Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
December 2011
Scott David McElhenny (Principal)
AWC/2009020124301/December 2011
McElhenny applied one investment model in numerous customersí accounts by executing thousands of trades on a group basis in a variable annuity platform offered by one company and a mutual fund platform offered by another company. McElhenny could place one trade, which was not individualized for each of his customers, and that trade would be processed for all of his customers that were part of the trading group. The group trading executed by McElhenny in his customersí accounts involved inverse and leveraged funds. 

McElhenny engaged in such trading without having reasonable grounds for believing that the recommendation was suitable for each of his customers in light of their individual investment objectives, financial situation and needs. As a result of McElhennyís recommendations, the customers sustained a collective loss exceeding $1 million. McElhenny exercised discretion in the customersí accounts without each customerís written authorization and his member firmís acceptance of the accounts as discretionary. McElhenny executed more than one hundred unauthorized securities transactions in one customerís account. 
Scott David McElhenny (Principal): Barred
Tags:  Annuities    Variable Annuity    Mutual Funds    Unauthorized Transaction     |    In: Cases of Note : FINRA
November 2011
Scott Stafford McLean (Principal)
AWC/2010024607501/November 2011

McLean recommended to a customer that he transfer his existing mutual funds to McLeanís member firm, and told the customer that, if he became dissatisfied, he could liquidate the account at no expense.  Shortly thereafter, the customer accepted McLeanís recommendation and transferred the mutual funds. 

Thereafter, the customer had suffered losses in those mutual fund investments and wanted to liquidate his holdings. Accordingly, McLean reimbursed the customer $252 for the charges he incurred in selling the mutual funds, thereby improperly sharing in the customerís losses. The firmís written procedures expressly prohibited registered representatives from sharing in any benefits or losses with clients resulting from securities transactions.

Scott Stafford McLean (Principal): Fined $5,000; Suspended 1 business days
Tags:  Sharing Profits    Mutual Funds     |    In: Cases of Note : FINRA
October 2011
NAME REDACTED
AWC/2010022728801/October 2011

NAME REDACTED executed mutual fund transactions in customersí accounts without their knowledge or authorization.

In an effort to conceal his misconduct,  NAME REDACTED  falsified his member firmís books and records. Also, he completed and submitted firm switch forms related to the unauthorized transactions he effected in the customersí accounts and falsely represented that he had spoken to each of the customers and had obtained their authorization before executing the trades. NAME REDACTED provided false information relating to the reason why these customers authorized the transactions, and he knew at the time he made these written statements on firm documents that they were false.

NAME REDACTED altered the firmís customer telephone call logs with respect to customersí accounts to falsely show that he had spoken to each of the customers and obtained their authorization to effect the transactions.

Finally, NAME REDACTED accessed the firmsí internal system and changed the telephone number of some customers whose accounts he had effected the unauthorized transactions to incorrect telephone numbers.

NAME REDACTED: Barred
Tags:  Mutual Funds     |    In: Cases of Note : FINRA
Bill Singer's Comment
NAME REDACTED at the sole discretion of RRBDlaw.com
July 2011
Andrew Joseph Franz
AWC/2010025073601/July 2011

Without authorization, Franz took possession of checks payable to the investment adviser firm where he was employed, deposited the checks, which totaled about $21,000, to a personal bank account, and converted a portion of the funds to his own use and benefit.

Franz was the broker of record for a money market mutual fund account that an investor owned, and while the investor was out of state and without his knowledge or authorization, Franz contacted the mutual fund company multiple times and instructed it to issue checks to the investor drawn against his money market account. The mutual fund company issued checks payable to the investor totaling about $271,250 and mailed them to the investorís residence in Ohio.

Franz obtained possession of the checks at the investorís residence and, without the investorís knowledge or authorization, Franz forged his signature on the checks, deposited the checks to a personal bank account and converted a portion of the funds to his own use and benefit and remitted the rest to the investor.

Andrew Joseph Franz : Barred
Tags:  Forgery    Investment Advisor    Mutual Funds    Conversion     |    In: Cases of Note : FINRA
Bill Singer's Comment

The frightening part of this is how easy it all was -- and how few meaningful safeguards appear to exist.  I mean, seriously, what could you reasonably do to prevent an RR from going to a customer's home, stealing his mail, forging his signature, and converting the proceeds?

Thomas Michael Kinser
2009017466201/July 2011
Kinser converted approximately $330,000 in customerís funds. Kinser called the mutual fund company through which he had invested customerís funds to change the address on the account from the customerís residential address to Kinserís office address. At Kinserís request, the mutual fund company sent redemption checks drawn on the customerís account to Kinser without the customerís knowledge, consent or authorization, and Kinser forged the customerís signature on the checks, endorsed them to make them payable to him and deposited the funds in his own account. In order to conceal the conversions, Kinser fabricated account summaries and documents, including charts and statements purporting to reflect the customerís account balance, which he presented to the customer in periodic meetings, misleading the customer into believing all of his money was still invested in mutual funds and was still earning interest. Kinser failed to respond to FINRA requests for information and documents.
Thomas Michael Kinser: Barred
Tags:  Forgery    Mutual Funds     |    In: Cases of Note : FINRA
June 2011
Uzo Omar Chima (Principal)
AWC/2006007105101/June 2011

Chima engaged in a pattern of unsuitable short-term trading and switching of unit investment trusts (UITs), closed-end funds (CEFs) and mutual funds in retired and/or disabled customer accounts without having reasonable grounds for believing that such transactions were suitable for the customers in view of the nature, frequency and size of the recommended transactions and in light of their financial situations, investment objectives, circumstances and needs. Some of the transactions were effected through excessive use of margin and without ensuring that customers received the maximum sales charge discount. In furtherance of his short-term trading strategy, Chima engaged in discretionary trading without prior written authorization, falsified customer account update documents and mismarked trade tickets for each of the customersí accounts, stating that the orders were unsolicited when, in fact, they were solicited.

The transactions generated approximately $450,000 in commissions for Chima and his firm, and approximately $370,000 in losses to the customers; some customers also paid over $75,000 in margin interest. In numerous UIT purchases, none of which exceeded $250,000, Chima failed to apply the rollover discount to which each customer was entitled.

Chima caused his member firmís books and records to be false in material respects, in that he provided false information on customer update forms for customersí accounts, signed the forms certifying that they were accurate and submitted them to his firm.

Uzo Omar Chima (Principal): Fined $75,000; Suspended 2 years; Ordered to pay $12,443.73, plus interest, in restitution to customers.
Tags:  Mutual Funds    UIT    Trading    Suitability     |    In: Cases of Note : FINRA
Bill Singer's Comment
I'm puzzled -- what exactly did Chima need to do beyond the allegations in order to be Barred?
May 2011
Edward Charles Bartlett III
AWC/2009019969201/May 2011

Bartlett signed customersí names to documents related to purchases of mutual funds and insurance products without authorization.  Although the customers authorized Bartlett to purchase the securities or insurance products for them, only one of the customers orally authorized Bartlett to sign his name.

Bartlett signed customersí names to new account applications, client profiles, risk questionnaires, insurance applications and transaction confirmation forms. In one instance, Bartlett forged a customerís name because he was concerned that he would lose a substantial commission if he went back to the customer to obtain her signature on a form.

Edward Charles Bartlett III: Fined $5,000; Suspended 5 months
Tags:  Signature    Mutual Funds    Insurance    Signature     |    In: Cases of Note : FINRA
March 2011
Lillian S. Scales
AWC/2010023669001/March 2011
Scales was listed as a joint owner with a customer on a mutual fund account her member firm held, falsely maintaining that she and the customer were relatives because the firm allowed employeesĎ immediate family members to maintain joint accounts with them. The customer contacted the firm and reported funds missing from the mutual fund account and that Scales had improperly taken approximately $39,000 from the account and deposited the funds directly into her personal bank account, without the customerís knowledge or consent, for her own use and benefit.
Lillian S. Scales: Barred
Tags:  Mutual Funds    Joint Account    Conversion     |    In: Cases of Note : FINRA
January 2011
NEXT Financial Group, Inc.
AWC/2009016272902/January 2011

NEXT Financial Group did not have a reasonable system for reviewing its registered representativesí transactions for excessive trading. The firm relied upon its OSJ branch managers to review its registered representativesí transactions and home office compliance personnel to review its OSJ branch managersí transactions, but the firm failed to utilize exception reports or another system, and the supervisors and compliance personnel only reviewed transactions on weekly paper blotters or electronic blotters.

The monthly account statements and contingent deferred sales charge reports for mutual fund activity were also available for review and could be indicators of excessive trading, however, given the volume of trading certain principals reviewed, and in certain cases, the large number of representatives for which the principal was responsible, it was not reasonable to expect principals to be able to track excessive trading on a weekly sales blotter, let alone through monthly account statements or mutual fund sales charge reports.

Due to the lack of a reasonable supervisory system, the firm failed to detect a registered representativeís excessive trading, which resulted in about $102,376 in unnecessary sales charges; the firm failed to identify or follow up on other transactions that suggested other registered representativesí excessive trading in additional customer accounts. 

The Firm did not have a reasonable system for ensuring that it obtained and documented principal review of its registered representativesí transactions, including sales of complicated products such as variable annuities, and the firm should have been particularly attentive to maintaining books and records that established that the transactions had been properly reviewed. The firm failed to provide reasonable supervision of municipal bond markups and markdowns to ensure that its registered representatives charged its customers reasonable markups and markdowns. In addition,  the firmís branch office examination program was unreasonable because it was not designed to carry out its intended purpose of detecting and preventing violations of, and achieving compliance with, federal, state and FINRA securities regulations, as well as its own policies.

The firm failed to have a reasonable supervisory system to oversee implementation of its heightened supervision policies and procedures for its registered representatives as it failed to comply with the terms of its heightened supervision for its registered representatives regarding client complaints, regulatory actions or internal reviews, therefore it had a deficient implementation of heightened supervision policies and procedures.

The firm failed to have a reasonable supervisory control system or to have in place Supervisory Control Procedures as required by FINRA Rule 3012, and it failed to perform adequate 3012 testing or prepare adequate 3012 reports. Moreover,the firm failed to have a reasonable system and procedures in place to review and approve investment advisorsí private securities transactions.

Furthermore, the firm filed inaccurate and late Rule 3070 reports relevant to customer complaints, and did not file or amend Form U4 and Uniform Termination Notice for Securities Industry Registration (Form U5) reports in a timely manner.

The Firm's AML systems and procedures were unreasonable, as the firm failed to establish and implement an AML Compliance Program reasonably designed to achieve compliance with NASD Rule 3011. Although the firm utilized a money movement report, its supervisors did not detect red flags involving numerous instances of potentially suspicious activities relating to the trading of a companyís stock and the transfers of proceeds relating to the trading of a stock, and thus failed to investigate and report these activities in accordance with its own procedures and the requirements of the Bank Secrecy Act and the implementing regulations.

In addition, over 1.3 million shares of a companyís stock were traded in customer accounts a registered representative serviced; during a one-week period, the firmís only AML exception report that monitored large money movement flagged the customerís account, but the firm took no action and failed to file any SARs as appropriate.

NEXT Financial Group, Inc.: Censured; Fined $400,000; Ordered to pay $103,179.84, plus interest, in restitution to customers.
Tags:  Bank    AML    SAR    Mutual Funds    Annuity    Mark-Up Mark-Down     |    In: Cases of Note : FINRA
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