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
Richard Scott From aka Richard Scott Winther (Principal)
AWC/2010021116001/December 2011
From made misrepresentations in emails to individuals representing entities with whom he had done past investment banking business or hoped to conduct future investment banking business. At that time, From and his member firm were not actively engaged in any securities business due to the firmís failure to maintain minimum required net capital. 

In emails, From stated that he was currently calling investors to recommend investments in some companies but, in fact, he never made any such calls. From merely claimed he was doing so in order to receive payment for his past investment banking business with one of the companies. 

In an email, From described the terms of a reverse merger that he claimed he had recently completed when, in fact, he did not participate in the reverse merger at all, but was instead describing a deal a different broker-dealer he knew conducted. Fromís purpose in making the false claim was to generate future investment banking business with the company. 

In another email to an individual representing another company, From represented that he had already obtained indications of interest from potential investors for an offering of securities the company contemplated, although he had not spoken to any potential investors but merely claimed he had done so for the purpose of generating future investment banking business with the company. 
Richard Scott From aka Richard Scott Winther (Principal): Fined $5,000; Suspended 30 business days
Tags:  Email    Net Capital     |    In: Cases of Note : FINRA
Bill Singer's Comment
One of those oddball cases in which someone got into trouble not so much for what he did as for what he didn't do (but was claiming to have done).
November 2011
Dennis Lee Grossman (Principal)
OS/2008011672301/November 2011

As the AMLCO and president of his member firm,  Grossman failed to demonstrate that he implemented and followed sufficient AML procedures to adequately detect and investigate potentially suspicious activity

Grossman did not consider the AML procedures and rules to be applicable to the type of accounts held at the firm and therefore did not adequately utilize, monitor or review for red flags listed in the firmís procedures. His daily review of trades executed at the firm and all outgoing cash journals and wires, Grossman did not identify any activity of unusual size, volume or pattern as an AML concern. The firmís registered representatives, who were also assigned responsibility for monitoring their own accounts, failed to report any suspicious activity to Grossman. Until the SEC and/or FINRA alerted Grossman to red flags of suspicious conduct, Grossman did not file any SARs.

Grossman failed to implement adequate procedures reasonably designed to detect and cause the reporting of suspicious transactions and, even with those minimal procedures that he had in place at the firm, he still failed to adequately implement or enforce the firmís own AML program. For example, accounts were opened at the firm within a short period of each other that engaged in similar activity in many of the same penny stocks, and several red flags existed in connection with these accounts that should have triggered Grossmanís obligations to undertake scrutiny of the accounts, as set out in the firmís procedures, including possibly filing a SAR.  Additionally,individuals associated with the accounts had prior disciplinary histories, including securities fraud and/or money laundering. Because of Grossmanís failure to effectively identify and investigate suspicious activity,he often failed to identify transactions potentially meriting reporting through the filing of SARs. Moreover, Grossman failed to implement an adequate AML training program for appropriate personnel; the AML training conducted was not provided to all of the registered representatives at the firm. 

Furthermore, Grossman failed to establish and maintain a supervisory system at the firm to address the firmís responsibilities for determining whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act of 1933 (Securities Act) and, as a result, Grossman failed to take steps, including conducting a searching inquiry, to ascertain whether these securities were freely tradeable or subject to an exemption from registration and not in contravention of Section 5 of the Securities Act. The firm did not have a system in place, written or unwritten, to determine whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act; Grossman relied solely upon the clearing firm, assuming that if the stocks were permitted to be sold by the clearing firm, then his firm was compliant with Section 5 of the Securities Act. 

Grossman failed to designate a principal to test and verify the reasonableness of the firmís supervisory system, and failed to establish, maintain and enforce written supervisory control policies and procedures at the firm and failed to designate and specifically identify to FINRA at least one principal to test and verify that the firmís supervisory system was reasonable to establish, maintain and enforce a system of supervisory control policies and procedures.

The firm created a report, which was deficient in several areas, including in its details of the firmís system of supervisory controls, procedures for conducting tests and gaps analysis, and identities of responsible persons or departments for required tests and gaps analysis. Grossman made annual CEO certifications, certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and registrations; the certifications were deficient in that they failed to include certain information, including whether the firm has in place processes to establish, maintain and review policies and procedures designed to achieve compliance with applicable laws and regulations and whether the firm has in place processes to modify such policies and procedures as business, regulatory and legislative events dictate. 

Grossman failed to ensure that the firmís heightened supervisory procedures placed on a registered representative were reasonably designed and implemented to address the conduct cited within SECís allegations; the additional supervisory steps imposed by Grossman to be taken for the registered representative were no different than ordinary supervisory requirements. Moreover, there was a conflict of interest between the registered representative and the principal assigned to monitor the registered representativeís actions at the firm;namely, the principal had a financial interest in not reprimanding or otherwise hindering the registered representativeís actions. Furthermore,Grossman was aware of this conflict, yet nonetheless assigned the principal to conduct heightened supervision over the registered representative. 

The heightened supervisory procedures Grossman implemented did not contain any explanation of how the supervision was to be evidenced, and the firm failed to provide any evidence that heightened supervision was being conducted on the registered representative. Also, Grossman entered into rebate arrangements with customers without maintaining the firmís required minimum net capital. Similarly, he caused the firm to engage in a securities business when the firmís net capital was below the required minimum and without establishing a reserve bank account or qualifying for an exemption. Grossman was required to perform monthly reserve computations and to make deposits into a special reserve bank account for the exclusive benefit of customers, but failed to do so.

Dennis Lee Grossman (Principal): Fined $75,000; Suspended 4 months in Principal capacity only
Bill Singer's Comment
A concise rendition by FINRA.  Assuming that the allegations are not over-blown, the sanctions here are fair and responsive to the cited misconduct.  With year-end upon us, it would be a worthwhile exercise for many of you to read this case and use it as a checklist -- how do you measure up?
September 2011
E1 Asset Management, Inc.
AWC/2010021038901/September 2011

While conducting a securities business, the Firm failed to maintain the required minimum net capital. The firmís financial books and records, including the firmís trial balances and net capital calculations, were inaccurate; the firm improperly netted payroll advances against its monthly payroll accrual, improperly included amounts held in a brokerage account as an allowable asset even though the firm did not have a Proprietary Accounts of Introducing Broker/Dealer (PAIB) agreement, failed to accrue some expenses and took a larger deduction for a fidelity bond deductible than it was permitted.

The Firm failed to report to FINRA statistical and summary information for complaints. NASD Rule 3070 reporting was inaccurate in that firm reports for these complaints included erroneous complaint dates, incorrect product codes, inaccurate problem codes and/or identified the wrong registered representative. In connection with some of its registered employees, the firm failed to amend or ensure the amendment of Uniform Applications for Securities Industry Registration or Transfer (Forms U4) to disclose customer complaints and the resolution of those complaints, and the firm also filed late Forms U4 amendments.

The Firm failed to have an adequate system to preserve instant messages (IM) sent or received by registered representatives of the firm; the firm did not archive IMs in a non-erasable, non-rewritable format.

E1 Asset Management, Inc. : Censured; Fiend $75,000
Tags:  Net Capital        Instant Messaging     |    In: Cases of Note : FINRA
May 2011
Brewer Financial Services, LLC , Adam Gary Erickson (Principal) and Steven John Brewer
AWC/2010023252701/May 2011

Acting through Erickson and Brewer, the Firm:

  • sold the private placement offerings of a company formed exclusively to acquire and provide growth to its parent company and a limited liability company for which Brewer was a director, without disclosing to the investors material facts that:
    • the parent company had defaulted on a $2.5 million loan,
    • had reported an operating loss of $1,622,912 for one calendar year and an approximate operating loss of $4.5 million for another calendar year, and
    • had defaulted on interest payments to note-holders.
  • continued to sell the limited liability companyís private placement offering to new investors, knowing that it had defaulted on its interest payments to existing investors and without disclosing that material fact to new investors.

The firm sold the private placement offerings to non-accredited investors without providing them with the financial statements required under Securities and Exchange Commission (SEC) Rule 506, resulting in the loss of exemption from the registration requirements of Section 5 of the Securities Act of 1933. Because no registration statement was in effect for the offerings and the registration exemption was ineffective, the firm sold these securities in contravention of Section 5 of the Securities Act of 1933.

Acting through Erickson, the Firm conducted inadequate due diligence related to its sale of the offerings in that it failed to ensure the issuers had retained a custodian to handle certain investorsí qualified funds prior to accepting investment of Individual Retirement Account (IRA) funds into the offerings.

Ating through Erickson and Brewer, the Firm offered to sell and sold the companyís private placement offering by distributing to the public a private placement memorandum (PPM) containing unbalanced, unjustified, unwarranted or otherwise misleading statements; among other things, the PPM implied that the parent company was not experiencing financial difficulty and failed to disclose that it reported a significant loss one year. In addition, the investors in the companyís notes were not provided with financial statements for either the company or the parent company. Moreover, the PPM was misleading in that it failed to state clearly how offering proceeds would be used, lacked clarity regarding the relationship between the issuer and its affiliates, and failed to provide the basis for claims made regarding the performance expectations of the issuer or its affiliates.

Furthermore, the firm failed to establish adequate written supervisory procedures related to its sales of private placement offerings, in that the firmís procedures failed to require that financial statements be provided to investors when private placement offerings are sold to non-accredited investors, pursuant to SEC Rule 506.

The Firm allowed Brewer to be actively engaged in managing the firmís securities business without being registered as a principal and a representative although Brewer signed and submitted an attestation to FINRA stating he would not be actively engaged in the management of the firmís securities business until he completed registration as a representative and principal. Among other things, Brewer reviewed and revised the firmís recruitment brochure, approved offer letters to prospective firm registered representatives, dictated the structure of new representativesí compensation, including the level of commissions and loan repayment terms, and instructed firm personnel to send private placement offering documents to prospective investors.

The firm maintained the registrations for individuals who were not active in the firmís investment banking or securities business or were no longer functioning as registered representatives.

The Firm conducted a securities business on a number of days even though it had negative net capital on each of those dates. The firmís net capital deficiencies were caused by its failure to classify contributions from the parent company as liabilities after the firm returned the contributions to the parent company within a one-year period of having received them, and improperly treating its assets as allowable even though all of its assets had been encumbered as security for a loan agreement the parent company executed. Moreover, the Firm had inaccurate general ledgers, trial balances and net capital computations, and filed inaccurate Financial and Operational Uniform Single

Brewer Financial Services, LLC: Expelled

Adam Gary Erickson (Principal) and Steven John Brewer: Barred

Tags:  Private Placement    Due Diligence    Unregistered Principal    Parking    Net Capital     |    In: Cases of Note : FINRA
Bulltick, LLC, Javier Guerra (Principal) and Victor Manuel Robles (Principal)
AWC/2006006958101/May 2011

The Firm made certain unsecured loans to its parent that exceeded the parameters set forth in SEC Rules 15c3-1(e)(1)(i) and (ii), thereby triggering its reporting obligation. Through its financial and operations principals (FINOPs), Guerra and Robles, the Firm provided notices to FINRA at the beginning of several months of loans that it anticipated making during the course of the month, but the notices did not comply with the requirements of SEC Rule 15c3-1(e)(1); the firm did not provide adequate advance notice of loans that exceeded the 30 percent threshold on numerous occasions and did not provide subsequent notice of unsecured loans that exceeded the 20 percent threshold on other occasions. Guerra and Robles, as FINOPS at the firm, were responsible for providing the required notices on the firmís behalf but failed to do so.

The Firm had inadequate excess net capital for a year because it failed to include in its net capital calculation certain positions in Latin American and other debt securities held in firm accounts at its clearing firms, and did not report these positions as assets on its balance sheet or apply haircuts to these positions in its computation of net capital; deficiencies ranged from at least $900,000 to at least $13.7 million and all of the positions relevant to the net capital deficiency had later either paid down their principal or were sold by the firm.

The firm engaged in securities transactions in which commissions were split between the firm and a nonregistered foreign person with the person receiving most of the commissions and the firm getting the balance. In addition to making the initial referrals, the non-registered foreign person, along with the firm, among other things, negotiated the terms of the transactions, which the firm executed. The firm did not properly reflect the payment to the finder on its books and records, and also did not disclose the compensation arrangement as required.

Moreover, the Firm did not maintain adequate books and records concerning proprietary positions the firm held at separate clearing firms for over a year; this included failing to reflect the positions on any of the firmís internal books and records, failing to maintain documents related to the processing of the transactions such as the electronic or paper order tickets and the trade confirmations, failing to maintain documents related to the supervision of the transactions, and failing to appropriately reflect its liabilities and assets on financial documentation the firm maintained. Furthermore, although FINRA staff advised the firm that its procedures related to SEC Rule 15c3-1(e) were not reasonably designed to achieve compliance with that rule and needed to be amended, the firm failed to amend its procedures to establish supervisory procedures reasonably designed to ensure compliance with the rule.

Guerra engaged in outside investment activities through a limited liability company that used his firmís address, and he failed to provide prompt written notice of these business activities to his member firm.

Bulltick, LLC: Censured and Fined $300,000

Javier Guerra (Principal): Fined $20,000; Suspended 10 business days 

Victor Manuel Robles (Principal): Fined $10,000; Suspended 5 business days 

Tags:  Net Capital    Unregistered Person    Finder Fees     |    In: Cases of Note : FINRA
March 2011
Teri Sue Shepherd (Principal)
AWC/2009017136101/March 2011
Acting through Shepherd, her member firm conducted a securities business while failing to maintain adequate net capital. Shepherd caused the firmís net-capital violations by improperly treating a debt the firmís parent company owned as an allowable asset for purposes of its net-capital calculations, and improperly treating as allowable the excess amount of concessions receivable for trails over the amount of corresponding commissions payable.
Teri Sue Shepherd (Principal): Fined $7,500; Suspended 45 days in Principal capacity only; Required to requalify by examination before acting in any FINOP capacity with any FINRA registered broker-dealer.
Tags:  FINOP    Net Capital     |    In: Cases of Note : FINRA
Bill Singer's Comment
The main interest in this case is the somewhat rare sanction upon a FINOP and the requirement to requalify in that capacity.
February 2011
Francis Thomas Duffy (Principal)
AWC/2008013287601/February 2011
Duffy failed to fully accrue a $325,000 settlement of a customer arbitration claim against the firm as a liability on his member firmís ledgers and other records. Duffy only accrued as liabilities amounts when due under a payment schedule to the settlement agreement, and had not booked $125,000 of the settlement that had not been paid as a liability, which caused his firmís records to be inaccurate. As a result of failing to properly and accurately track assets, liabilities and expenses, the firm, while conducting a securities business, and acting through Duffy, failed to maintain its minimum net capital requirement. The deficiencies were primarily attributable to Duffy incorrectly viewing funds from private placements deposited in an escrow account of a separate but related company, as good capital to his firm before the funds were actually legally and physically available to the firm; and while Duffy was aware of past delays in the firmís ability to access funds deposited in escrow, he did not take into account the possibility of delays when estimating the firmís net capital position, and during that time period, was only performing a month-end formal computation of new capital after requisite capital was actually infused.
Francis Thomas Duffy (Principal): Fined $10,000; Suspended 10 business days in FINOP capacity only
Tags:  Escrow    Net Capital    Private Placement     |    In: Cases of Note : FINRA
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
Stuart Gregory Burchard (Principal)
OS/2008011656401/January 2011

Acting through Burchard, his Firm failed to

  • prepare accurate general ledgers and trial balances;
  • prepare accurate computations of net capital under the aggregated indebtedness standard while conducting a securities business;
  • maintain or meet its minimum net capital requirement, failed to notify FINRA when its net capital declined below the minimum required under SEC Rule 15c3-1;
  • prepare and file FOCUS Reports Part IIA for several calendar quarters;
  • comply with the terms of its membership agreement when it acted as a dealer after executing more than 10 proprietary trades in its account during a calendar year, thereby increasing its minimum net capital requirement from $5,000 to $100,000;
  • file an application for approval of a material change in its business operations as originally provided in its membership agreement;
  • report customer complaints, which were discloseable events, within 10 business days and statistical and summary information of customer complaints the firm received on a quarterly basis;
  • timely amend Forms U4 to disclose settlements;
  • timely report settlements, arbitration awards and a default judgment that were required to be disclosed;
  • develop, establish and implement an adequate AML compliance program;
  • conduct and/or document adequate independent testing of its AML compliance program and procedures;
  • establish procedures to ensure the designation of an AML Compliance Officer to NASD;
  • NASD of any changes in contact information for its AML Compliance Officer in a reasonable amount of time and failed to implement and adequate AML training program;
  • establish and implement an adequate Customer Identification Program;
  • evidence that a due diligence review was performed to review the identities or beneficial owners of accounts of foreign financial institutions;
  • establish adequate procedures designed to monitor, detect and investigate suspicious activity despite the presence of red flags noted in the firmís procedures;
  • prepare and maintain exception reports produced to review for unusual activity in accounts; failed to evidence due diligence in opening accounts of foreign financial institutions;
  • monitor and respond to requests for information from FinCEN; and
  • establish and implement policies, procedures and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act, including failure to implement policies and procedures designed to detect and report suspicious activity and to verify the identity of customers.

Burchard failed to reasonably supervise the activities of a registered representative and registered principal to ensure that she performed the supervisory responsibilities Burchard delegated to her.

Stuart Gregory Burchard (Principal): Barred
Tags:  Net Capital    FOCUS    AML    CIP     |    In: Cases of Note : FINRA
Bill Singer's Comment
Impressive.  Note that the Principal was barred.
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