009016117101/February 2010
The Firm permitted its registered representatives to use email to conduct business without having in place an effective system or procedure for email surveillance and archiving. Specifically, the firm relied on its registered representatives to electronically forward their emails to the firmís chief compliance officer for supervisory review and archiving, while lacking any means to ensure that registered representatives were actually doing so. As such, the firmís system and procedures for email surveillance and archiving were not reasonably designed to achieve compliance with SEC Rule 17a-4, and NASD Rules 3010(d)(2) and 3110. The Firm failed to preserve and maintain numerous securities-related and/or firm related emails that registered representatives had not forwarded to its chiefcompliance officer.
Investment Distributors, Inc. : Censured; Fined $80,000; Must certify in writing to FINRA that the firm has implemented a supervisory system, including written procedures, reasonably designed to achieve compliance with SEC Rule 17a-4 and NASD Rule 3110 with respect to the preservation and maintenance of email communications, and with NASD Rule 3010(d)(2) with respect to the supervisory review of email correspondence of registered representatives with the public.
Tags:  Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
I can't think of a acceptable email supervisory system that relies upon the good-faith of RRs to forward all business-related emails to their CCO.  Moreover, it's been stressed over and over again that the "honor system" will not pass muster in this regard. 
Westrock Advisors, Inc.
AWC/2007008162201/February 2010
The Firm failed to file required attestations that it adopted and implemented written supervisory procedures reasonably designed to ensure that the firm and its employees complied with provisions of NASD Rule 2711(i) governing research analysts and research reports. The Firm failed to adequately supervise its research analysts, including supervising communications between the research analysts and subject companies, and documenting its monitoring of trading in research analystsí brokerage accounts. The Firm issued research reports that failed to accurately disclose material facts.

The Firm allowed its research analysts to use third-party email systems but did not reasonably enforce a system to audit or review their email correspondence.

The Firm permitted an individual registered as a General Securities Principal and General Securities Representative to supervise the conduct of its research analysts without passing either the Series 16 Supervisory Analyst or the Series 87 Research Analyst exams as FINRA rules required.

The Firm failed to develop and implement an AML program reasonably designed to achieve and monitor its compliance with the requirements of the Bank Secrecy Act and the implementing regulations thereunder; the firmís AML program had inadequate procedures governing the testing of its AML program; and the firmís testing of its AML procedures was inadequate and not independent one year, and not tested another year.

The Firm failed to timely report statistical and summary information regarding customer complaints and failed to amend, timely amend or ensure the amendment of Uniform Applications for Securities Industry Registration or Transfer (Forms U4) or Uniform Termination Notices for Securities Industry Registration (Forms U5) to disclose customer complaints and their resolution.

The Firm failed to retain originals of certain incoming and outgoing written correspondence relating to its business, received by mail and by fax,or copies of such correspondence and failed to adequately enforce written supervisory procedures prohibiting firm personnel from using third-party, non-firm email accounts for firm business.
Westrock Advisors, Inc.: Censured; Fined $100,000
Tags:  Supervision    WSP    AML    Email    Unregistered Supervisor     |    In: Cases of Note : FINRA
Bill Singer's Comment
The proverbial kitchen sink: Research, AML, Email, Supervision, Customer Complaints, U4/U5.  Frankly, the member may have gotten off light with only a Censure and a $100,000 fine. 
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

Laidlaw & Company (UK) LTD.
AWC/2007007315501/January 2010

The Firm failed to retain email communications related to its business that were sent to and from non-firm email accounts that firm registered representatives working from one of its branch offices used, and failed to establish and maintain a system for supervisory review of those outside emails.

Acting through a registered principal, the Firm failed to develop a privacy policy or disseminate privacy notices required by SEC Regulation S-P to its customers. censured, fined $5,000, jointly and severally, and fined an additional $60,000

The Firm failed to maintain new account documents for some accounts and failed to maintain complete new account documents for other accounts that lacked customer information. The Firm failed to enforce its written supervisory procedures concerning the dissemination of a privacy policy and the collection and maintenance of complete new account forms.

Laidlaw & Company (UK) LTD.: censured, Fined $5,000 (jointly and severally with unidentified party); Fined an additional $60,000
Tags:  Email    Supervisory System    Regulation S-P    WSP     |    In: Cases of Note : FINRA
Bill Singer's Comment
We start of 2010 with yet another case involving emails transmitted from non-firm accounts. Note that old Reg S-P issues still bedevil the industry.
Enforcement Actions
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