Absurd SEC Staff Bulletin Warns Industry To Adjust To Known Variables And Be Flexible (BrokeAndBroker.com Blog)SEC Charges Hawaii-Based Submarine Tour Operator and Its Principals with Offering Fraud and Misappropriation of Investor Funds (SEC Release)FINRA Censures and Fines Morgan Stanley for Inaccurate Stock Ratings But Lauds Firm's Extraordinary Cooperation
From March 2014 through March 2019 (the relevant period), JPM failed to reasonably supervise a former registered representative (RR 1) who engaged in unsuitable and unauthorized trading in the account of a senior customer, who also was RR 1's grandmother (Customer A). JPM failed to take reasonable action to investigate and address RR 1's misconduct, despite the presence of red flags.By reason of the foregoing, the firm violated NASD Rule 3010 and FINRA Rules 3110 and 2010.
The saga of Beverley Schottenstein's lawsuit against JP Morgan Securities and her grandsons Evan and Avi has been widely reported in the press. This litigation is the stuff of soap operas, rom-coms, and television mini-series. As with the old serial movies of years long since past, just when you think the end is near, there's a cliff-hanger. As we return to the action, a federal court seems to have blown the final whistle. But for the fact that this may be less American football and more like soccer where the time runs out but they keep playing into something called "extra time" which, for the life of me, I don't quite get because, you know, the clock shows "0:00" but, regardless, they keep on running around kickin' the ball. Best I can tell, the federal court's whistle is ending the game but let's see how that all pans out over the next few months.
This Notice provides guidance to firms about the supervision of complex products, which may include a security or investment strategy with novel, complicated or intricate derivative-like features, such as structured notes, inverse or leveraged exchange-traded funds, hedge funds and securitized products, such as asset-backed securities. These features may make it difficult for a retail investor to understand the essential characteristics of the product and its risks.The Notice identifies characteristics that may render a product "complex" for purposes of determining whether the product should be subject to heightened supervisory and compliance procedures and provides examples of heightened procedures that may be appropriate.
SIDE BAR: The JPM AWC wrongly asserts on Page 2 that it was in "2013, FINRA issued Regulatory Notice 12-03 . . ." First off, the "12-" indicates 2012 and the "03" means that it was only the third such notice issued in 2012; and if you look at the upper right corner of the PDF file for the Notice linked above, you will see that it is dated "January 2012." Notwithstanding FINRA's fudging of an entire year, JPM was on notice as of January 2012 -- some two years before the 2014 events -- that it needed to be extra vigilant when it came to Customer A's structure product investments.
[M]alekzadeh started his business in 2013 by purchasing limited edition and collectible sneakers to resell online. Beginning as early as January 2020, Zadeh Kicks began offering preorders of sneakers before their public release dates, allowing Malekzadeh to collect money upfront before fulfilling orders. Malekzadeh advertised, sold, and collected payments from customers for preorders knowing he could not satisfy all orders placed.For example, in 2021, Malekzadeh began selling preorders of Nike Air Jordan 11 Cool Grey sneakers. Zadeh Kicks received and accepted preorder sales of over 600,000 pairs of sneakers, resulting in payments to Malekzadeh of more than $70 million. Malekzadeh had no way of acquiring the quantity of sneakers needed to fill the preorders received. In fact, he was only able to acquire just over 6,000 pairs. Customers were either left with unfulfilled orders or they received a combination refund of cash and Zadeh Kicks gift cards.By April 2022, Malekzadeh owed customers more than $70 million in undelivered sneakers and unknown additional millions held by customers in worthless company gift cards.In her role as Zadeh Kicks chief financial officer, Mockerman conspired with Malekzadeh to provide false and altered financial information to numerous financial institutions-including providing altered bank statements-on more than 15 bank loan applications. Together, Mockerman and Malekzadeh received more than $15 million in loans from these applications.As part of the government's ongoing criminal investigation, federal agents have seized millions of dollars in cash and luxury goods that Malekzadeh acquired with the proceeds of his fraud. The seized items include nearly 100 watches, some valued at over $400,000, jewelry, and hundreds of luxury handbags. The government also seized nearly $6.4 million in cash which was the result Malekzadeh's sale of watches and luxury cars manufactured by Bentley, Ferrari, Lamborghini, Porsche, and others.
[I]n 2017 and 2018, Merson participated in a scheme to defraud involving investments in Standby Letters of Credit (SBLCs). Investors were promised that they could receive a portion of the value of an SBLC, worth millions of dollars, for a much smaller initial investment. Investors were promised returns equal to many times the amounts of their initial investments in a matter of weeks. They were also promised that their money would remain in the attorney trust account of a co-conspirator-who at the time was a licensed attorney in Florida-until confirmation was received that the SBLC had been issued.In his role as an intermediary between investors and the principal members of the conspiracy, Merson falsely represented to investors that the investment was not risky and that he had been involved in similar successful deals in the past. He also falsely represented that he was an independent consultant who was only going to receive a small finder's fee, and claimed not to know the details of the transaction or the payouts the clients could expect. In fact, he had a significant independent financial interest in the investment transaction that he affirmatively misled investors about as he responded to investor inquiries.
The Securities and Exchange Commission today charged Surgalign Holdings, Inc., formerly RTI Surgical Holdings, Inc., and former executives Brian Hutchison and Robert Jordheim for masking disappointing sales numbers by shipping future orders ahead of schedule to accelerate, or "pull forward," revenue and then failing to disclose this practice to investors. In June 2020, RTI restated its public financial statements from 2014 through 2019 to correct errors caused by this practice.As alleged by the SEC, RTI's reliance on pull-forwards cannibalized future revenue streams and damaged important customer relationships while the company reassured investors it was meeting revenue guidance. The SEC further alleged that RTI sometimes shipped orders early without customer approval and recognized revenue for those shipments prematurely, in violation of generally accepted accounting principles (GAAP), and that RTI's former CEO, Hutchison, and former CFO, Jordheim, permitted RTI to recognize revenue for such shipments.
[I]n 2019, two of Deccan's largest investors and clients sought to fully redeem their investments, which together totaled nearly 18% of Deccan's more than $3 billion in assets under management. The order finds that without full and fair disclosure to either university, Deccan did not seek to liquidate in a reasonable manner certain illiquid securities held by both clients. The Commission's order finds that Deccan also made materially misleading statements and omissions, including at Bodas' suggestion, to one of the redeeming university clients ("University Two") in an effort to advantage Deccan's non-redeeming clients and investors, which included Bodas and other Deccan partners. As the order finds, Deccan breached its fiduciary duty: (i) when advising University Two to sell certain of its interests to Deccan's non-redeeming clients at a price advantageous to the non-redeemers; and (ii) by failing to disclose its intent to tie up nearly 13% of the cash in University Two's account in an illiquid side-pocket in the weeks leading up to University Two's final redemption and at a time when Deccan and University Two were negotiating a short-term extension of their investment advisory agreement.According to the Commission's order, Deccan also failed to retain text messages, as required by the Investment Advisers Act of 1940, including by virtue of Bodas texting Deccan's head of trading operations to delete and to not to back-up their extensive text messages. Finally, the Commission's order finds that Deccan lacked adequate policies and procedures for record retention and client and investor redemptions.
7. On April 26, 2019, one of Deccan's largest investors in its Commingled Fund, University One, timely notified Deccan that it wanted to redeem its entire $146 million investment by June 30.8. The day Bodas learned of University One's redemption, he reacted with the following text message to the head of trading and operations with directions on how to handle the redemption (the "April Text"):
"Use everything to hold [University One] back in the [L]SPV. Anything mildly illiquid. We don't want their withdrawal to impact our other investors . . . And then take our sweet time. Hopefully 2 or 3 years . . . And if [University One] hassle[s] us we can tell them we can liquidate immediately at a 20% discount and have the rest of our funds buy it. . . .So basically whatever cannot be sold the that (sic) one day 6/30 goes into the SPV. Why should we sell in advance and have other investors bear the cost of these fools. And then sell 5% of [average daily volume]. . . .So figure this out. . . ."
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20. University Two, like Deccan's other clients, had exposure to the unlistedIndian company, which by December 2019 was approximately $17.4 million, or 6% of the value of its SMA. On December 17, as University Two's final year-end redemption date approached, Bodas learned from Deccan's head of trading and operations that Deccan had received bids at 875 Rupee and 880 Rupee for shares sufficient to liquidate most if not all of University Two's interest in the Indian company. If accepted, Deccan would have needed to obtain approval for the transaction from the company's board of directors to complete the trade. By that time, however, Bodas and Deccan had learned from the third party valuation agent that it expected the shares would be marked at 840 Rupee at December 31. As with the indications of interest Deccan received earlier in 2019 discussedabove, Deccan did not seek to pursue these potential opportunities to sell the Indian security for the benefit of University Two.21. Instead, Bodas and Deccan offered to sell University Two's interest in theIndian security as part of the same transaction it would utilize to liquidate the interest of University One and its LSPV. To encourage University Two to accept that offer, on December 17 Bodas texted Deccan's head of trading and operations handling the discussions, "[s]hould you tell [University 2] that if we don't sell we may have to side pocket [the investment in the Indian Company] as that's what we'll be doing for others?" Deccan's head of trading and operations, understanding that a side pocket likely would have significantly delayed University Two's final redemption, replied, "Interesting idea would make selling more compelling right?" Bodas responded, "Yes. And you could say there is a likelihood. So make it vague enough." After the head of trading and operations did so, he reported to Bodas, who had not participated in the discussions, that UniversityTwo "pretty much immediately" agreed to the proposed transaction. On December 20, Bodas directed Deccan's head of trading and operations, "[a]ll I want is max price for portfolio and min price to [University Two for shares of the Indian company]. Figure it out . . . Get [University Two] done at 840."
Jeffrey S. Maier, Claimant, v. Wells Fargo Clearing Services, LLC, Respondent (21-02849)
https://www.finra.org/sites/default/files/aao_documents/21-02849.pdfCharlotte M. Maier IRA, Claimant, v. Wells Fargo Clearing Services, LLC, Respondent (21-02866)
FINDINGSThere is no award to Claimants in this arbitration. During a four-to-five-year period that Claimants held the three municipal bonds purchased via Respondent, they realized a total return of $26,429.05. This included both income and gains on the investments. The testimony by Claimants indicated there was a 14-month period in which they sold the three bonds and purchased other bonds at another brokerage firm. If Claimants had not sold the three bonds, this would have resulted in an estimated interest income of approximately $6,082.00 for the 14- month period. Claimants wrote emails to Respondent and provided recordings expressing concern that municipal bond information documents did not properly advertise the call feature of the bonds. The Arbitrator believes that the written explanation provided by Respondent is sufficient and accurate. Claimants had one call on the Kansas City, Missouri bond. This was of concern to Claimants and led to Claimants eventually selling all three municipal bonds. The Arbitrator is of the opinion that Claimants should have retained the bonds.
Between August 30, 2019, and February 28, 2020, Morgan Stanley published approximately 11,000 equity research reports that included price charts with inaccurate historical stock ratings. As a result, the firm violated FINRA Rules 2241(c)(3) and 2010. These errors resulted, in part, from the failure to establish and maintain a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with FINRA Rule 2241(c)(3). As a result, the firm violated FINRA Rules 3110(a) and (b)(1) and 2010.In addition, between April 7 and May 17, 2021, the firm failed to accurately disclose required beneficial ownership information in 1,616 equity research reports. As a result, the firm violated FINRA Rules 2241(c)(4)(F) and 2010.
In resolving this matter, FINRA has recognized extraordinary cooperation. The firm retained outside counsel to investigate, and correct, the historical stock ratings and beneficial ownership disclosure issues before the issues were detected by any regulator, and the firm self-reported both issues to FINRA. After discovering the issues, the firm promptly took steps to correct them and voluntarily enhanced its supervisory systems and procedures regarding disclosure reviews and disclosure-related software updates. In addition, the firm provided substantial assistance to FINRA in its investigation, including by identifying the causes, scope, and impact of the disclosure errors and omissions, proactively explaining the findings to FINRA staff in multiple meetings, and providing detailed factual summaries prior to receiving Rule 8210 requests.
From August 2015 to February 2019, Mehlin exercised discretion in eight customer accounts held by members of the same family by effecting over 250 trades across the accounts without receiving same-day authorization. Although the customers approved his exercise of discretion, none of them provided prior written authorization for Mehlin to exercise discretion in their accounts. Nor did the firm accept any of the accounts as discretionary and, in fact, it prohibited the exercise of discretion, except in certain circumstances not applicable here. In addition, from 2015 to 2018, Mehlin inaccurately stated on four annual compliance questionnaires that he did not exercise discretion in customer accounts; and, in 2018, improperly asked one of the customers to deny his use of discretion in any conversation with the firm.Therefore, Mehlin violated NASD Rule 2510(b) and FINRA Rule 2010.. . .From June 2017 through February 2019, Mehlin used text messages to and from his private phone number to communicate with one of the customers in whose account he exercised discretion. The messages concerned securities business including, inter aha, discussions about investment choices, account performance, and completing firm forms. Because the text messages were not done through an approved firm platform, they were not captured, supervised, or retained by the firm. In addition, in a 2018 annual compliance questionnaire, Mehlin inaccurately stated that he did not use personal text messages to discuss securities business with customers.Therefore, Mehlin violated FINRA Rules 4511 and 2010.
From 2011 through the date of his termination Wilkie circumvented his firm's written procedures by taking steps to conceal that he had been named as a beneficiary on a customer's life insurance policy, including by failing to notify his firm he was named as a beneficiary, eventually causing his son to be named as a beneficiary and submitting eight false compliance questionnaires denying his beneficiary status in violation of FINRA Rule 2010.
In December 2017, Fazzone's firm customer purchased a fixed annuity issued by the firm's affiliate, New York Life, in the amount of $177,715. Fazzone earned a $5,775 commission on the sale.In April 2018, the customer died. In June 2018, Fazzone submitted a claim against the customer's estate seeking reimbursement for the $5,775 commission which he represented had been reversed by New York Life. To support his claim, Fazzone presented a document purportedly prepared and signed by the customer instructing the estate to reimburse Fazzone for any commissions reversed due to her death.Based on Fazzone's claim, the customer's estate paid Fazzone the $5,775. However, New York Life did not reverse or charge back Fazzone the $5,775 commission at any time.By submitting a wrongful claim and receiving reimbursement to which he was not entitled, Fazzone converted $5,775 from his firm customer's estate.Therefore, Fazzone violated FINRA Rule 2010.