Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
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.
July 2009

The firm failed to 

  • provide for appropriate procedures and controls and an appropriate system of follow-up and review with respect to its obligations to provide 
    • appropriate procedures for supervision of business operations on the NYSE Trading Floor;
    • adequate supervision of its sole branch office, review of options accounts by a delegated person; ensure that its operational and regulatory activities were supervised and that it had systems, procedures and staff to follow-up and review all areas of its business activities, including its anti-money laundering (AML) program, suspicious activity reporting and its branch office to ensure compliance with applicable securities regulations and NYSE rules;
  • supervise the trading activity of its president and chairman
  • ensure that electronic communications with the public were reviewed and retained; 
  • establish an AML compliance program that detected and caused the reporting of certain transactions; 
  • establish and implement policies, procedures and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and the implementing regulations thereunder; 
  • provide for independent testing for compliance; and designate adequate and trained staff to ensure compliance with the Bank Secrecy Act;
  • document error accounts trades that a floor broker made;
  • deliver original or updated options disclosure document prior to newly approved customers or previously approved options accounts;
  • properly record all revenue and expenses on an accrual basis
  • maintain minimum net capital compliance; and
  • implement adequate best execution procedures and conduct a formal analysis of best execution data. 

The Firm 

  • employed independent contractors without adequately complying with NYSE regulations;
  • handled options accounts activity in violation of NYSE regulations; and 
  • failed to comply with the firm element of the continuing education rule

Schumacher failed to 

  • reasonably discharge his supervisory duties as president and chairman; and 
  • document error accounts trades that a floor brokermade.
Strasbourger, Pearson, Tulcin,Wolff, Inc. and Michael J. Schumacher (Principal): Censured; Fined $100,000 jt/several with Strasbourger; Required to retain an independent consultant to conduct a comprehensive review of its policies, procedures and practices to ensure compliance with federal securities laws, NYSE/NASD rules, and to make
March 2009

The Firm 

  • prepared and maintained inaccurate customer reserve formula computations and failed to make required deposits to its Special Reserve Account as required by the Securities Exchange Act, and failed to notify FINRA of its failure to make the deposits;
  • prepared and maintained an inaccurate net capital computation, trial balance and general ledger, and filed a materially inaccurate Financial and Operations Combined Uniform Single (FOCUS) report in which it overstated its net capital;
  • failed to conduct an accurate box count (in that there were certificates in the box for positions that were not on the firm’s stock record, and the amount of shares in the box did not match the firm’s stock record); 
  • failed to maintain an accurate securities position record, and did not take steps to obtain physical possession or control of securities failed-to-receive by initiating a buy-in procedure or otherwise in automated customer account transfers (ACATs) failures and customer-related fails; 
  • failed to liquidate, or timely liquidate, unpaid-for customer securities positions in cash accounts as required by Regulation T, and permitted customers to purchase securities in accounts that were frozen pursuant to Regulation T without having cash on deposit for the purchases, and failed to liquidate customer positions in a timely manner in customer margin accounts that fell below FINRA’s maintenance margin requirements;
  • permitted an individual to act as its operations manager and to perform functions requiring registration as a Financial and Operations Principal (FINOP) when she was not so registered, and also employed a chief compliance officer who was not registered with the firm as a general securities principal or registered in any capacity with the firm;
  • had not recently conducted an independent test of its anti-money laundering (AML) compliance program, failed to provide prompt notification to FINRA of the change of its AML compliance officer, failed to conduct ongoing AML training for appropriate personnel, and its AML compliance program was inadequate in that it failed to establish policies and procedures that could reasonably be expected to detect and cause the reporting of suspicious transactions;
  • failed to maintain all internal electronic correspondence on non-erasable, non-rewriteable media, and its supervisory system was deficient in that registered persons could delete emails at will, and its written procedures were deficient because they lacked details or explanation;
  • failed to maintain a continuing and current firm element continuing education program;
  • failed to establish and maintain a reasonable supervisory system for financial and credit risk management relating to its correspondent business;
  • failed to reasonably supervise its operations system conversion and its operations activities to detect and/or prevent violations including, but not limited to, inaccurate box counts, position records, buy-in procedures, Regulation T and NASD Rule 2520,maintenance of electronic correspondence and customer account transfers;
  • engaged in the practice of improperly liquidating customer money market fund positions and failing to sweep customer free credit balances into customer-designated money market funds or a bank deposit account to create cash flows to meet its daily settlement obligations;
  • failed to maintain and provide account documentation to FINRA for accounts liquidated to meet its daily settlement requirements, and failed to comply with FINRA’s Uniform Practice Code in that it validated account transactions and transfers late; and
  • failed to report to FINRA, for itself or for any of its correspondent firms, daily INSITE information regarding the number and type of transactions conducted each day, the dollar value of the transactions, the net liquidating equity in proprietary trading accounts, the dollar amount of unsecured customer debits, information about margin debits, and calls in customer accounts and short interest information.
North American Clearing, Inc.: Expelled
Bill Singer's Comment
On May 27, 2008, the SEC's ex parte motion for emergency relief was granted and a temporary restraining order was entered against the defendants and freezing North American Clearing's assets. The SEC requested the relief when it filed a complaint on May 27, 2008 against North American Clearing, its founder and director Richard L. Goble (at the time, a Financial Industry Regulatory Authority (FINRA) Board member), its president Bruce B. Blatman, and its former financial and operations principal Timothy J. Ward, charging them with fraud and other securities laws violations. The SEC's complaint alleges that the defendants engaged in illegal activities, including the misuse of customer funds, in order to hide North American Clearing's financial problems and to pay for its daily business operations. http://www.sec.gov/litigation/complaints/2008/comp20602.pdf
February 2009
The Firm failed to develop and implement a customer identification program. The Firm’s Checks Received and Forwarded Blotter or an equivalent record was inadequate in that the firm failed to record checks received. The Firm failed to develop and maintain a continuing and current education program for its covered registered persons for one year, in that it failed to develop a written training plan outlining the Firm Element program and failed to maintain records documenting the content and completion of the Firm Element by its covered registered persons. 
Kern, Suslow Securities, Inc.: Censured; Fined $22,500
Bill Singer's Comment
How you can fail to develop/implement a CIP in this day and age is truly puzzling. But okay, maybe they thought they had one or they had one, but FINRA was being too picky. Then of course we have to tip our hat to the Firm for failing to record checks received--now that's quite a feat!  But, okay, maybe they don't get that many checks and the few that came in they simply deposited without maintaing a formal blotter. However, when you add to the two prior charges the failure to develop/maintain a CE program or to maintain a training plan (I mean, geez, you can cut and paste one of those or pay a few bucks to a consultant), you gotta admit that FINRA raise a tad too many "failures" for it all to be coincidental.  
Michael Alvin Callaway
Callaway allowed a subordinate client associate to complete firm training programs, including FirmElement training, for him by completing the modules and taking the applicable proficiency tests using his User ID and password. Callaway condoned allowing client associates to complete firm training, including Firm Element training, for members of his business unit. 
Michael Alvin Callaway: Fined $5,000; Suspended 3 months

Respondents allowed a subordinate client associate to complete the Firm Element training programs for them by completing the modules and taking the applicable proficiency tests using their user IDs and passwords. 

Troy Eric Brown: Fined $5,000; Suspended 10 business days in all capacities

Larry Michael Cole: Fined $5,000; Suspended 10 business days in all capacities

Jeffrey David Swanson: Fined $5,000; Suspended 30 business days in all capacities

January 2009

The Firm permitted Marshall 

  • and another individual to execute trades in covered securities during a period beginning 30 calendar days prior to and ending five calendar days after publishing research reports concerning the subject companies; 
  • to trade in a manner that was inconsistent with his recommendation, as reflected in the most recent research report the firm published. 

The Firm and Marshall provided a subject company with a draft copy of a research report that contained prohibited information before the report was published. 

Acting through Marshall, the Firm issued research reports that failed to disclose that Marshall and/or a member of his household had a financial interest in the securities of the subject company and the nature of the financial interest. 

The Firm failed to 

  • affirmatively disclose in one research report that an affiliate owned more than one percent of a subject company’s common equity securities, and failed to disclose in research reports the risks that may have impeded achievement of the price target stated in each report;
  • develop and implement adequate written supervisory procedures reasonably designed to ensure that the firm and its employees complied with the provisions of NASD Rule 2711; 
  • provide an attestation to FINRA for a year that it had adopted and implemented procedures regarding compliance with NASD Rule 2711, and failed to develop and implement any written supervisory procedures concerning watch or restriction lists; and
  • develop and implement a Firm Element Continuing Education program, specifically, to develop a written training plan for its covered registered persons. 

The Firm's research reports did not include clear, comprehensive and prominent disclosures regarding whether it or any of its affiliates, officers or employees held interests in the subject companies’ securities.

First Dallas Securities: Censured and fined $50,000 ($10,000 of which was jointly and severally with Marshall)

Eric Jay Marshall: Fined $10,000 jt/sev with Firm and an additional $5,428.07 (includes $428.07 in disgorged trading profits; Suspended 15 days as a research analyst

Bill Singer's Comment
Years and years after the massive research rules overhaul and firms and folks still can't get it right.  If you're still in doubt, go read NASD Rule 2711. Research Analysts and Research Reports.
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