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.
December 2010
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 personís 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 ďfor cause,Ē 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
Tags:  Supervision    Turnover     |    In: Cases of Note : FINRA
Bill Singer's Comment
Interesting issue here is that the old-fashioned "eyeballing" of accounts may no longer be the minimally acceptable standard.  Clearly, FINRA is chastizing the supervisor for not reading exception runs that would have highlighted turnover ratios.
Cory Todd Schmelzer (Principal)
AWC/2007008935002/December 2010

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 representativeís 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 Schmelzerís supervisory deficiencies, the representative engaged in conduct that the firm deemed inappropriate and which potentially put the firmís clientsí assets at risk.

Cory Todd Schmelzer (Principal): Fined $7,500; Suspended 15 business days in Principal capacity only
Tags:  Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment

See, David Gustav Much, AWC/2007008935001, December 2010

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 principalís possible misconduct, and failed to follow-up on the registered principalís 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
Tags:  Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment
It's rare that a President of a FINRA member firm gets taken down for failing to reasonably supervise a firm's principal. 
November 2010
Clinton James Lewis (Principal)
AWC/2009016863001/November 2010
Lewis was responsible for supervising a registered representative of his member firm and for reviewing the firmís 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 customerís 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 representativeís 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
Tags:  Checks    Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment
You know, a very succinct presentation by FINRA here and a valid complaint.  Also explains why it's necessary to monitor incoming funding from third parties.
October 2010
Guy Steven Amico (Principal)
AWC/2007007151705/October 2010

As his member firmís president, Amico failed to adequately supervise the firmís 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 firmís compliance with regulatory requirements imposed on the firm and knew, or should have known, that the firmís 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 FINRAís 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.
Tags:  Supervision    AML     |    In: Cases of Note : FINRA
Bill Singer's Comment

An interesting case because it holds a firm's President liable not so much for what he did or didn't directly do, but, rather, for the fact that he "knew or should have known" that his Chief Compliance Officer and AML Compliance Officer were not performing their respective compliance jobs. It's a bit of a dicey proposition for FINRA to simply posit a President's liability upon an Exit Report, as those are frequently contentious affairs (that is the Staff's allegations and the firm's responses).  Moreover, if the exit reports merely cite "concerns" but do not elevate those to formal charges, then it's questionable as to what the firm's President should do.  Again, we need to keep in mind that The CCO and AMLCO were hired to do their jobs -- those jobs were not to be done by the President, who has other responsibilities.  It's one thing for a President to "know" of the malfeasance or nonfeasance of his compliance officers, and such knowledge should compel prompt action.  However, when a regulator says that a President "should have known" of compliance officers misconduct but the main proof is that he/she was on notice per an exit report, well, I'm not convinced that such a predicate is sufficient. 

As with all regulatory matters, this case may well be "fact specific," and the details of what the President knew may be fare more extensive than what's presented in FINRA's monthly squib.  Of course, I'd like to see the exit reports for major firms, and then I would like to see whether FINRA will hold the presidents of such members to the same standards.

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 firmís 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
Tags:  Supervision        Unregistered Person     |    In: Cases of Note : FINRA
Scott Howard Goldstein (Principal)
AWC/2007007151706/October 2010
As his member firmís CEO, Goldstein knew, or should have known of substantive violations of FINRA rules and the potential inadequacy of firm compliance personnel. The firmís 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 SECís 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.
Tags:  AML    Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment
Another FINRA case holding a senior executive liable for "knew or should have known" supervisory violations.
September 2010
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 officeís activities in light of deficiencies identified during branch audits, and failed to appoint a properly qualified principal to supervise the branch officeís 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 firmís 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.

Childs

  • 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, in restitution 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

Tags:  Supervision    Supervisory System    Gifts        Email     |    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
August 2010
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 firmís 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.
George Ernest Reilly (Principal): Barred
Tags:  Supervision    CMO    Mark-Up Mark-Down     |    In: Cases of Note : FINRA
Portales Partners, LLC
AWC/2009016184701/August 2010

The Firm 

  • did not have a qualified individual to supervise the conduct of the firmís head of research, who was a senior research analystóbut 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 principalís 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.
Portales Partners, LLC : Censured; Fined $25,000
Tags:  Research    Supervision     |    In: Cases of Note : FINRA
April 2010
Valores Finamex International, Inc. and Vincent Anthony Buchanan (Principal)
AWC/2009016196001/April 2010

Acting through Buchanan, Valores Finamex failed to produce evidence of Buchananís review of a registered representativeís correspondence. The Firmís 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 managerís supervisor, and 
  • assign a qualified supervisor to supervise the registered representative.

The Firm permitted Buchanan to conduct a securities business while he was ďContinuing Education Inactive.Ē  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. 

Tags:  Producing Manager    WSP    Supervision    Correspondence     |    In: Cases of Note : FINRA
March 2010
Casimir Capital, L.P.
AWC/2006006836301/March 2010
The firm failed to adequately respond to ďred flagsĒgenerated 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.
Casimir Capital, L.P. : Censured; Fined $65,000
Tags:  Supervision     |    In: Cases of Note : FINRA
Edgar Davis Mock III
AWC/2009016258201/March 2010
Registered Principal Mock prepared false documents relating to his member firmís 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
Tags:  Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment

Maybe FINRA just misunderstood.  You see, when this Registered Principal took an exam, the firm referred to it as a Mock Exam -- you know, it was just a dry-run, not for real.  What probably happened here is that Principal Mock prepared Mock Documents and FINRA just misunderstood.  Yeah, that's the ticket!

I tried to resist but I couldn't.

George Albert Montes
AWC/2005000346105/March 2010
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 ďred flagsĒ indicating that unsuitable and excessive trading was occurring in customer accounts, Montes failed to take reasonable supervisory steps to respond to the ďred flagsĒ with a view toward preventing the unsuitable and excessive trading and did not adequately investigate the representativesí 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.
Tags:  Suitability    Supervision    Options     |    In: Cases of Note : FINRA
Bill Singer's Comment
Another in an ever increasing line of cases in which Supervisors/Principals are being held accountable for failing to reasonably supervise.
John Brian Busacca III
E072005017201/March 2010

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 customersí accounts. As the firmís President,  Busacca permitted a non-registered person to act in a principal capacity as the firmís 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, ďNorth AmericanĒ or the ďFirmĒ), 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
Tags:  Supervision    Unregistered Principal     |    In: Cases of Note : FINRA
Bill Singer's Comment

FINRAís Department of Enforcement filed a 17-cause complaint against North American Clearing, Inc.  and Busacca on August 13, 2007. Busacca was charged in only two of the 17 causes of action, causes 13 and 17.

  • Cause 13 alleged that Busacca and North American failed to reasonably supervise the Firmís operations system conversion and its operations activities to detect and prevent certain violations, during the period from April 2003 through February 2005, in violation of NASD Rules 3010 and 2110.
  • Cause 17 alleged that Busacca and North American employed and designated an unregistered principal as the Firmís chief compliance officer from July 2004 until February 2005, in violation ofNASD Rules 1022(a) and 2110.

Busacca and North American filed answers denying Enforcementís allegations.

In May 2008, the Securities and Exchange Commission (SEC) filed suit against North American and some of its managers (including Goble) seeking the appointment of a receiver for the Firm. A federal court subsequently appointed a receiver for North American, the receiver assumed control of the Firm, and the Firm went out of business. At the request of the Securities Investor Protection Corporation, the court later appointed a trustee to oversee North Americanís liquidation pursuant to the Securities Investor Protection Act of 1970.

In this case, Enforcement reached a settlement of the complaint against North American with the receiver and trustee pursuant to which FINRA expelled North American from FINRA membership. Enforcement filed a motion to sever the allegations against North American from those against Busacca pursuant to NASD Rule 9214. The Hearing Officer granted Enforcementís request to sever over Busaccaís objection.

The OHO Panel conducted a hearing with respect to the two counts of the complaint for which Busacca was charged on November 10, 2008. Enforcement called five witnesses: two FINRA staff members, Sandra Fan (North Americanís former operations manager), Goble, and Busacca. Busacca testified on his own behalf.

The NAC sustained the OHO's findings and sanctions.

The NAC Decision: http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/nacdecisions/p120606.pdf

The OHO Decision:
http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/ohodecisions/p118160.pdf

Karen L. Fence
AWC/2008014020401/March 2010
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 customersí accounts. The representative made these recommendations without having a reasonable basis for believing that they were suitable based on the customersí 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
Tags:  Elderly    Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment
As far as failure-to-supervise cases go, this six-month suspension and fine is fairly hefty.  Then again, it appears that elderly clients were left unprotected.
Melvin Lee Peterson
AWC/2005000346106/March 2010

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 customersí accounts, Peterson failed to reasonably respond to ďred flagsĒ indicating unsuitable and excessive trading by not contacting the customers nor restricting activity in the accounts. Peterson relied on the representativesí 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.
Tags:  Supervision     |    In: Cases of Note : FINRA
Bill Singer's Comment

FINRA's March reports reflect a marked increase in sanctions against Principals for failing to reasonably supervise and likely reflect the regulator's intent to focus on this particular failing for some time to come.  To the extent that there was ever a honeymoon for supervisors and managers when it came to failing to supervise, that lovey-dovey period is clearly over.

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
Tags:  Supervision    WSP     |    In: Cases of Note : FINRA
February 2010
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 firmís 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
  • email correspondence,
  • incoming and outgoing hard copy correspondence at the firmís 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
Tags:  Unregistered Principal    Supervision    Supervisory System    Email    Correspondence    WSP    Producing Manager     |    In: Cases of Note : FINRA
Bill Singer's Comment
A well-presented case and a timely warning.  First off, many firms simply patched together a supervisory system because some veteran left or someone was supposed to implement more specific policies (or hire another Principal) and, well, you know how those things tend to dribble away and get forgotten.  Next thing you know, FINRA comes in and -- OMG!, we forgot to take care of this!!

I urge all my clients to pick at least an annual date when they give their policies and procedures a "cold review;" i.e., you take a rule and literally go line by line through your WSPs, memos, and other policies and confirm that what's written is what is in effect.  Concurrent with that run-through, you should also confirm that you are up-to-date with any new or amended rules.  Similarly, confirm that all folks who require a specific registration are duly registered (you would be surprised how often it's "assumed" that a registration application went through only to learn the FINRA shows no record of the filing -- or that someone was supposed to sit for an exam but postponed it and never satisfied the requirement.

All of which leads to another punchlist item:  If you have set forth policies and procedures in writing, are they being observed?  It's bad enough to run afoul of a FINRA rule, but to impose upon yourself a given task (which FINRA staff will note in your WSPs) and then to not properly implement that task is idiotic.  Similarly, as so many in-house Compliance folks love to spend hours on the computer drawing up all sorts of fancy organizational charts showing who reports to whom, it's probably a good idea to actually look at those charts once in a while and make sure that everyone so listed is still working at your firm and still supervising or reporting to those designated.
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 customersí account, investigate the activity and make the appropriate Suspicious Activity Report (SAR) filing. The firmís AML program lacked procedures on monitoring and preventing money laundering and did not explain what follow-up would be required if a money laundering ďred flagĒwas detected or when a SAR must be filed. Reilly failed to detect and investigate the suspicious nature of transactions in a representativeís corporate customerís account.
George Ernest Reilly (Principal): Fined $50,000; Suspended 2 years in Principal capacity only.
Tags:  Supervisory System    Supervision    AML     |    In: Cases of Note : FINRA
Michael Thomas DiPuppo (Supervisor) and Robert Michael DiPuppo
AWC/2008013742101/February 2010
The DiPuppos member firm had in place a supervisory system for the firmís variable annuity transactions specifying that variable annuity transactions that exceeded 50 percent of the lower end of the customerís net worth bracket required additional supervisory review concerning potential liquidity issues. The DiPuppos disagreed with the firmís 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 firmís 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
Tags:  Variable Annuity    Supervision         |    In: Cases of Note : FINRA
Bill Singer's Comment
And, class, what do we learn from this lesson?  That's correct -- you may always disagree with your company's policy but you should never, ever circumvent it.  And for those of you who submitted that extra credit paper, you get ten bonus points for noting that you should never alter customer net worth information.
Regal Securities, Inc.
AWC/2007007344801/February 2010
The Firm failed to
  • develop and implement an adequate supervisory system and written procedures for detecting and reporting suspicious activity;
  • provide adequate anti-money laundering (AML) training for its designated AML officers and firm employees; and
  • conduct adequate independent testing of its AML compliance program for two years.
Regal Securities, Inc.: Censured; Fined $50,000
Tags:  AML    Supervision    Supervisory System     |    In: Cases of Note : FINRA
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 analystsí 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 firmís AML program had inadequate procedures governing the testing of its AML program; and the firmís 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.
Westrock Advisors, Inc.: Censured; Fined $100,000
Tags:  Supervision    WSP    AML    Email    Unregistered Supervisor     |    In: Cases of Note : FINRA
Bill Singer's Comment
The proverbial kitchen sink: Research, AML, Email, Supervision, Customer Complaints, U4/U5.  Frankly, the member may have gotten off light with only a Censure and a $100,000 fine. 
January 2010
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
Tags:  Supervision    Unregistered Office    Scripts    Telemarketing     |    In: Cases of Note : FINRA
Bill Singer's Comment
An interesting aspect of this case is the "undertaking" to cooperate with any and all FINRA investigations. Although once a rare component of settlements, we are seeing an increase in this obligation. 
Enforcement Actions
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