The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
January 17, 2019
FINRA NAC Affirms OHO Findings that Chief Compliance Officer Failed to Supervise Her Husband, the Firm's President
In the Matter of FINRA Department of Enforcement, Complainant, vs.
Cantone Research, Inc., Anthony Cantone,
and Christine Cantone
, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2013035130101 / January 16, 2019)http://www.finra.org/sites/default/files/fda_documents/2013035130101
%20Cantone%20Research%20Inc.%20CRD%2026314%20Anthony
%20Cantone%20CRD%201066139%20Christine%20Cantone
%20CRD%202687618%20NAC%20Decision%20va.pdf
%20Cantone%20Research%20Inc.%20CRD%2026314%20Anthony
%20Cantone%20CRD%201066139%20Christine%20Cantone
%20CRD%202687618%20NAC%20Decision%20va.pdf
As set forth in pertinent part in the FINRA National Adjudicatory Council ("NAC") Decision:
This case arose from the sales of over $8 million worth of certificates of participation ("COPs"), which were tied to underlying projects involving the redevelopment of nursing homes, assisted living facilities, and other real estate ventures owned and controlled by Christopher Brogdon ("Brogdon"). COPs are a type of financing where an investor purchases a share of the revenues of a project rather than the bond being secured by those revenues. Primarily at issue in this case is whether Cantone Research, Inc. ("CRI" or the "Firm"), and Anthony Cantone ("Cantone") failed to disclose to investors negative material information that concerned both Brogdon's past financial and legal troubles and financial issues with the COPs at issue in this appeal. Specifically, the crux of the allegations concern that, when marketing the offerings, Cantone and CRI relied on a biography of Brogdon that highlighted his decades of success and his business acumen related to assisted living and nursing home management and redevelopment. However, the biography excluded negative information related to Brogdon's business failures, including two NASD bars, two bankruptcies, criminal fraud charges, substantial liens against a company he controlled, and a judgment against Brogdon in a breach of contract lawsuit.The complaint also alleges that CRI and Cantone failed to disclose one of their own significant business failings to investors. In addition to their failures to disclose Brogdon's negative financial and legal history, the complaint alleges that Cantone and CRI did not disclose to investors that Brogdon failed to make timely numerous interest payments, which were covered by undisclosed short term "loans" from the Cantones and CRI, as well as significant financial losses sustained by other Brogdon COPs. The complaint also alleges that Cantone and CRI convinced investors to extend two of the COPs beyond their original maturity dates without disclosing the real reason for the extension-that Brogdon was unable to pay. Finally, the complaint alleges that CRI and Cantone misused customer funds and that Christine Cantone ("C. Cantone") failed to reasonably supervise her husband Cantone's conduct related to these deals.The Extended Hearing Panel ("Hearing Panel") found that CRI and Cantone intentionally made material omissions and a misrepresentation in connection with the sale of securities in a series of private placements, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Exchange Act Rule 10b-5 thereunder, and FINRA Rules 2020 and 2010, and negligently made additional material omissions in connection with the sales of securities, in violation of Sections 17(a)(2) and (3) of the Securities Act of 1933 ("Securities Act"), and FINRA Rule 2010. The Extended Hearing Panel suspended Cantone in all capacities for 15 months and fined him and CRI $150,000, jointly and severally. The Extended Hearing Panel also found that CRI and C. Cantone failed to supervise Cantone reasonably, in violation of NASD Rule 3010 and FINRA Rule 2010. The Hearing Panel suspended C. Cantone in all capacities for six months, and it fined her and CRI $75,000, jointly and severally.The Extended Hearing Panel concluded that Enforcement failed to establish that CRI and Cantone made improper use of customer funds or recommended an unsuitable investment, and it therefore dismissed these charges. . .
Respondents and FINRA's Department of Enforcement all appealed the Office of Hearing Officers Hearing Panel Decision. As set forth under the heading "Conclusion," the NAC found that:
CRI and Cantone intentionally made material omissions and a misrepresentation in connection with the sales of securities in a series of private placements, in willful violation of Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and FINRA Rules 2020 and 2010. For these violations, Anthony Cantone is suspended in all capacities for one year and fined, jointly and severally with CRI, $100,000. CRI and Cantone also negligently made additional material omissions in connection with the sales of securities, in violation of Sections 17(a)(2) and (3) of the Securities Act, and FINRA Rule 2010. For these violations, Cantone is suspended in all capacities for three months and fined, jointly and severally with CRI, $50,000. The suspensions will run consecutively. For their willful violations of the Exchange Act, CRI and Cantone are statutorily disqualified. C. Cantone and CRI violated NASD Rule 3010(a) and FINRA Rule 2010 by failing to reasonably supervise Cantone. For these violations,C. Cantone is suspended for two years in any principal and supervisory capacities, and fined $73,000, jointly and severally with CRI. C. Cantone is also ordered to requalify as a securities principal upon the completion of her suspension. We affirm the Hearing Panel's dismissal of the charge that CRI and Cantone misused customer funds. . .
The Value of Handwritten and Typewritten Notes In FINRA Expungement Arbitration
In the Matter of the Arbitration Between Lawrence V. Sorace, Claimant, v. PNC Investments (FINRA Arbitration 18-01850 / January 15, 2019)
http://www.finra.org/sites/default/files/aao_documents/18-01850.pdf
In the Matter of the Arbitration Between Lawrence V. Sorace, Claimant, v. PNC Investments (FINRA Arbitration 18-01850 / January 15, 2019)
http://www.finra.org/sites/default/files/aao_documents/18-01850.pdf
In a FINRA Arbitration Statement of Claim filed in May 2018, associated person Claimant Sorace sought the expungement of a customer complaint from his Central Registration Depository records ("CRD"). Respondent PNC did not oppose
the requested relief. The customer did not participate in the expungement hearing and did not contest the
request.. In recommending expungement, the sole FINRA Arbitrator mad a FINRA Rule
2080 finding that the customer's claim, allegation, or information is false.
The Arbitrator offered this rationale:
The customer alleged that Claimant, while a Financial Advisor with Respondent, gave her "inappropriate advice by instructing that she surrender a variable annuity". At the hearing, Claimant testified that he recommended against surrendering the annuity. He testified that he explained to the customer the disadvantages of surrendering the annuity, including surrender charges, and that she could withdraw 10% without incurring a penalty.Claimant's testimony was supported by his typewritten notes that "client stated that she makes her own decisions". Claimant's notes specifically reflect that he "[r]ecommended the client not do that [surrender the annuity] and only do the 10% if she wanted cash." Claimant's notes also reflect other unrelated instances where the customer decided not to follow Claimant's recommendations.Claimant's handwritten notes also reflect his conversation with the customer regarding her questions concerning the annuity.Claimant's testimony was further supported by the fact that the customer and Claimant met or spoke with each other on at least six (6) occasions following the surrender of the annuity but the customer did not claim that Claimant gave her inappropriate advice until a June 27, 2015 meeting that the customer's husband joined. . .
GUEST BLOG: The SEC's Gagging Rights by Aegis Frumento Esq (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/4390/frumento-sec-gag-order/
The Cato Institute says that it has a book manuscript by someone who settled a case with the SEC showing that "the SEC's allegations against him were unfounded and unfair." But an SEC gag order in the author's settlement agreement, seems to be preventing the Institute from publishing that book. All of which prompted the Cato Institute to sue the SEC. The Complaint asserts that the SEC settles 98% of the cases it brings. But of the 2% that go to trial, the SEC tends to "win" only 88% overall, and only 57% of the time when the charges involve insider trading. Those are still high numbers, but they are not 98%. They suggest that of the approximately 800 cases that the SEC settles each year, perhaps 100 of them might reasonably be contested at trial, including perhaps 25 of the over 50 insider trading cases. Yet the SEC tries less than 20 cases a year. Of course, with the SEC suffering under a hiring freeze since 2016, it would not have the staff to try 120 cases a year, even if the government wasn't shut down. But still, maybe 100 respondents a year settle who might have beaten the SEC in court. A hundred ensnared innocent respondents is not insignificant.
Unredeemed CDs Cited In Customer Lawsuit against Wells Fargo In the Matter of the Arbitration Between Thomas W. Riordan & Barbara J. Riordan JTWROS and Thomas W. Riordan WFCS
Custodian Trad IRA, Claimants, vs. Wells Fargo Advisors, LLC, Respondents (FINRA Arbitration 18-02123 / January 14, 2019)
http://www.finra.org/sites/default/files/aao_documents/18-02123.pdf02123
In a FINRA Arbitration Statement of Claim filed in June 2018, public customer Claimants asserted violation of FINRA Rule 2010 2111, and 2020, and 3110; misrepresentation or failing to disclose material facts concerning an investment; guaranteeing customers that they will not lose money on a particular securities transaction; negligence; and breach of contract. The causes of action arose in connection with two brokerage certificates of deposit ("CDs") that .Respondent Wells Fargo Advisors allegedly guaranteed could be redeemed at any time with no losses or penalties and with full accrued interest. Claimants sought $32,550 in compensatory damages. Respondent Wells Fargo generally denied the allegations and asserted various affirmative defenses. The sole FINRA Arbitrator found Respondent Wells Fargo liable and ordered it to pay to Claimants $4,000 in compensatory damages and to reimburse $600 in FINRA filing fees.
http://www.finra.org/sites/default/files/aao_documents/18-02123.pdf02123
In a FINRA Arbitration Statement of Claim filed in June 2018, public customer Claimants asserted violation of FINRA Rule 2010 2111, and 2020, and 3110; misrepresentation or failing to disclose material facts concerning an investment; guaranteeing customers that they will not lose money on a particular securities transaction; negligence; and breach of contract. The causes of action arose in connection with two brokerage certificates of deposit ("CDs") that .Respondent Wells Fargo Advisors allegedly guaranteed could be redeemed at any time with no losses or penalties and with full accrued interest. Claimants sought $32,550 in compensatory damages. Respondent Wells Fargo generally denied the allegations and asserted various affirmative defenses. The sole FINRA Arbitrator found Respondent Wells Fargo liable and ordered it to pay to Claimants $4,000 in compensatory damages and to reimburse $600 in FINRA filing fees.
Bill Singer's Comment: I can't even begin to express my anger with the lack of content and context given the intriguing fact patter. When did these customers purchase the CDs at issue and what were the circumstances by which the CDs were not able to be redeemed? How is it that an award was made -- which suggests that the customers incurred losses as a result of some misconduct by Wells Fargo -- yet only $4,000 of the nearly $33,000 in alleged damages was awarded? I am NOT suggesting that the Arbitrator got the holding or Award wrong but really would have appreciated some insight as to the underlying failure-to-redeem and the calculation of losses.
Former Merrill Lynch Rep Wins Expungements In the Matter of the Arbitration Between Michael D. Clancy, Claimant, v. Merrill Lynch Pierce Fenner & Smith Inc., Respondent (FINRA Arbitration 17-02567 / January 14, 2019)
http://www.finra.org/sites/default/files/aao_documents/17-02567.pdf
http://www.finra.org/sites/default/files/aao_documents/17-02567.pdf
In a FINRA Arbitration Statement of Claim filed in September 2017, associated person Claimant Clancy asserted defamation and tortious interference with business expectancy. Claimant Clancy alleged that Respondetn Merrill Lynch Pierce Fenner & Smith had defamed him in the Uniform Termination Notice for Securities Industry Registration ("Form U5") filed with the Central Registration Depository ("CRD"), Claimant sought an expungement of the matter from his CRD. Respondent Merrill Lynch generally denied the allegation, asserted various affirmative defenses, and contested the expungement request. The sole FINRA Arbitrator recommended expungement of the "Yes" answers (to be revised to "No") to Form U5 Questions 7B and 7(F)(1) with the deletion of the accompanying Internal Review and Termination Disclosure Reporting Pages. Further, the Arbitrator recommended the expungement of the "Yes" answers (to be revised to "No") to Form U4 with the deletion of the accompanying disclosure reporting page. Finally, the Arbitrator recommended the
expungement of all references to two customer complaints. The Arbitrator made a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous. and offered this rationale:
In this case, the Respondent acknowledged that erroneous information was entered on Claimant's U-4 and is reflected in the Broker Check. Claimant was not permitted to resign; he voluntarily left the firm. The parties stipulated that the documents need to be amended to reflect the voluntary departure.There were other matters that perhaps could best be described as ambiguities in the evidence. For example, Respondent offered three matters it believed were evidence of unauthorized trading. Only one matter is cited on the BrokerCheck and it appears that Claimant did not contribute to that settlement. Of the other two examples Respondent offered, one customer kept the securities in the account and did not contest the trades. It should be noted in this regard that Claimant was not investigated while at Respondent's firm; the investigation did not take place until after Claimant left and Respondent began to contact Claimant's customers.The other case not mentioned on the BrokerCheck had to do with a customer calling and indicating that more shares of an IPO than the customer expected had been purchased for the customer's account. The customer intended to participate in the IPO purchase. This could easily have been an execution error, whether institutional or systemic, due to a day which the parties agreed was "crazy" as the IPO had so much interest that the trading system broke down due to volume. There was no proof that the over-purchase was intentional or negligent on Claimant's part. This could be analogous to the misreporting of Claimant's departure status. The customer's account was corrected and no harm was incurred.