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.
October 2010
Kevin Bradley Martin (Principal)
AWC/2008012444203/October 2010

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

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

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

Martin failed to cause the firm to preserve electronic communications.

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

According to FINRA, Martin erred because:

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

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

 

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