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
Internet Securities and Michael Wayne Beardsley (Principal)
AWC/2009020930302/December 2011
Beardsley was a registered representativeís direct supervisor who was responsible for reviewing and approving the representativeís securities transactions, but failed to exercise reasonable supervision over the representativeís recommendations of exchange-traded funds (ETFs) in customersí accounts, thereby allowing the representative to conduct numerous unsuitable transactions. 

As the firmís chief compliance officer (CCO), Beardsley was responsible for ensuring that the firm filed all necessary Uniform Applications for Securities Industry Registration or Transfer (Forms U4), Uniform Termination Notices for Securities Industry Registration (Forms U5) and Rule 3070 reports. The Firm and Beardsley failed to timely amend Beardsleyís Form U4 to disclose the settlement of an arbitration against him, the firm and the registered representative; the firm failed to timely amend a registered representativeís Form U5 to disclose settlement of the arbitration; and the firm and Beardsley failed to timely report the settlement to FINRAís 3070 system

The Firm and Beardsley failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules as they pertain to private placements. The firm and Beardsley failed to conduct investigations of offerings for suitability but relied on information the registered representative who proposed selling the offering provided; never reviewed issuersí financials, nor attempted to obtain information about the issuers from any third parties; failed to maintain documentation of their investigations; allowed a registered representative to draft selling agreements with offerings which allowed the issuer to make direct payment to an entity the representative, not the firm, owned,; failed to implement supervisory procedures to ensure compliance with SEC Exchange Act Rule 15c2-4(b); and failed to implement supervisory procedures to prevent general solicitation of investments in connection with offerings made pursuant to Regulation D. 

The Firmís written procedures required Beardsley to obtain and review, on at least an annual basis, a written statement from each registered representative about his or her outside business activities; despite the fact that several registered representatives were actively engaged in outside business activities, Beardsley failed to obtain any such written statements. 

For almost a three-year period, Beardsley did not request any duplicate statements of outside securities accounts firm employees held; he neither requested nor obtained any written notifications from firm employees concerning their actual or anticipated outside securities activities. In addition, the Firm and Beardsley failed to implement an adequate system of supervisory control policies and procedures regarding testing supervisory procedures for compliance, erroneous criteria for identifying and supervising producing managers, including Beardsley, review and monitoring transmittal of funds or securities, customer changes of address, customer changes of investment objectives, and concomitant documentation for its limited size and resources exception in FINRA Rule 3012. Moreover,he firm and Beardsley completed an annual certification in which Beardsley certified that he had reviewed a report evidencing the firmís processes for establishing, maintaining and reviewing policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, Municipal Securities and Rulemaking Board (MSRB) rules and federal securities laws and regulations; modifying such policies and procedures as business, regulatory and legislative changes and events dictate; and testing the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with FINRA rules, MSRB rules and federal securities laws and regulations. In fact, the report did not evidence any processes for testing the effectiveness of such policies, and no such testing was done.

Furthermore, on the firmís behalf, Beardsley executed an engagement letter committing the firm to serve as a placement agent for an issuer of limited partnership units. The letter, which a registered representative of the firm drafted, falsely represented that the firm was not a registered broker-dealer. 

The Firm and Beardsley failed to enforce the firmís Customer Identification Program (CIP) in that they completely failed to verify four customersí identities. The Firm and Beardsley failed to conduct a test of the firmís anti-money laundering (AML) compliance program for a calendar year. FINRA found that the firm conducted a securities business while failing to maintain its required minimum net capital.

Internet Securities: Censured; Fined $12,500; Required to retain an outside consultant to review and prepare a report concerning the adequacy of the firmís supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firmís size, including, among other things, the firmís revenues and financial resources. 

Michael Beardsley: No fine in light of financial status: Suspended 1 year in Principal capacity only
Tags:  ETF    Private Placement    Suitability    Annual Compliance Certification    Away Accounts    AML    CIP     |    In: Cases of Note : FINRA
November 2011
Brookstone Securities, Inc.,David William Locy (Principal),Mark Mather Mercier (Principal), and Antony Lee Turbeville (Principal)
OS/2009017275301/November 2011

While associated with the firm, registered representatives made misrepresentations or omissions of material fact to purchasers of unsecured bridge notes and warrants to purchase common stock of a successor company.

The registered representatives:

  • guaranteed customers that they would receive back their principal investment plus returns, failed to inform investors of any risks associated with the investments and did not discuss the risks outlined in the private placement memorandum (PPM) that could result in them losing their entire investment. The registered representatives had no reasonable basis for the guarantees given the description of the placement agentís limited role in the PPM; and
  • provided unwarranted price predictions to customers regarding the future price of common stock for which the warrants would be exchangeable and guaranteed the payment at maturity of promissory notes, which led customers to believe that funds raised by the sale of the anticipated private placement would be held in escrow for redemption of the promissory notes.

The Firm, acting through a registered representative, made misrepresentations and/or omissions of material fact to customers in connection with the sale of the private placement of firm units consisting of Class B common stock and warrants to purchase Class A common stock; the PPM stated that the investment was speculative, involving a high degree of risk and was only suitable for persons who could risk losing their entire investment. The representative represented to customers that he would invest their funds in another private placement and in direct contradiction, invested the funds in the firm private placement.

The Representative recommended and effected the sale of these securities without having a reasonable basis to believe that the transactions were suitable given the customersí financial circumstances and conditions, and their investment objectives. The representative recommended customers use margin in their accounts, which was unsuitable given their risk tolerance and investment objectives, and he exercised discretion without prior written authorization in customersí accounts.

Acting through Locy, its chief operating officer (COO) and president, the Firm failed to reasonably supervise the registered representative and failed to follow up on ďred flagsĒ that should have alerted him to the need to investigate the representativeís sales practices and determine whether trading restrictions, heightened supervision or discipline were warranted. Moreover, despite numerous red flags, the firm took no steps to contact customers or place the representative on heightened supervision, although it later placed limits only on the representativeís use of margin. The firm eventually suspended his trading authority after additional large margin calls, and Locy failed to ensure that the representative was making accurate representations and suitable recommendations.

Turbeville, the firmís chief executive officer (CEO), and Locy delegated responsibility to Mercier, the firmís chief compliance officer (CCO), to conduct due diligence on a company and were aware of red flags regarding its offering but did not take steps to investigate. 

Acting through Turbeville, Locy and Mercier, the Firm failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability; under the firmís written supervisory procedures (WSPs), Mercier was responsible for ensuring the offering complied with due diligence requirements but performed only a superficial review and failed to complete the steps required by the WSPs; Locy never evaluated the companyís financial situation and was unsure if a certified public accountant (CPA) audited the financials, and no one visited the companyís facility. Neither Turbeville nor Locy took any steps to ensure Mercier had completed the due diligence process. Turbeville and Locy created the firmís deficient supervisory system; the firmís procedures were inadequate to prevent and detect unsuitable recommendations resulting from excessive trading, excessive use of margin and over-concentration; principals did not review trades or correspondence; and the firmís new account application process was flawed because a reviewing principal was unable to obtain an accurate picture of customersí financial status, investment objectives and investment history when reviewing a transaction for suitability. The firmís procedures failed to identify specific reports that its compliance department was to review and did not provide guidance on the actions or analysis that should occur in response to the reports; Turbeville and Locy knew, or should have known, of the compliance departmentís limited reviews, but neither of them took steps to address the inadequate system.

Brookstone Securities, Inc.: Censured; Fine $200,000

David William Locy (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only

Mark Mather Mercier (Principal): Fined $5,000; Suspended from 3 months in Principal capacity only

Antony Lee Turbeville (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only

Tags:  Private Placement    Suitability    Supervision    Due Diligence     |    In: Cases of Note : FINRA
J.P. Turner & Company, LLC and James Edward McGrath (Principal)
OS/2009016612701/November 2011

McGrath failed to reasonably supervise a registered representative who recommended and effected unsuitable and excessive trading in a customerís account. McGrath had supervisory responsibility over the registered representative and was responsible for reviewing his securities recommendations to ensure compliance with member firm procedures and applicable securities rules. McGrath failed to reasonably supervise the registered representative by, among other things, failing to enforce firm account procedures and failing to respond to red flags regarding the registered representativeís trading activity in the customerís account.

The firmís supervisory procedures required McGrath to review account transactions, such as the registered representativeís recommended transactions in the customerís account, on a daily and monthly basis for, among other things, general suitability, excessive trading and churning, in-and-out trading and excessive commissions and fees; the firmís procedures also required that McGrath review all exception reports related to the individuals who he supervised and take appropriate measures as necessary. Through these required reviews, McGrath was aware of red flags of possible misconduct in the customerís account, including frequent short-term trading, excessive commission and margin charges, high turnover and cost-to-equity ratios, and substantial trading losses, and the account frequently appeared on the firmís exception reports; McGrath failed to reasonably respond to and address the red flags in the customerís account.

McGrath never spoke with the customer despite the fact that the firmís compliance department sent several emails to McGrath advising him that the customerís account needed customer contact as required by the firmís WSPs; McGrath never spoke with the customer directly to confirm that he was aware of the activity level in his account or that such activity was appropriate in light of his financial circumstances and investment objectives.

McGrath failed to ensure that an Active Account Suitability Supplement and Questionnaire was sent to the customer within the time frame the firmís WSPs required. Moreover, months after the registered representative began trading in the customerís account, McGrath instructed the registered representative to curtail the short-term trading in the account and hold positions for a longer period; that was the only time McGrath spoke to the registered representative about the customerís account. Furthermore, McGrath reduced the registered representativeís commissions for purchases in the customerís account, but this measure did not have the desired impact; the registered representative actually increased the number of purchases and frequency of short-term trading to offset the effects of the commission reduction until the customer closed the account after suffering losses of approximately $120,000.

McGrath failed to take any action against the registered representative based on his failure to comply with his instructions; among other things, McGrath never restricted the trading in the customerís account, spoke to the customer, placed the registered representative on heightened supervision, recommended disciplinary measures against him to address these concerns, or spoke with the firmís compliance department regarding the supervision of the registered representative. The firm allowed the registered representative to effect transactions in the customerís account for months without obtaining a signed and completed new account form from the customer, and failed to enforce its review of active accounts as the WSPs required. The firm failed to send a required suitability questionnaire to the customer until almost a year after the account had been opened and suffered significant losses, failed to qualify his account as suitable for active trading and failed to perform a timely quarterly review of the account.

J.P. Turner & Company, LLC: Censured; Fined $20,000

James Edward McGrath (Principal): Fined $5,000; Suspended 10 business days in Principal capacity only

Tags:  Suitability    Supervision    Commissions     |    In: Cases of Note : FINRA
Bill Singer's Comment

What really stopped me in my tracks was the allegation that McGrath cut the RR's commissions for purchases but this resulted in the RR's increasing buy orders and the frequency of short-term trades. Frankly, if a supervisor even thinks that it's necessary to cut commissions in order to promote better compliance practices by an RR, it might simply be a good time to fire the RR rather than keep your fingers' crossed -- particularly if you're not reaching out to the customers for insight. 

A very generous settlement offer from FINRA to McGrath given the widespread nature of the allegations.

Steven Krasner aka Steven Zarkhin
AWC/2009019995901/November 2011

Krasner made unsuitable recommendations to a customer who was a retiree and inexperienced investor

Although the customer agreed to each of Krasnerís recommendations, Krasner employed a trading strategy that was not suitable for the customerís particular financial situation. The customer had indicated in account opening documents that he had an investment objective of capital preservation and a low risk tolerance. 

Krasner recommended the use of margin to execute trades in the customerís account and at times exposed the customer to inappropriate financial risk. Krasner never read the customerís account opening documents, though they were available to him, and was unaware of the customerís financial situation and risk tolerance, as stated in the account opening documents.

Krasnerís member firmís database and computer platform that he used to place trades, as well as the account statements that were mailed to the customer each month, inaccurately indicated that the investment objective was speculation.  In his conversations with the customer, Krasner never confirmed the accuracy of the investment objective. Krasner employed a short-term and speculative trading strategy of short selling stock and using margin. Since Krasner was not fully aware of the customerís stated financial condition, he based his recommendations on the erroneous view that the customer could absorb the high risks of these transactions. 

The customer frequently spoke with Krasner on the phone, gave Krasner express permission to execute the recommended trades and informed Krasner that he was willing to engage in some speculation. Furthermore, Krasner based his recommendations on his conversations with the customer and the firmís inaccurate database, not the accurate financial information that was contained in the account opening documents. 

Krasner executed solicited trades in the customerís account, while charging the account $51,790 in commissions and fees. Although several of the individual trades were profitable, including commissions, the customerís account lost $54,160 in net value, dropping from a net equity value of $162,571 to $108,410.

Steven Krasner aka Steven Zarkhin : Fiend $10,000; Ordered to disgorge to a customer $18,126.81 (payable as partial restitution); Suspended 2 months
Tags:  Suitability    Margin     |    In: Cases of Note : FINRA
Bill Singer's Comment
Ah, this answers a frequently asked question: What if the customer agrees to engage in "unsuitable" trading?  As I've often noted to my clients, suitability is suitability is suitability.  If a customer says it's okay to engage in reckless or inappropriate trading, then you probably should drop the account.  If you don't, you may well have transformed yourself and your brokerage firm into an insurance policy for the client:  If the trades are profitable, the client will keep the profits; however, if the trades are unprofitable, the client may sue you and you could be found to have recommended unsuitable trades and be forced to cough up the bucks.
October 2011
Capital Financial Services, Inc.
AWC/2009019125903/October 2011

The Firm failed to have reasonable grounds to believe that private placements offered by two entities pursuant to Regulation D were suitable for any customer.

The Firm began selling the offerings for one entity after its representatives visited the issuerís offices to review records and meet with the issuersí executives; the firm also received numerous third-party due diligence reports for these offerings but never obtained financial information about the entity and its offerings from independent sources, such as audited financial statements.

Despite the issuerís assurances, the problems with its Regulation D offerings continued; the issuer repeatedly stated to the firmís representatives that the interest and principal payments would occur within a few weeks, and the issuer made some interest payments but failed to pay substantial amounts of interest and principal owed to its investors, and these unfulfilled promises continued until the SEC filed its civil action and the issuerís operations ceased.

In addition to ongoing delays in making payments to its investors, the firm received other red flags relating to the entityís problems but continued to allow its brokers to sell the offering to their customers; in total, the firmís brokers sold $11,759,798.01 of the offering to customers.

Despite the fact that the firm received numerous third-party due diligence reports for the other entitiesí offering, it never obtained financial information about the issuer and its offerings from independent sources, such as audited financial statements, and although it received a specific fee related to due diligence purportedly performed in connection with each offering, the firm performed little due diligence beyond reviewing the private placement memoranda (PPM) for the issuerís offerings. The firmís representatives did not travel to the entityís headquarters to conduct any due diligence for these offerings in person and did not see or request any financial information for the entity other than that contained in the PPM.

The Firm obtained a third-party due diligence report for one of the offerings after having sold these offerings for several months already; this report identified a number of red flags with respect to the offerings. Moreover, the firm should have been particularly careful to scrutinize each of the issuerís offerings given the purported high rates of return but did not take the necessary steps, through obtaining financial information or otherwise, to ensure that these rates of return were legitimate, and not payable from the proceeds of later offerings, in the manner of a Ponzi scheme. Furthermore, the firm also did not follow up on the red flags documented in the third-party due diligence report; even with notice of these red flags, the firm continued to sell the offerings without conducting any meaningful due diligence.

The Firm failed to have reasonable grounds for approving the sale and allowing the continued sale of the offerings; even though the firm was aware of numerous red flags and negative information that should have alerted it to potential risks, the firm allowed its brokers to continue selling these private placements.The firm did not conduct meaningful due diligence for the offerings prior to approving them for sale to its customers; without adequate due diligence, the firm could not identify and understand the inherent risks of these offerings.The Firm failed to enforce reasonable supervisory procedures to detect or address potential red flags and negative information as it related to these private placements; the firm therefore failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.

Capital Financial Services, Inc.: Censured; Ordered to pay $200,000 restitution to investors
Tags:  Private Placement    Suitability    Due Diligence     |    In: Cases of Note : FINRA
Bill Singer's Comment
Folks, if this case doesn't make it abundantly clear, if you're going to traffick in the sale of private placements, you gotta go to the car lot and kick the tires.  The days of pushing the paper and getting the non-refundable due dilly fee are over.
August 2011
Miguel Angel Murillo
OS/2008014728701/August 2011

Murillo recommended and effected excessive transactions in a customerís account that were unsuitable in light of the customerís financial situation, needs and investment objectives.

Murillo controlled and directed the trading in the customerís account by recommending and executing all the transactions in the account. The customer was unable to evaluate Murilloís recommendations, did not understand the meaning of ďmargin,Ē and was unable to exercise independent judgment concerning the transactions in the account due to his lack of investment knowledge and limited English skills; the customer trusted Murillo completely to make and execute recommendations in his account.

Murillo did not have a reasonable basis for believing that the volume of trading he recommended was suitable for the customer in light of information he knew about the customerís financial circumstances and needs, and given the amount of commissions and fees the customer was charged; and as a result, the transactions Murillo recommended and executed were unsuitable, even if the investment objectives were speculative as reflected on the customerís new account form. The customer told Murillo that he wanted a conservative retirement account set up because he was nearing retirement age and could not risk any losses with his funds; nevertheless, the new account forms listed the customerís investment objective as speculation and his risk tolerance as aggressive.

The trades were excessive in number and resulted in excessive costs to the customerís account, and the vast majority of the transactions in the customerís account were effected through the use of margin and resulted in the customer incurring additional costs in the form of margin interest. In addition, Although the customer signed a pre-completed margin agreement, along with other pre-completed new account forms Murillo sent to him, the customer did not understand margin and did not realize that Murillo was effecting trades on his account on margin. Moreover, owing to the customerís lack of investment knowledge and inability to decipher his monthly account statements, the customer was unaware that he had a margin balance and did not understand the risk of the margin exposure in his account; at one point, the customerís account had a margin balance of approximately $106,818.52 while the accountís equity was approximately $67,479.98. The transactions on margin Murillo effected in the customerís account were unsuitable for the customer in view of the size and nature of the account and the customerís financial situation and needs.

Miguel Angel Murillo: No fine in light of financial status; Suspended 20 business days; Ordered to pay partial restitution of $35,000 to a customer
Tags:  Suitability    Foreign Language         |    In: Cases of Note : FINRA
July 2011
National Securities Corporation and Matthew G. Portes (Principal)
AWC/2009019068201/July 2011

National Securities failed to have reasonable grounds to believe that certain private placements offered pursuant to Regulation D were suitable for customers. Acting through Portes, as the firmís Director of Alternative Investments/Director of Syndications, National failed to adequately enforce its supervisory procedures to conduct adequate due diligence as it relates to an offering. Portes and the firm became aware of multiple red flags regarding an offering, including liquidity concerns, missed interest payments and defaults, that should have put them on notice of possible problems, but the firm continued to sell the offering to customers. Acting through Portes, the Firm failed to enforce its supervisory procedures to conduct adequate due diligence relating to other offerings.

Portes reviewed the PPMs for these offerings and diligence reports others prepared, but the review was cursory.The due diligence reports noted significant risks and specifically provided that its conclusions were conditioned upon recommendations regarding guidelines, changes in the PPMs and heightened financial disclosure of affiliated party advances, but the firm did not investigate, follow up on or discuss any of these potential conflicts or risks with either the issuer or any third party. In addition, acting through Portes, the Firm failed to enforce reasonable supervisory procedures to detect or address potential ďred flagsĒ as related to these offerings; and the firm, acting through Portes, failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.

National Securities Corporation: Censured; Odered to pay a total of $175,000 in restitution to investors.

Matthew G. Portes  (Principal): Fned $10,000; Suspended from association with any FINRA member in any principal capacity only for 6 months.

Tags:  Due Diligence    Suitability        Private Placement     |    In: Cases of Note : FINRA
Bill Singer's Comment
FINRA is starting to make a point about Due Diligence of private placements -- you need to inquire and if you're on notice of problems (potential or otherwise), you better start to inquire.  There's no more wiggle room when it comes to these red-flag situations.
June 2011
Uzo Omar Chima (Principal)
AWC/2006007105101/June 2011

Chima engaged in a pattern of unsuitable short-term trading and switching of unit investment trusts (UITs), closed-end funds (CEFs) and mutual funds in retired and/or disabled customer accounts without having reasonable grounds for believing that such transactions were suitable for the customers in view of the nature, frequency and size of the recommended transactions and in light of their financial situations, investment objectives, circumstances and needs. Some of the transactions were effected through excessive use of margin and without ensuring that customers received the maximum sales charge discount. In furtherance of his short-term trading strategy, Chima engaged in discretionary trading without prior written authorization, falsified customer account update documents and mismarked trade tickets for each of the customersí accounts, stating that the orders were unsolicited when, in fact, they were solicited.

The transactions generated approximately $450,000 in commissions for Chima and his firm, and approximately $370,000 in losses to the customers; some customers also paid over $75,000 in margin interest. In numerous UIT purchases, none of which exceeded $250,000, Chima failed to apply the rollover discount to which each customer was entitled.

Chima caused his member firmís books and records to be false in material respects, in that he provided false information on customer update forms for customersí accounts, signed the forms certifying that they were accurate and submitted them to his firm.

Uzo Omar Chima (Principal): Fined $75,000; Suspended 2 years; Ordered to pay $12,443.73, plus interest, in restitution to customers.
Tags:  Mutual Funds    UIT    Trading    Suitability     |    In: Cases of Note : FINRA
Bill Singer's Comment
I'm puzzled -- what exactly did Chima need to do beyond the allegations in order to be Barred?
April 2011
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.
Workman Securities Corporation
AWC/2009018818401/April 2011

The Firm failed to:

  • have reasonable grounds to believe that a private placement an entity offered pursuant to Regulation D was suitable for any customer, after it received red flags that the entity had financial issues and was not timely making interest payments, but continued to sell the offering to customers;
  • enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of private placements;
  • conduct adequate due diligence of the private placements or confirm that its representatives were doing their own due diligence;
  • conduct adequate due diligence of private placements other entities offered; and
  • enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of the private placements the entities offered pursuant to Regulation D.

The Firm reviewed cursory private placement memoranda (PPMs) for the offerings but failed to investigate red flags or analyze third-party sources of information or take affirmative steps to ensure the information in the offering documents was accurate.

The Firm failed to preserve electronic communications in a non-rewritable, non-erasable or ďWORMĒ format that complied with books and records requirements, and the firm used third-party software for storing and retaining electronic communications that did not comply with the requirements of SEC Rule 17a-4(f). Although the Firm was informed that its electronic storage medium was non-compliant but did not take adequate remedial action to retain email properly.

Workman Securities Corporation : Censured; Ordered to pay $700,000 as partial restitution to investors; Ordered to certify in writing to FINRA that it has established and implemented a system and procedures reasonably designed to achieve compliance with recordkeeping requirements related to electronic communications, and provide a written report to FINRA describing the policies, procedures and controls it has established and implemented related to the integrity of the retention and retrieval process for electronic communications, and the supervisory system it has implemented to oversee the preservation of electronic communications.
Bill Singer's Comment
In 2011 we see a continuation of FINRA's enforcement focus on private placements, with an emphasis on members' responses to "red flags" and the sincerity of the firm's due diligence efforts.  The day's of taking a piece of a private placement and sleepwalking through your obligations to your clients is a vestige of the past.  There's no easy money in Reg D. You have to do your homework and put your money where your mouth is.
March 2011
Puritan Securities Inc. aka First Union Securities, Inc.
AWC/2008012927503/March 2011

The Firm entered into an agreement with an entity to sell a private placement for which the firmís brokers sold $1,415,940 of the private placement interests to customers, and the firm failed to create and maintain a reasonable supervisory system to detect and prevent sales practice violations in these transactions. The firm did not collect financial and other relevant information for the customers who purchased the private placement, and did not review these transactions to determine if the recommendations for the purchases were suitable for these customers.

Also, the firm failed to implement a supervisory system reasonably designed to review and retain electronic correspondence. The firm did not establish an email retention system that captured all of its brokersí emails. The firmís brokers were allowed to use email addresses using external domains, and the firm did not have the capability to review, capture and retain these emails.

Puritan Securities Inc. aka First Union Securities, Inc.: Censured; Fined $10,000 (in light of the firm's revenues and financial resources, a "lower fine" was imposed)
Tags:  Private Placement    Suitability    Due Diligence    Electronic Communications    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
As I've noted over the years, permitting registered persons to use email addresses that are off the firm's platform poses significant supervisory issues.  Here, brokers were permitted to use external domains but the firm did not have the ability to review, capture, and retain the subject communications. That's going to be a problem for FINRA.
January 2011
Cambridge Legacy Securities, L.L.C. and Tommy Edward Fincher (Principal)
AWC/2009020319001/January 2011

Cambridge failed to have reasonable grounds to believe that a private placement offered pursuant to Regulation D was suitable for any customer.

Acting through Fincher, its Chief Compliance Officer and registered principal, the Firm failed to

  • conduct adequate due diligence of the private placement offering before allowing its brokers to sell the security,
  • maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and
  • enforce reasonable supervisory procedures to detect or address potential red flags as it related to the offering.

Fincher was the principal responsible for conducting due diligence on the offering and approved the security as a new product available for firm brokers to sell to their customers; he allowed the firmís brokers to continue selling the security despite its ongoing failure to make overdue interest and principal payments. The Firm failed to have reasonable grounds for allowing the continued sale of the security even though the firm, through Fincher, was aware of numerous red flags concerning liquidity problems, delinquencies and defaults, but allowed its brokers to continue selling the security.

Cambridge Legacy Securities, L.L.C.:Censured; Ordered to pay $218,400 in restitution to customers. If the firm fails to provide FINRA with proof of restitution, it shall immediately be suspended from FINRA membership until such proof has been provided.

Tommy Edward Fincher: Fined $5,000; Suspended 6 months in Principal capacity only.

Tags:  Private Placement    Suitability     |    In: Cases of Note : FINRA
Bill Singer's Comment
Among the notable warnings from FINRA to start off 2011 is its concern that supervisors may not be connecting the dots when confronted with so-called "red flags." In this case, we see a private placement that is emanating trouble in terms of failed payments and other indicia of potential problems. Clearly, if your firm is going to go down the Reg D road, you're goint to have to keep your eyes and ears open to a far greater extent than was required in years past.
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