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
v
AWC/2010021236201/December 2011
Elevation commenced an options business, engaged in options transactions and designated an individual as its Registered Options Principal (ROP) until his resignation from the firm. The firm did not notify FINRA of his resignation but instead continued to engage in options business without registering a new ROP. The firm failed to establish, maintain and enforce an adequate supervisory system for its options activities, including written procedures, reasonably designed to achieve compliance with application securities regulations, and to supervise options transactions in which it engaged. Thefirm failed to comply with multiple requirements of FINRA Rule 2360, the options rule, by failing to comply with its registration and customer agreement requirements.
v: Censured; Fined $10,000
Tags:  Options     |    In: Cases of Note : FINRA
October 2011
Michelle Yvette Mangum
AWC/2009017685301/October 2011
After customers had informed Mangum that they might file a complaint against her firm for significant losses in their account, she instructed them to register a complaint with her member firm based on inaccurate information. Mangum instructed them to assert to the firm that the losses were her responsibility because she had failed and/or refused to purchase protective puts in their account after being instructed to do so. This advice was inaccurate since it was one of the customers, not Mangum, who had refused to sell any portion of their highly margined position, and Mangum had already advised the customers that they would not be able to purchase protective puts because their account lacked sufficient buying power.
Michelle Yvette Mangum : Fined $5,000; Suspended 1 month
Tags:  Options     |    In: Cases of Note : FINRA
Bill Singer's Comment
And the reason that Mangum's advice doesn't qualify as superlative Customer Service is what???
September 2011
Ayre Investments, Inc. and Timothy Tilton Ayre (Principal)
OS/2009016252601/September 2011

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

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

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

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

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

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

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

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

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

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

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

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

July 2011
Patrick Shawn Kennedy (Supervisor)
AWC/2009018671501/July 2011

Kennedy continued recommending and effecting put options trading in a customerís account even though he knew that the trading was unsuitable because the customer was unemployed and the risk was inconsistent with the customerís financial resources, investment objectives and risk tolerance.

Kennedy recommended that an elderly couple invest $50,000 in a put options trading strategy with approximately $57,000 to be invested in mutual funds and bonds with none of the mutual funds to be used for put options trading. The customersí account, which had approximately $267,298.55, suffered realized and unrealized losses of $195,046.40 due to Kennedyís put option trading strategy and the liquidation of mutual funds to cover losses from the put options trading and to meet margin requirements of securities that were purchased in the customersí account due to the put options trading.

Patrick Shawn Kennedy (Supervisor): Fined $5,000; Suspended 9 months
Tags:  Options    Elderly     |    In: Cases of Note : FINRA
January 2011
Peter Joseph Brandstaetter
AWC/2008014880601/January 2011

Brandstaetter created and distributed illustrations that promoted an options trading strategy to members of the public that contained numerous false, exaggerated, unwarranted or misleading claims and statements. Brandstaetter sent the illustrations to one of the customers, she had not completed an options trading agreement with Brandstaetterís member firm and she had not been furnished with an options disclosure document prior to (or contemporaneous with) the receipt of the illustrations. Brandstaetter did not seek or receive approval of the documents from his firmís options principal prior to the dissemination of the materials.

Brandstaetter exercised discretion in a customerís account without her written permission or the firmís approval, although he was aware that his firmís written supervisory procedures prohibit discretionary trading within customer accounts.

Peter Joseph Brandstaetter: Fined $20,000; Suspended 10 business days
Tags:  Discretion    Options     |    In: Cases of Note : FINRA
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