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.
A&F Financial Securities, Inc. AWC/2008011649201/December 2010
The Firm failed to
create and maintain adequate records of customer complaints,
report timely statistical and summary information concerning the complaints, and
timely report the settlement of one of the complaints.
timely update a registered person’s Uniform Application for Securities Industry Registration or Transfer (Form U4) upon learning of the facts and circumstances giving rise to the amendments.
implement its own heightened supervisory procedures with respect to registered representatives on heightened supervision.
When establishing its heightened supervision procedures, the firm decided to exclude brokers on heightened supervision from its monthly surveillance report; accordingly, the activities of the registered representatives under heightened supervision were not shown. The special supervisor designated to manually review all trades of registered representatives on heightened supervision for suitability and excessive trading relied on his manual review when determining which accounts should be reviewed and contacted “for cause,” rather than choosing clients at random and with cause based on trading activity. FINRA found that this was inadequate because the manual review failed to identify numerous accounts that had turnover ratios in excess of six times the average equity annualized.
A&F Financial Securities, Inc. : Censured; Fined $27,500
Schmelzer failed to fulfill his supervisory responsibilities over the activities of a registered representative under his supervision at his member firm. The registered representative recommended that his insurance business customers participate in a Stock to Cash program, offered by a third-party entity under which customers would pledge stock to obtain loans to purchase other products; and the representative’s customers, including clients of the firm, participated in the program at his recommendation, obtaining loans of more than $4.2 million in the aggregate.
Schmelzer failed to ensure that the registered representative promptly disclose his participation in the program to the firm, and failed to ensure that the registered representative promptly disclose to his firm his recommendations that his customers utilize the program, even after he learned that the representative had ignored his prior instruction to make such disclosure. As a result of Schmelzer’s supervisory deficiencies, the representative engaged in conduct that the firm deemed inappropriate and which potentially put the firm’s clients’ assets at risk.
Cory Todd Schmelzer (Principal): Fined $7,500; Suspended 15 business days in Principal capacity only
Jack Clark Smith Jr.(Principal) AWC/2007011125102/December 2010
In his capacity as the president of a member firm, Smith failed to reasonably supervise a firm registered principal.
Smith did not take steps to inquire into red flags indicating the registered principal’s possible misconduct, and failed to follow-up on the registered principal’s outside business activities and excessive absences from the firm. Smith subsequently failed to timely investigate allegations that the registered principal was participating in private securities transactions away from the firm, and once the firm confirmed the selling away activities, Smith, in his capacity as president, took no steps to place the registered principal on heightened supervision.
Jack Clark Smith Jr.(Principal): Fined $15,000; Suspended 25 business days
Clinton James Lewis (Principal) AWC/2009016863001/November 2010
Lewis was responsible for supervising a registered representative of his member firm and for reviewing the firm’s receipt and forwarding of customer funds, but he failed to properly supervise the registered representative, who converted funds from customers. The registered representative wrote checks from his outside business that were made payable to the firm to fund investments for one of his customers. Lewis reviewed these checks and failed to ask the registered representative why his business was providing the funds for the customer’s investments. Lewis failed to contact the customer to determine whether the amount invested was correct, which could have been detected and would have prevented the registered representative’s conversion of customer funds.
Clinton James Lewis (Principal): Fined $5,000; Suspended 10 business days in Principal capacity only with the exception that he may continue to act as an Options Principal
Guy Steven Amico (Principal) AWC/2007007151705/October 2010
As his member firm’s president, Amico failed to adequately supervise the firm’s chief compliance officers (CCOs) and AML compliance officers (AMLCOs). Amico knew, or should have known, of substantive violations of FINRA rules and the potential inadequacy of firm compliance personnel through FINRA exit conference reports that the firm failed to
properly report customer complaints and other reportable matters,
make Form U4 or Form U5 amendments to report disclosable events, and
timely amend Forms U4 or U5.
Amico received FINRA exit conference reports regarding violations of the BSA and FINRA AML rules. Amico received SEC written findings identifying suspicious penny stock transactions, AML program issues and reporting deficiencies.
As the president and owner of the firm, Amico was responsible for the firm’s compliance with regulatory requirements imposed on the firm and knew, or should have known, that the firm’s CCOs and AMLCOs were not performing the compliance functions designated to them. Amico knew through FINRA exit conference reports and SEC written findings that the firm, through the CCOs and AMLCOs, was not in compliance with BSA requirements and NASD Rule 3011, was not making necessary filings under NASD Rule 3070 and Article V, Sections 2 and 3 of FINRA’s By-Laws, and that one of the CCOs/AMLCOs had a disciplinary history but failed to take affirmative steps to ensure that they were performing the AML and reporting functions delegated to them.
Guy Steven Amico (Principal): Fined $100,000; Suspended Principal capacity only 4 months; Required to complete 8 hours of AML Training; Required to register for AML training within 60 days of issuance of the AWC and provide evidence to FINRA of the registration within 10 days of registration; attend such training within six months of issuance of this AWC and provide FINRA with evidence of completion of training within 10 days of completion of the training program.
Richard Michael Barber (Supervisor) OS/2008015310801/October 2010
Barber failed to reasonably supervise the activities of a registered representative who entered transactions at the direction of an unregistered individual. Barber facilitated this misconduct by giving the unregistered individual unfettered access to a branch office and supplying him with a work station, including a desk, phone and Internet access. Barber failed to enforce his member firm’s written supervisory procedures regarding, among other things, delegation of duties, suitability reviews and reviews for concentrated positions.
Richard Michael Barber (Supervisor): Fined $5,000; Barred in Principal capacity only; Suspended 1 month in all capacities
Scott Howard Goldstein (Principal) AWC/2007007151706/October 2010
As his member firm’s CEO, Goldstein knew, or should have known of substantive violations of FINRA rules and the potential inadequacy of firm compliance personnel. The firm’s AML compliance program, as its CCOs and AMLCOs administered, did not fully comply with the requirements of the BSA and regulations thereunder, and therefore violated NASD Rule 3011. Goldstein knew through FINRA exit conference reports, firm responses to the reports and the SEC’s written findings, that the firm, through its CCOs and AMLCOs, was not in compliance, and FINRA expressly identified firm customers who had problematic backgrounds and/or engaged in suspicious transactions but Goldstein did not take affirmative steps to ensure that the CCOs/AMLCOs were performing the AML functions delegated to them. Goldstein knew that one of the CCOs/AMLCOs had a FINRA disciplinary history and had engaged in supervisory deficiencies. FINRA found that the firm, through its CCOs/AMLCOs, failed to report numerous customer complaints reportable under NASD Rule 3070(c) and other reportable events under 3070(b), failed to make Forms U4 or U5 amendments to report disclosable events in numerous instances, and failed to timely amend a Form U4 or U5 in numerous other instances. Goldstein knew through FINRA exit conference reports, firm responses to the reports and SEC written findings that the firm, through the CCOs/AMLCOs, was not making the necessary filings but did not take any affirmative steps to ensure that they were performing reporting functions.
Scott Howard Goldstein (Principal): Fined $100,000; Suspended 1 year in Principal capacity only; Required to complete eight hours of AML training. Goldstein must register within 60 days of issuance of the AWC for the AML training and provide FINRA with proof of evidence of registration within 10 days of registration, attend such training within six months of issuance of the AWC and provide FINRA with evidence of completion of training within 10 days of completion.
Cambridge Legacy Securities, L.L.C. Oran Ben Carroll (Principal), and Russell Kent Childs (Principal) AWC/2007010684401/September 2010
Acting through Carroll, its president and registered principal, the Firm failed to adequately implement a supervisory system designed to achieve compliance with applicable securities laws and regulations; specifically, the firm and Carroll failed to implement an adequate system to supervise a branch office’s activities in light of deficiencies identified during branch audits, and failed to appoint a properly qualified principal to supervise the branch office’s activities.
The Firm allowed Carroll and Childs to accept, and they did accept, a gift and/or gratuity in excess of $100 from the president and general partner of an entity that offered an alternative investment product, and Childs sold almost $6 million of that product to customers at the firm’s branch office.
The Firm failed to properly maintain its email communications and, acting through Carroll, failed to have a procedure in place to ensure that his own email, which was designated as legal and confidential, was properly maintained and reviewed. The Firm failed to establish and maintain an adequate supervisory system in the areas of internal communications and correspondence.
The Firm charged both commissions and advisory fees on transactions in alternative investment products whose offering documents specifically prohibited such activity.
charged customers commissions, in the amount of $434,589.03, and an annual percentage-based advisory fee on transactions in alternative investments; and
made unsuitable recommendations to customers and had no reasonable basis for believing that his recommendations of nonliquid alternative investments were suitable for the customers in light of their age, financial needs, annual income, liquid net worth and risk tolerance.
Cambridge Legacy Securities, L.L.C.:Censured, Fined $50,000; Ordered to pay $21,864.74, plus interest, inrestitution to customers; If the firm fails to provide proof of restitution within 15 days, it shall be immediately suspended from FINRA membership until proof has been provided
Oran Ben Carroll (Principal): Fined $25,000; Suspended 3 months in Principal only capacity
Russell Kent Childs (Principal): Fined $25,000; Ordered to pay $412,724.28, plus interest, in restitution to customers;Suspended 9 months in all capacities; If Childs fails to provide proof of restitution within 15 days, he shall be immediately suspended from association with any member in any capacity until proof has been provided
Joseph Anthony Devito (Principal) AWC/2007008882403/September 2010
Devito failed to enforce his member firm’s 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 firm’s written supervisory procedures by allowing a then-proprietary trader and associated person to disregard FINRA licensing requirements and the firm’s 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
George Ernest Reilly (Principal) 2007007329501/August 2010
Reilly failed to establish and maintain a supervisory system with written supervisory procedures reasonably designed to prevent excessive markups in CMO bond transactions, and failed to exercise his supervisory responsibilities to ensure that the firm’s CMO trader and other firm representatives complied with NASD Rules 2110 and 2440. Reilly made notations of his reviews of CMO trades for markups on a daily trade blotter but did not conduct reviews to ensure that the markups were fair, reasonable and consistent with market prices. Reilly had the authority to reverse or cancel CMO trades for unreasonable or excessive markups but did not do so, despite the fact that under his supervision, markups for CMO transactions were excessive.
did not have a qualified individual to supervise the conduct of the firm’s head of research, who was a senior research analyst—but instead permitted senior principals to supervise the analyst when they were not qualified to do so;
reviewed and approved its research reports prior to use, but did not evidence such approval; as a result, the firm issued research reports that were not approved by a registered principal’s signature or initial;
failed to adopt or implement written supervisory procedures reasonably designed to achieve compliance with applicable rules regarding the supervision of research activity and the approval of research reports;
failed to attest annually (for two years) that it had adopted and implemented such procedures, and that the firm failed to make or obtain research analyst attestations in connection with their public appearances as Securities and Exchange Commission (SEC) Regulation AC required.
Valores Finamex International, Inc. and Vincent Anthony Buchanan (Principal) AWC/2009016196001/April 2010
Acting through Buchanan, Valores Finamex failed to produce evidence of Buchanan’s review of a registered representative’s correspondence. The Firm’s written supervisory procedures failed to
identify the registered representative as a producing manager,
contain procedures reasonably designed to provide heightened supervision over the activities of each producing manager who is responsible for generating 20 percent or more of the revenue of the business units supervised by the producing manager’s supervisor, and
assign a qualified supervisor to supervise the registered representative.
The Firm permitted Buchanan to conduct a securities business while he was “Continuing Education Inactive.” Also, the Firm failed to
send an annual privacy notice to its customers;
provide an explanation to its customers of their right to opt out of disclosure of nonpublic personal information to nonaffiliated third parties; and
establish policies and procedures that address and review administrative, technical and physical safeguards for the protection of customer records and information involved in the outsourcing of compliance and operations functions to nonaffiliated third parties.
The Firm effected Trade Reporting and Compliance Engine-eligible securities trades and failed to report, or properly report, those transactions.
Valores Finamex International, Inc.: Censured; Fined $27,500 ($10,000 of which was jointly and severally with Buchanan).
Vincent Anthony Buchanan: Fined $10,000 jointly and severally with Valores Finamex; Suspended in Principal capacity only for 20 business days.
The firm failed to adequately respond to “red flags”generated by its exception report systems to review trading by its brokers to identify potentially improper trades or potentially inappropriate sales practices, including potential excessive trading or other potentially unsuitable transactions in retail customers accounts. The firm failed to establish, maintain and enforce adequate written supervisory procedures to provide guidance to supervisors and compliance personnel for review of transactions for suitability and excessive trading.
Registered Principal Mock prepared false documents relating to his member firm’s annual reports of its supervisory control system and annual certification of its compliance and supervisory processes for several years, which he later provided to FINRA. Mock backdated the documents to make them appear that they were prepared and executed on earlier dates.
Edgar Davis Mock III : Fined $5,000; Suspended 1 year in Principal capacity only
Registered representatives at Registered Principal Montes' member firm who used options strategies in their customer accounts, repeatedly became subject to active account surveillance and appeared on compliance department spreadsheets when their customer accounts sustained losses from voluminous stock and options transactions. Despite being made aware of “red flags” indicating that unsuitable and excessive trading was occurring in customer accounts, Montes failed to take reasonable supervisory steps to respond to the “red flags” with a view toward preventing the unsuitable and excessive trading and did not adequately investigate the representatives’ options trading.
George Albert Montes: Fined $15,000; Suspended 1 year in Principal capacity only; Required to requalify by examination before acting in any principal capacity with a FINRA member.
Registered Principal Busacca failed to reasonably supervise the firm's operations and failed to diligently address numerous problems at the firm, including, but not limited to, inaccurate box counts, accurate securities position records, violations of section 220.8 of Regulation T of the Federal Reserve Board, failing to maintain margin requirements, failing to report data pursuant to NASD Rule 3150 and problems with transfers of customers’ accounts. As the firm’s President, Busacca permitted a non-registered person to act in a principal capacity as the firm’s chief compliance officer.
The FINRA Hearing Panel (OHO) suspended Busacca for six months in all principal capacities and fined him $25,000 for failing to reasonably supervise the operations of North American Clearing, Inc., f/k/a Advantage Trading Group, Inc. (hereinafler, “North American” or the “Firm”), in violation ofNASD Rules 3010 and 2110. The OHO Panel also fined Busacca $5,000 for permitting North American, as its president, to employ an unregistered chief compliance officer, in violation of NASD Rules 1022 and 2110. On appeal, FINRA's National Adjudicatory Council (NAC) sustained the OHO's findings and sanctions.
This decision has been appealed to the SEC and the sanctions are not in effect pending consideration of the appeal.
John Brian Busacca III : Fined $30,000; Suspended 6 months in Principal Capacity only
Registered Principal Fence was responsible for the supervision of a representative and failed to take appropriate action to supervise the activities of the representative who was engaged in excessive and unsuitable trading in bonds and mutual funds in elderly customers’ accounts. The representative made these recommendations without having a reasonable basis for believing that they were suitable based on the customers’ investment objectives, financial situation and needs. Fence failed to take appropriate action to supervise the representative that was reasonably designed to prevent his violations and to achieve compliance with applicable rules.
Karen L. Fence : Fined $5,000; Suspended 6 months in Principal capacity only
Registered Principal Peterson was responsible for contacting representatives at his member firm whose accounts appeared on the active account surveillance reports to investigate the activity and contact the customers, if necessary. Despite being made aware of frequent transactions in customers’ accounts, Peterson failed to reasonably respond to “red flags” indicating unsuitable and excessive trading by not contacting the customers nor restricting activity in the accounts. Peterson relied on the representatives’ unsubstantiated and false claims and order entry records.
Melvin Lee Peterson: Fined $15,000; Suspended 1 year in Principal capacity only; Required to requalify by examination before acting in any principal capacity with any FINRA member.
Nomura Securities International, Inc. AWC/2007011877901/March 2010
The Firm failed to reasonably supervise or control certain of its business activities, provide for appropriate procedures of supervision and control, and establish a separate system of follow-up and review to determine that delegated authority and responsibility was being properly exercised. The Firm failed to follow certain of its written supervisory procedures for the domestic securities lending desk, failed to create and maintain adequate evidence of its compliance with its supervisory procedures for the domestic securities lending desk, failed to detect and prevent a securities lending supervisor from engaging in self-supervision, and permitted a person who was not registered with, qualified by or found acceptable to the New York Stock Exchange (NYSE) to regularly perform the duties customarily performed by a securities lending representative, for a brief period of time.
Nomura Securities International, Inc. : Censured; Fined $75,000
Eric Lowell Small (Principal) AWC/2007007345601/February 2010
While associated with his former member firm as a registered principal but not registered as a research analyst or a research principal, Small supervised the conduct of the firm’s research analysts, including approving research reports they prepared and that his firm issued.
Small failed to establish and maintain adequate supervisory procedures concerning the review of
incoming and outgoing hard copy correspondence at the firm’s branch offices that he was in charge of, and
outside investment activity of registered representatives at the firm.
The Firm's procedures indicated that a supervisory principal must review all correspondence, but these procedures were not reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules. The procedures were inadequate in that they contained insufficient detail concerning how and when such reviews were to occur, and the firm had no written supervisory procedures addressing the review of outside brokerage accounts. Small failed to establish, maintain and enforce adequate written supervisory control procedures relating to
NASD Rule 3012(a)(2)(B) and its requirement that members establish, maintain and enforce procedures reasonably designed to review and monitor transmittals of funds or securities between customers and registered representatives, and
NASD Rule 3012(a)(2)(C) and its requirement of an analysis and determination of whether producing branch office managers should have been subjected to heightened supervision.
Eric Lowell Small (Principal): Fined $17,500; Suspended 10 business days in Principal capacity only
George Ernest Reilly (Principal) 2006006518904/February 2010
Reilly failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules for market making and for supervising market making activities and the activities of registered representatives.
Reilly failed to develop and implement an AML compliance program, as required by the Bank Secrecy Act, reasonably designed to detect suspicious money movements and trading activities in corporate customers’ account, investigate the activity and make the appropriate Suspicious Activity Report (SAR) filing. The firm’s AML program lacked procedures on monitoring and preventing money laundering and did not explain what follow-up would be required if a money laundering “red flag”was detected or when a SAR must be filed. Reilly failed to detect and investigate the suspicious nature of transactions in a representative’s corporate customer’s account.
George Ernest Reilly (Principal): Fined $50,000; Suspended 2 years in Principal capacity only.
Michael Thomas DiPuppo (Supervisor) and Robert Michael DiPuppo AWC/2008013742101/February 2010
The DiPuppos member firm had in place a supervisory system for the firm’s variable annuity transactions specifying that variable annuity transactions that exceeded 50 percent of the lower end of the customer’s net worth bracket required additional supervisory review concerning potential liquidity issues. The DiPuppos disagreed with the firm’s policy and, to circumvent the system, they altered the net worth of customers to a higher bracket to avoid the 50 percent threshold that would have flagged them on a report and required additional review. By altering customer net worth information, the DiPuppos caused their firm’s books and records to be false. Michael DiPuppo failed to carry out supervisory responsibilities to ensure that new account forms and annuity applications documents that Robert DiPuppo and other registered representatives in his branch submitted were accurate
Michael DiPuppo: Fined $15,000; Suspended 90 days in all capacities
Robert DiPuppo: Fined $10,000; Suspended 30 days in all capacities
Westrock Advisors, Inc. AWC/2007008162201/February 2010
The Firm failed to file required attestations that it adopted and implemented written supervisory procedures reasonably designed to ensure that the firm and its employees complied with provisions of NASD Rule 2711(i) governing research analysts and research reports. The Firm failed to adequately supervise its research analysts, including supervising communications between the research analysts and subject companies, and documenting its monitoring of trading in research analysts’ brokerage accounts. The Firm issued research reports that failed to accurately disclose material facts.
The Firm allowed its research analysts to use third-party email systems but did not reasonably enforce a system to audit or review their email correspondence.
The Firm permitted an individual registered as a General Securities Principal and General Securities Representative to supervise the conduct of its research analysts without passing either the Series 16 Supervisory Analyst or the Series 87 Research Analyst exams as FINRA rules required.
The Firm failed to develop and implement an AML program reasonably designed to achieve and monitor its compliance with the requirements of the Bank Secrecy Act and the implementing regulations thereunder; the firm’s AML program had inadequate procedures governing the testing of its AML program; and the firm’s testing of its AML procedures was inadequate and not independent one year, and not tested another year.
The Firm failed to timely report statistical and summary information regarding customer complaints and failed to amend, timely amend or ensure the amendment of Uniform Applications for Securities Industry Registration or Transfer (Forms U4) or Uniform Termination Notices for Securities Industry Registration (Forms U5) to disclose customer complaints and their resolution.
The Firm failed to retain originals of certain incoming and outgoing written correspondence relating to its business, received by mail and by fax,or copies of such correspondence and failed to adequately enforce written supervisory procedures prohibiting firm personnel from using third-party, non-firm email accounts for firm business.
Kevin Patrick Brennan AWC/2007007358604/January 2010
Registered Principal Brennan failed to reasonably supervise and respond to warning signs that registered representatives were conducting and operating a securities business from an unregistered branch office without supervision. The representatives
improperly solicited potential customers by telephone in connection with the offer of securities,
made false representations, including unwarranted price predictions,
omitted material facts, and
used misleading telemarketing scripts that a registered principal had not approved.
Brennan failed to timely amend his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose material information.
Kevin Patrick Brennan: Fined $15,000; Suspended 6 months in Principal capacity only; Undertakes to cooperate with any and all FINRA investigations
At first blush, it's nothing more than a published statement under the signatures of SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw. SEC Commissioners publish many statements during a given year. Sometimes they criticize a particular action by the Commission, sometimes they voice their support, and other times, well, you know, the spirits... Read On