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?

 

Lisa Renee Mello (Principal)
AWC/2008012444202/October 2010

Mello served as her member firmís FINOP and was responsible for monitoring the firmís financial condition to determine whether its net capital was sufficient to conduct a securities business. The firmís registered representatives effected trades in collateralized mortgage obligations (CMOs) through the firmís proprietary trading account. The transactions appeared to remove beneficial ownership of the CMOs from the firm, but they were sham transactions because the securities remained in the firmís inventory.

The registered representative was able to accomplish and maintain his scheme because Mello and others at the firm 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. As a result of the registered representativeís activity and the firmís method of monitoring it, the firm conducted a securities business on multiple days while failing to maintain its required minimum net capital and, because Mello failed to discern the true effect of the registered representativeís trading on the firmís net capital, she allowed the firm to conduct a securities business on multiple occasions while in violation of SEC Exchange Act Rule 15c3-1.

Lisa Renee Mello (Principal): Fined $8,000; Suspended as FINOP for 6 months
Tags:  CMO    Proprietary Traders    Net Capital    FINOP     |    In: Cases of Note : FINRA
Bill Singer's Comment

As I noted in the apparent companion case of Kevin Bradley Martin:

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?

September 2010
Assent LLC
AWC/2007008882402/September 2010

The Firm permitted a then-proprietary trader and associated person to engage in proprietary firm options trading when he was not properly licensed to do so and, as a result, the firm failed to register a person engaged in its investment banking or securities business in the category of registration appropriate to the function to be performed as specified in NASD Rule 1032. The Firm's written supervisory procedures required all proprietary traders to possess the Series 7 general securities representative license and Series 55 equity traders limited representative license (and Series 63 qualification), and provided for no exceptions unless approvals were obtained and the traderís activities were restricted until the licensing deficiency was rectified; the associated person possessed none of the licenses required by the firm nor were activities restricted. As a result, the firm failed to enforce its written supervisory procedures by allowing the associated person to disregard FINRA licensing requirements and the firmís internal licensing requirements applicable to its proprietary traders.

The Firm failed to enforce written internal firm trading limits that applied to the associated person by failing to enforce its written supervisory procedures concerning the imposition of individual trading limits on proprietary traders; the firm failed to take adequate steps to ensure the associated person and other relevant associated persons of the firm understood the meaning and application of the terms of the associated personís individual trading limits, and allowed the associated person to exceed his individual trading limits on several occasions.

Assent LLC : Censured; Fined $79.,000
Tags:  Unregistered RRs    Trading Limits    Proprietary Traders     |    In: Cases of Note : FINRA
Joseph Anthony Devito (Principal)
AWC/2007008882403/September 2010
Devito failed to enforce his member firmís written supervisory procedures with respect to licensing, in that the procedures required designated supervisory principals to ensure that the associated persons they supervised were properly licensed. Devito failed to enforce the firmís written supervisory procedures by allowing a then-proprietary trader and associated person to disregard FINRA licensing requirements and the firmís internal licensing requirements applicable to its proprietary traders. Devito failed to enforce written internal firm trading limits and failed to enforce firm written supervisory procedures concerning the imposition of individual trading limits on proprietary traders by failing to ensure that the individual and other relevant associated persons of the firm understood the meaning and application of the terms of individual trading limits, and by also allowing the associated person to exceed his individual trading limits on several occasions.
Joseph Anthony Devito (Principal): Censured; Fined $10,000
Tags:  Proprietary Traders    WSP    Supervision     |    In: Cases of Note : FINRA
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