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.
June 2011
Portfolio Advisors Alliance, Inc. and Marcelle Long (Principal)
OS/2008011640602/June 2011

Respondents failed to put any heightened supervisory measures in place for a branch manager or to follow up on ďred flags.Ē Notwithstanding the branch managerís remote location, prior disciplinary history, outside business disclosures or his disclosure that he was potentially under financial stress and unable to meet financial obligations, the Firm and Long failed to put any heightened supervisory measures in place or to follow up on the red flags after he disclosed information on a compliance questionnaire, for which the affirmative answer required that he attach a separate sheet providing complete details about the disclosed activities, which Long did not complete or enforce. Also, the firmís and Longís heightened supervision of the branch manager was inadequate in that it consisted only of inspecting his office annually and speaking on the phone on a fairly regular basis. Long inspected the branch managerís branch office, and although she was aware that the manager was involved in certain outside business activities, based on the disclosures that he made on his Uniform Application for Securities Industry Registration or Transfer (Form U4), she admitted that she did not inspect any files or financial records associated with his disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.During a subsequent inspection, Long again did not review documentation regarding the branch managerís disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.

Additionally, the branch manager had participated in private securities transactions wherein he had raised more than $1.5 million from investors, many of whom were firm customers.

In addition, the firm and Long failed to review or retain email communications on the branch managerís outside email account, and Long did not review his outside email account during her inspections of his branch office. Moreover, FINRA found that the firm did not have any supervisory procedures regarding the review and retention of email communications on outside email accounts.

Portfolio Advisors Alliance, Inc.: Censured; Fined $35,000

Marcelle Long: Fined $7,500; Suspended in Principal/Supervisory capacity only for 30 days

Bill Singer's Comment

At first blush, the sanctions appear a bit harsh but after it all sinks in -- nah, FINRA seems to have had the punishment about right.  Given the history of the subject branch manager and the apparent supervisory lapses, the Principal is lucky that she got off with only a 30-day Principal/Supervisory suspension. The sanctions against her could have been far worse and, frankly, with some justification.

Either I'm getting mellow in my old age or FINRA is starting to get some things right.  Whoa -- did I really write that?

April 2011
Daniel A. Contreras (Principal)
AWC/2009018398701/April 2011

Contreras engaged in private securities transactions by recommending that customers invest in promissory notes, which were not approved investments of his member firm. Contreras failed to provide written notice to his firm describing in detail the proposed transactions and his proposed role therein, and stating whether he had received, or might receive, selling compensation in connection with the transactions.

The company that issued the promissory notes filed for Chapter 13 Bankruptcy, and all of Contrerasí customers lost their entire investment.

Contreras borrowed approximately $65,000 from his customers, contrary to his firmís written procedures prohibiting registered representatives from borrowing money or securities from any prospects or customers, including non-firm prospects/customers, and Contreras failed to pay back any of the money he borrowed.

Contreras failed to respond to FINRA requests for information and testimony.

Daniel A. Contreras (Principal): Barred
Tags:  Borrowing    Bankruptcy    Private Securities Transaction     |    In: Cases of Note : FINRA
Bill Singer's Comment
An all too typical scenario involving private securities transactions and borrowing from clients. A lot of folks are surprised when they learn how often those two factors go hand in hand.  Of course, an equally common factor is that an RR who fails to pay back customers from whom he borrowed money, also tends not to respond to FINRA requests for information and testimony.
Earnest Flowers III
OS/2009016956601/April 2011

In connection with the sale of investments in a film production company, Flowers made fraudulent misrepresentations and omitted to disclose material information. Flowers collected at least $92,000 from investors, falsely representing that he would use their funds to finance a film production business and promising exorbitant, guaranteed returns. Instead of investing the funds, Flowers misused $30,498 to repay other investors and pay for personal expenses without the investorsí knowledge, consent or authorization.

Flowers made recommendations to a customer to invest in private placement offerings that were unsuitable in light of the customerís financial situation, investment objective and financial needs.

Flowers attempted to settle away customersí complaints without his member firmís knowledge or consent.

Flowers signed an attestation form for a firm acknowledging that email communications with the public must be sent through the firmís email address and copied to the compliance department, but Flowers communicated with customers via unapproved, outside email accounts without his member firmsí knowledge or consent, and as a result of his outside communications, his member firms were unable to review his emails to firm customers. In addition, Flowers engaged in private securities transactions without providing prior written notice to, and receiving prior written approval from, his member firms.

Earnest Flowers III : Barred
Bill Singer's Comment
A succinct, well-presented case. Kudos to FINRA on this one.
Gary Chew
AWC/2008014479002/April 2011

Chew engaged in a

  • private securities transaction, by purchasing shares of stock via subscription agreement, outside the regular scope of his employment with his member firm and without providing prior written notice of this private securities transaction to the firm; and
  • outside business activity, as the president and sole owner of an entity, without providing prompt written notice to his firm.

Chew made false statements and attestations to his firm when he completed compliance questionnaires and annual attestations on which he declared to the firm that he had not personally invested in any private security transaction outside of the firm, that he was not ďengaged in any outside activity either as a proprietor, partner, officer, director, trustee, employee, agent or otherwise,Ē and that he did not participate in any outside business activities except for those previously disclosed to, and approved in writing by, the firm.

Gary Chew: Fiend $10,000; Suspended 3 months
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