Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2010
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
October 2010
Intermountain Financial Services, Inc. and Kent Duane Sweat (Principal)
OS/2008011579401/October 2010

Acting through Sweat, the Firm failed to

  • enforce its written supervisory procedures pertaining to its annual compliance meeting, branch office inspections, outside business activities, outside securities accounts, Regulation SP, hiring practices and the use of personal computers; and
  • maintain records of its Firm Element Continuing Education Needs Analysis and Written Training Plan for multiple years, and
  • maintain continuing education (CE) records to evidence that the firmís representatives participated in the Firm Element CE program during one year.

Sweat and the firm failed to maintain copies of registered representativesí incoming and outgoing correspondence with the public relating to its securities business, and failed to maintain evidence of review as NASD rules and firm procedures required.

The Firm failed to implement

  • procedures concerning the capturing, preservation, maintenance and storage of all original and copied communications the firm received and sent;
  • a written anti-money laundering (AML) compliance program reasonably designed to achieve the firmís compliance with the laws, rules and regulations to which it was subject; and 
  • its AML procedures by failing to provide AML training in a manner specified in its written AML program, and did not properly update its AML compliance officer contact information as required.

Intermountain Financial Services, Inc.:  Censured; Fined $12,750

Kent Duane Sweat: Fined $7,500; Suspended in Principal Capacity only for 5 business days 

Tags:  WSP    Electronic Communications    Email    AML     |    In: Continuing Education
September 2010
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
Murphy & Durieu
AWC/2008013233001/September 2010

The Firm sold stock shares of issuers that were not registered with the SEC for which no exemption from registration applied, which generated, through the transactions, proceeds of approximately $790,000 for customers; and failed to conduct a ďsearching inquiryĒ to ensure that the sales did not violate Section 5 of the Securities Act. The Firm failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to ensure compliance with applicable rules and regulations regarding the distribution of unregistered and non-exempt securities, and, in particular, its acceptance of the delivery of stock shares in certificate form and its subsequent sales of the same. The Firm's written supervisory procedures did not require an inquiry to be conducted into whether deposited stock shares were registered with the SEC or exempt from registration.

The Firm failed to identify activity in corporate accounts as suspicious, investigate it and report it through Form SAR-SF filings and, therefore, failed to implement or enforce its AML program by failing to identify suspicious activity, properly investigate it and file a Form SAR-SF on such activity, as appropriate.

Murphy & Durieu : Censured; Fined $75,000
Tags:  Unregistered Securities    WSP    SAR    AML     |    In: Cases of Note : FINRA
August 2010
CMG Institutional Trading, LLC and Shawn Derrick Baldwin (Principal)
2006006890801/August 2010

Acting through Baldwin, CMG Institutional Trading

  • participated in securities related activities without employing a qualified municipal securities principal;
  • failed to timely file quarterly lists of issuers with which it engaged in a municipal securities business;
  • failed to adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that the conduct of the broker and associated persons in municipal securities activities are in compliance with Municipal Securities and Rulemaking Board (MSRB) rules and that the procedures shall codify the brokerís supervisory system for ensuring compliance;
  • had an inadequate Anti-Money Laundering (AML) compliance program, in that it failed to
    • verify customer identification information,
    • conduct independent testing of its AML program,
    • designate a person to transmit contact information to FINRA and
    • to provide AML training for two years;
  • failed to timely create and maintain a business continuity plan and engaged in securities transactions without a qualified financial and operations principal (FINOP);
  • conducted a securities business while its net capital was below the required minimum;
  • failed to prepare an accurate general ledger, trial balances and books and records; and failed to file an annual audit report and a quarterly Financial and Operational Combined Uniform Single (FOCUS) report; and
  • failed to file an application for approval of a material change in its business operations even though it participated in an offering as an underwriter on a firm commitment basis, and disseminated sales literature that contained numerous inaccuracies and misrepresentations.

Also, the firm permitted Baldwin to engage in its securities business even though his registration was inactive because he had failed to complete a continuing education course.

FINRA's National Adjudicatory Council (NAC) imposed these sanctions following appeal of an Office of Hearing Officers (OHO) decision:

CMG Institutional Trading, LLC: Expelled

Shawn Derrick Baldwin (Principal): Barred

Tags:  Unregistered Principal    WSP    MSRB    AML    NAC    FINOP    FOCUS    Material Change Of Business     |    In: Cases of Note : FINRA
Bill Singer's Comment

On August 30, 2007, FiNRAís Department of Enforcement (ďEnforcementĒ) filed a 14-cause complaint against CMG and Baldwin alleging the aforementioned violations of SEC, NASD, and MSRB Rules.

On September 26, 2007, CMG and Baldwin filed answers to the complaint. The Hearing Panel conducted a hearing on July 7, 2008.

On October 14, 2008, the Hearing Panel found CMG and Baldwin liable under each cause alleged in the complaint.

On November 4, 2008, the Respondents appealed the Hearing Panelís decision. Oral argument was held on June 12, 2009. The Decision was published on May 3, 2010.

See the 2010 NAC Decision at http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/nacdecisions/p121380.pdf

See the 2008 Office of Hearing Officers Decision at http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/ohodecisions/p117583.pdf

I commend both the OHO and the NAC decisions to you as they are well-written and reasoned, and set forth in a comprehensive manner the allegations, findings, and rationale.  An excellent effort by FINRA.

Richard Michael Bowers (Principal)
2006003916901/August 2010
As his firmís Chief Compliance Officer, Bowers permitted an individual, the agent of the firmís owner, to act as a firm principal without being registered to do so. Bowers failed to ensure the sufficiency of the firmís written supervisory procedures and failed to enforce the firmís requirement to document permission for outside business activities.
Richard Michael Bowers (Principal): Fined $5,000; Required to requalify in all principal capacities before resuming any principal activities; Suspended 2 months in Principal capacities only
Tags:  Unregistered Principal    WSP     |    In: Cases of Note : FINRA
June 2010
Kevin Michael John OíConnor (Principal)
AWC/2007011308803/June 2010
OíConnor failed to establish, maintain and enforce an adequate supervisory system and written supervisory procedures related to the issuance, receipt and transmittal of checks payable to customers. In addition, the written supervisory procedures and supervisory system were inadequate because they did not provide for managerial review or supervision of the process. OíConnor 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. OíConnor failed to adequately enforce his member firmís procedures concerning penny stock transactions.
Kevin Michael John OíConnor (Principal): Fined $17,500; Suspended 30 days in Principal capacity only
Tags:  Supervisory System    WSP    Check     |    In: Cases of Note : FINRA
May 2010
Register Financial Associates, Inc.and George Robert Register (Principal)
OS/2007011496203/May 2010
The Firm allowed an individual to function as a research analyst without having the required licenses. The Firm
  • shared a draft of a section of a research report that contained a research summary, rating and price target with a subject company before it was published, and the draft was not provided to legal or compliance personnel at the firm;
  • did not monitor or place restrictions on the trading of stock picks by research analysts, who placed trades in violation of the limits placed on analysts by NASD Rule 2711(g) and failed to retain records showing the dates that newsletters were published prior to 2005;
  • failed to disclose the valuation methods it used to determine the price target and the risks to achieving the price target in the stock pick sections of its research report;
  • failed to have a principal review, initial and date its published research reports before the earlier of its use or filing with FINRAís Advertising Regulation Department;
  • failed to adopt and implement written supervisory procedures to cover research reports distributed to the public and ignored red flags regarding stock pick sections qualifying as research reports; and
  • failed to establish, maintain and enforce written supervisory procedures for its newsletter, in that the firm had no written supervisory procedures that governed research reports distributed to the public.
The Firm's research analysts failed to disclose their financial interests in stock picks and omitted material facts that rendered the stock pick section of research reports misleading.

The Firm and Register filed false attestations regarding compliance with NASD Rule 2711, and the Firm failed to make the certifications required by SEC Regulation AC for its stock pick sections that the views expressed accurately reflected the research analystsí personal views. Furthermore, Register failed to adequately discharge his supervisory responsibilities and never took effective action to ensure that his firm was meeting its obligation to comply with FINRA rules, in that he never monitored the trading or ownership of stock picks by the firmís research analysts, imposed no restrictions on whether the analysts could trade or own securities when they were profiled as stock picks, and allowed research analysts to publish research reports unsupervised.

Register Financial Associates, Inc.: Fined $50,000

George Robert Register (Principal): Fined $15,000; Suspended 30 days in Principal/Supervisory capacities only
Tags:  WSP    research         |    In: Research and Advertising
Bill Singer's Comment
This case ranks among the more noteworthy Research matters that I have seen in the past few years.  Frankly, this is a well written and present analysis that provides some cogent explanation for what was not properly handled by the firm and/or its principal.  Certainly, in this day and age, member firms must ensure that someone is monitoring the trading and conflicts of a firm's research analysts.  While I am sure that there is some hyperbole in FINRA's allegations, the findings suggest that there was little, if any, meaningful oversight.
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
Foreside Distribution Services, L.P.
AWC/2008011737901/March 2010
The Firm failed to maintain and preserve all of its business-related electronic communications. The Firm did not have custody or control over records of business-related electronic communications that its investment adviser clients sent or received, and could not easily access them without first requesting them from, and having such records subject to review by, each investment adviser client. The Firm did not have an adequate system or agreement in place to ensure that the business-related electronic communications were retained and made easily accessible to the firm. The Firm failed to establish and maintain a supervisory system and failed to establish, maintain and enforce written supervisory procedures (WSPs) reasonably designed to maintain and preserve all business-related electronic communications, including emails, in an easily accessible place, in that the firmís WSPs did not address the retention of electronic communications that non-firm employed registered representatives send and receive. The Firm amended itsWSPs to specifically address the retention of these records, but they were deficient because they relied on the firmís investment adviser clients to retain the communications on their systems and did not ensure that the firm had easy access to the records.
Foreside Distribution Services, L.P. : Censured; Fined $100,000; Required to certify in writing to FINRA within 90 days of issuance of this AWC that it has in place systems and procedures reasonably designed to achieve compliance with laws,regulations and rules concerning the preservation of electronic mail communications.
Tags:  Email    Electronic Communications    WSP     |    In: Cases of Note : FINRA
Bill Singer's Comment
In this case, the FINRA member could not easily access certain business electronic communications without first requesting them from  each investment adviser client -- and, worse, prior to obtaining said records, those clients apparently had a prior right of review. 
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.
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
J.J.B. Hilliard,W.L. Lyons, LLC
AWC/2007009463801/January 2010

The Firm failed to have an adequate supervisory system, including written supervisory procedures and a supervisory control system, to properly and timely identify customer checks deposited at affiliated bank branches and ensure that all customer check deposits were duly credited to the appropriate customer accounts. The Firm escheated approximately $133,616.65 in funds to the Commonwealth of Kentucky when it was unable to identify the proper customer accounts. As a result of the unidentified customer check deposits, the firm failed to make and keep accurate daily records of all receipts and disbursements of cash and other debits and credits in its books and records, including entries to an Escheatment Account. The Firm understated its net capital charges and incorrectly calculated its Customer Reserve Formula. In addition, the Firm produced inaccurate month-end customer account statements, incorrectly liquidated certain customer fully paid securities, and failed to segregate some customersí fully paid securities, resulting in intra-day possession or control deficits. The Firm did not prepare required inter-company account reconciliations, failed to properly record certain aged unfavorable reconciliation differences and failed to conduct supervisory reviews of certain reconciliations and accounts.

The Firm ís supervisory procedures did not adequately ensure that its research analysts obtained the required approval for public appearances and provided proper disclosures during such public appearances. In addition, the Firm issued certain research reports that

  • contained indefinite ďmayĒ language regarding future investment banking services that the firm expected to provide,
  • did not include analyst certifications on the front page,
  • contained front pages that did not specify the page or pages in the research report on which the analyst certifications were to be found, and
  • incorrectly included the analyst certification information as part of the important disclosures.
J.J.B. Hilliard,W.L. Lyons, LLC: Censured, Fined $200,000; Required to place $133,817 into a segregated, interest-bearing account for a period of five years to reimburse customers who can reasonably demonstrate that they made deposits to their firm accounts at a bank branch and that the firm failed to properly credit the deposits to their accounts.
Tags:  WSP    Supervisory System    Check    Escheat    Public Appearances     |    In: Research and Advertising
Bill Singer's Comment
An interesting segregation plan -- well tailored to address the specific issue.  Smart move by FINRA.
John Michael Campbell
AWC/2008011565202/January 2010
As the Chief Compliance Officer of his member firm, Registered Principal Campbell failed to establish, maintain and enforce an adequate supervisory system and adequate written supervisory procedures (WSP) to detect and prevent excessive trading in customer accounts by the firm ís registered representatives. The Firm's WSP required Campbell to conduct quarterly account reviews and determine the turnover ratios for the accounts, but Campbell failed to follow these procedures. The WSP were unreasonable because they failed to require the firm to take any specific action when a customerís account exceeded a specified turnover ratio. Campbell failed to reasonably supervise registered representatives who excessively traded in customer accounts and failed to respond to red flags presented by their excessive trading, exposing customers to losses that occurred as a result of excessive and unsuitable trading, improper use of discretion or other sales practice violations.
John Michael Campbell: In light of Campbell's financial status, no Fine; Suspended 90 days in Principal capacity only
Tags:  Supervisory System    WSP    Turnover     |    In: Cases of Note : FINRA
Bill Singer's Comment

In recent years, FINOPs and CCOs are being named and sanctioned in FINRA enforcement actions. In this case, the CCO is whipsawed by a WSP deemed to have procedures that he did not follow and to have insufficient procedures that FINRA deemed to render the WSP unreasonable. 

Practice Pointer: If you are a new CCO, you might wish to retain an independent outside compliance consultant to give the firm's WSP the once over and revise or update any deficiencies.  Similarly, you should consider having the same consultant conduct an annual review of the document.  If nothing else, it will at least serve to document your good-faith in attempting to comply with the WSP rules.

Laidlaw & Company (UK) LTD.
AWC/2007007315501/January 2010

The Firm failed to retain email communications related to its business that were sent to and from non-firm email accounts that firm registered representatives working from one of its branch offices used, and failed to establish and maintain a system for supervisory review of those outside emails.

Acting through a registered principal, the Firm failed to develop a privacy policy or disseminate privacy notices required by SEC Regulation S-P to its customers. censured, fined $5,000, jointly and severally, and fined an additional $60,000

The Firm failed to maintain new account documents for some accounts and failed to maintain complete new account documents for other accounts that lacked customer information. The Firm failed to enforce its written supervisory procedures concerning the dissemination of a privacy policy and the collection and maintenance of complete new account forms.

Laidlaw & Company (UK) LTD.: censured, Fined $5,000 (jointly and severally with unidentified party); Fined an additional $60,000
Tags:  Email    Supervisory System    Regulation S-P    WSP     |    In: Cases of Note : FINRA
Bill Singer's Comment
We start of 2010 with yet another case involving emails transmitted from non-firm accounts. Note that old Reg S-P issues still bedevil the industry.
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