Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
RESEARCH and ADVERTISING
2009
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 2009
Branch offices utilized communications that failed to provide either adequate balancing language or a sound basis for evaluating the information provided. The communications contained statements that were promissory of successful investment results and contained exaggerated, misleading or unwarranted statements. The firm’s communications contained oversimplified and incomplete comparisons, failed to disclose the member firm’s name, and failed to provide required Securities and Exchange Commission (SEC) or Securities Industry Protection Corporation (SIPC) disclosures in conformance with SEC and/or SIPC rules.
Morgan Stanley & Co. Incorporated: Censured; Fined $120,000
Tags: Communications  SIPC  
Peter Christian Dunne
OS/2007011937002
Dunne posted electronic messages on an Internet message board concerning a company which constituted advertisements on his member firm’s behalf. Dunne posted the advertisements without a registered principal’s prior approval and none of the advertisements named the firm or reflected Dunne’s relationship with the firm.

The advertisements constituted purchase recommendations for the company and
  • failed to provide, or offer to furnish upon request, available investment information supporting each recommendation;
  • failed to disclose that
    • Dunne’s firm was a market maker in the company;
    • that the firm and/or its officers or partners had a financial interest in the company,
    • the nature of the financial interest; and
  • failed to provide a fair and balanced assessment, referring only to the company’s upside without any disclosure of the risks.
Dunne opened securities brokerage accounts at other firms, failed to notify the firms in writing that he was associated with other firms, and failed to notify his member firms in writing that he opened accounts at other firms.Dunne falsely represented to his member firms that he had no outside brokerage accounts and did not use or participate in chat rooms,message boards or other unapproved electronic communications.
Peter Christian Dunne: Fined $25,000; Suspended 1 year
November 2009

Jordan, a former research analyst with Wells Fargo Securities, LLC ("Wells Fargo") was named in a three count FINRA Complaint alleging that three research reports Jordan authored on Cadence Design Systems, Inc. ("Cadence") did not disclose certain conflicts of interest and that she thereby violated NASD Conduct Rules 2711(h)(1)(A), 2711(h)(1)(C), 2210(d)(1)(A), and 2110.

The First Cause alleged that Jordan failed to disclose in the Cadence Research Report dated February 4, 2005, that she had applied for the position of Corporate Vice President of Investor Relations with Cadence and scheduled employment interviews with members of Cadence’s senior management team.

The Second Cause alleged that Jordan failed to disclose in the Cadence Research Report dated March 2, 2005, that she had interviewed with senior members of Cadence’s management team.

The Third Cause  alleged that Jordan failed to disclose in the Cadence Research Report dated April 28, 2005, that she had accepted Cadence’s employment offer to become its Vice President of Investor Relations; and that she failed to disclose the financial interest she acquired under the terms of the Cadence employment offer.

Jennifer Anne Jordan: Following Appeal, FINRA's National Adjudicatory Council (NAC) increased the sanctions from the Office of Hearing Officers (OHO) fines of $10,000 and $2,500 to a fine of $20,000 and a 2 year suspension in all capacities.
Bill Singer's Comment

I am troubled by this case because the June 18, 2008, OHO Decision seemed well reasoned and did not make light of Jordan's lapses. After hearing testimony and considering the totality of the case, the OHO Panel made a point of expressing the rationale for the degree of sanctions it imposed (See, Page 21 of the OHO Decision):

Next, the Hearing Panel considered the following mitigating factors. First, Jordan’s misconduct did not harm any customers or other members of the investing public.85 Enforcement did not allege, and there is no evidence, that Jordan’s employment opportunity influenced her judgment about Cadence. Indeed, her reports were in line with others issued at the same time. None of the reports contained biased or inaccurate information about Cadence. Second, her misconduct did not have the potential to benefit her monetarily.86 For example, Jordan did not alter her judgment about Cadence to secure more favorable terms of employment. Third, Jordan cooperated throughout the investigation of this matter. She testified truthfully at her on-the-record interviews; she did not attempt to conceal her actions or otherwise mislead FINRA.87

The absence of culpable intent and the aberrant nature of Jordan’s misconduct, along with the mitigating factors discussed above, lead the Hearing Panel to conclude that a fine on the low end of the recommended sanctions for these violations is sufficient. . . .

Additionally, by FINRA Press Release dated June 27, 2007, the NASD censured and fined Wells Fargo Securities, LLC of San Francisco $250,000 - and imposed a $40,000 fine and 60-day supervisory suspension against its former Director of Research, Douglas van Dorsten - for failing to disclose in a research report that Jennifer Jordan had accepted a job at Cadence Design Systems, a San Jose, CA company that was the subject of the report. Notably, both the OHO Decision and the Press Release confirm that although Wells Fargo and van Dorsten had learned nearly three weeks prior to the April 28 report that Jordan had accepted a position at Cadence as Vice President of Investor Relations, that information was not disclosed in the report, and that van Dorsten approved the April 28 report without requiring that the report disclose that Jordan had accepted a position with Cadence.

Why did the NAC slam Jordan on appeal?  The fine was nearly doubled that imposed by the OHO and a staggering 2 year suspension was tacked on. How could two deliberative bodies see things so differently -- and why wasn't more deference given to the panel that conducted a plenary hearing?

As of the writing of this Commentary on November 30, 2009, although FINRA has posted online the Press Release and the underlying OHO Decision, the NAC Decision is still not posted (the most recent online NAC Decision is in the matter of John M. Saad dated October 6, 2009).

It is a disservice to FINRA's members, the investing public, and Respondent Jordan to not timely post the OHO Decision so that all three interested parties can weigh the merits of the NAC's rationale for increasing the sanctions.

Rodney Lee Cantrell
AWC/2007009405901
Cantrell caused unapproved advertisements that did not comply with FINRA’s standards for communications to be broadcast to the public. He failed to file with FINRA, within 10 days of first use, an advertisement concerning mutual funds and failed to include required references to his member firm’s Securities Investor Protection Corporation (SIPC)membership.
Rodney Lee Cantrell: Censured; Fined $10,000; Suspended 10 business days in all capacities
Tags: Broadcast    
September 2009
Name Redacted
AWC/2007009784401

NEWSLETTERS

  • XXX distributed newsletters that a principal of his member firm had not approved for distribution, thereby preventing his firm from complying with NASD Rule 2210(C)(1) by providing the newsletters to FINRA’s Advertising Regulation Department for approval; 
  • the newsletters failed to prominently disclose the firm’s name as the broker-dealer through which he conducted his securities business; and 
  • one of the newsletters referenced an unregistered entity through which XXX engaged in business but did not disclose the relationship between his firm and the unregistered entity. 

SEMINARS

  • XXX distributed invitations to seminars about financial matters, including investments, and a firm principal had not approved the content of the invitations;
  • the invitations and XXX’ Web site misrepresented that he was the author of books
  • the invitations contained misleading and exaggerated information and failed to identify his firm as the broker-dealer. 
  • XXX conducted seminars at which he made publications available for review, and offered to distribute the publications that were purchased from a vendor of investment publications, which a principal of his firm had not approved, and thereby prevented his firm from complying with NASD Rule 2210(C)(1) by providing the newsletters to FINRA’s Advertising Regulation Department for approval;
  • XXX offered to distribute the publications on his public Web site. The publications contained violations of the content standards in FINRA Rules 2210(d)(1) and (2) and included statements that were misleading, inaccurate or unwarranted; and
  • XXX used a script in presenting material at the seminars that was outdated and misleading
Name Redacted : Fined $15,000; Suspended 6 months
Bill Singer's Comment
A nice hand for FINRA! A well presented case. Easy to follow and replete with sufficient information to be both informative and educative. Promote the author of this report--immediately; and giver her/him a huge salary increase and bonus.

RBC Capital Markets Corp allowed associated persons to function as research analysts without having Series 86 or 87 research analyst registrations. The unregistered analysts published more than 3,500 research reports, and published more than 400 research reports after FINRA informed the firm that it had made a preliminary determination to recommend disciplinary action be initiated (one of the cited reports was published 7 months after the issuance of the Wells Notice) against the firm for its failure to appropriately register its research analysts (the Wells Notice). 

RBC Capital Markets Corporation: Censured; Fined $150,000
Bill Singer's Comment
This one sort of caught my attention. First of all, it involves RBC,which many of us have long held as a fairly conservative organization not known for non-compliant behavior -- yeah, coming from me of all folks, that's is very high praise. Second, allowing unregistered analysts to pen thousands of research reports is a fairly big goof bordering on epic proportions; all the more so for a somewhat staid firm like RBC. Third, after the Ref throws the flag on the field, you then go out and fail to catch a further 400 reports authored by mere associated persons -- and you let the last report get published as far as 7 months after the notice?
Bassari drafted a form letter about his previous employer and mailed it to former (potential) customers, which constituted sales literature without prior approval of an appropriate registered principal of his member firm. The form letter failed to provide a sound basis for statements contained in the letter, and contained other statements that were unwarranted. 
Robert Bassari (Principal): Fined $5,000; Suspended 10 business days
August 2009
David Travis Weitz
AWC/2007011496201

Weitz 

  • provided a draft of a research report that contained a research summary, rating and price target to the company whose stock was featured as a stock pick, and did not provide a complete draft of the research report to his firm’s legal or compliance personnel prior to sending the report to the company;
  • failed to disclose his ownership of securities that he profiled in research reports;
  • purchased securities within 30 days prior to the security being featured as a stock pick and before his firm’s legal or compliance officers pre-approved the Stock Pick section of the research report. 
  • failed to disclose valuation methods used to determine the price target and the risks to achieving price targets;
  • failed to certify that the views in sections of research reports that he authored or contributed to were his own. 
David Travis Weitz: Fined $10,000; Suspended 30 days
Bill Singer's Comment
See this apparent companion case: Haggerty
Jamie Patrick Lake
AWC/2009017481401
Lake solicited customers to invest a total of $729,500 in different investment schemes through his weekly radio talk-show and daily radio advertising spots. Lake converted $671,321 he solicited for his personal use and returned $58,179 to customers. 
Jamie Patrick Lake: Barred
Stephanie Murch Haggerty
AWC/2007011496202

Haggerty 

  • did not have the required Series 86 or 87 (Research Analyst Qualification Exam) licenses required for research analysts when she was the principal author of or contributor to the Stock Pick sections of her member firm’s newsletter;
  • failed to disclose her ownership of securities that she profiled as Stock Picks because she did not treat the section as a research report;
  • purchased a security for her own account within 30 days prior to the security being featured as a Stock Pick, and before her firm’s legal or compliance officers pre-approved the Stock Pick section of the newsletter;
  • failed to disclose valuation methods used to determine the price target in any Stock Pick section and the risks to achieving the price targets in her stock picks; and
  • failed to certify that the views in the sections of the firm’s newsletter that she authored or contributed to were her own. 
Stephanie Murch Haggerty: Fined $10,000; Suspended 30 days
Bill Singer's Comment
Assuming that we accept FINRA's explanation of the facts, it seems that Haggerty authored a "Stock Pick" column in a newsletter sent out by her firm. That's not a minor fact. How come someone at her firm didn't hold up publication of the newsletter when it realized that Haggerty was publishing material without anyone having pre-approved it? Further, why did Haggerty's Firm permit her to author research analyses (and why when she did not hold the Series 86/87? How could her firm not have had prior notice of her authored materials when the firm published the column in its own newsletter? This would be like my law firm asking a non-lawyer employee to draft a legal article under his/her name to be included on the firm's website and sent out in its newsletter. Then, when it turns out that the article has some errors and failed to disclose ethical conflicts, my law firm would argue that it didn't know the non-lawyer wasn't a lawyer, that the non-lawyer should not authored the article, and that the non-lawyer failed to disclose conflicts. Yeah, like that's going to work.

Something here is just not making sense -- of course, that something could be FINRA, which wouldn't be that much of a shock to me.

Also, see this apparent companion case: Weitz
July 2009
Wedge Securities, LLC
AWC/2007011191101

The Firm failed to

  • inclued the required analyst certification regarding the analyst’s compensation in a research report, and 
  • include in a clear and prominent manner the certification that the view expressed in the report accurately reflected the analyst’s personal views about the subject company; and
  • enforce and maintain a supervisory system, including policies and procedures, reasonably designed to ensure compliance with SEC Regulation AC and NASD Rules 2210 and 2211. 
Wedge Securities, LLC: Censured; Fined $20,00
June 2009

The Firm 

  • failed to evidence approval of research reports and to properly disclose securities holdings in research reports; 
  • failed to, enforce procedures to ensure compliance with FINRA rules requiring approval of research reports, establish and maintain a supervisory system reasonably designed to ensure that disclosure of securities ownership complied with FINRA rules, promulgate and enforce firm policies and procedures concerning review of employee electronic communications with the public that comported with the standards set forth in FINRA rules; 
  • failed to request and receive duplicate statements for employee brokerage accounts in contravention of its policies and procedures;
  • was unable to evidence requests or approvals of dual employment for employees as required by its policies and procedures;
  • failed to evidence that it conducted annual branch inspections;
  • failed to file an accurate Annual Compliance Report for one year;
  • failed to report customer complaints;  
  • unable to evidence that it timely filed Uniform Termination Notices for Securities Industry Registration (Forms U5) and that its Compliance Registered Options Principal regularly furnished the required options activity reports to the compliance officer and other senior management;
  • failed to file an accurate annual attestation regarding NYSE Rule 472; and
  • failed to make and keep accurate records of the computation of aggregate indebtedness.
Ladenburg Thalmann & Co., Inc.: Censured; Fined $200,000
Securities and Exchange Commission sustained findings of violation and sanctions on appeal of a National Adjudicatory Council decision on appeal from Office of Hearing Officers decision. 

Chief Compliance Officer Strong failed to supervise a research analyst who sold securities in his personal trading account contrary to the recommendations contained in various firm research reports, and allowed the trader to execute purchase transactions during the blackout periods. Strong failed to include, or included insufficient or inaccurate required disclosures in research reports, and failed to timely file an annual attestation of supervisory procedures for research analysts.

http://sec.gov/litigation/opinions/2008/34-57426.pdf

Robert Eugene Strong (Principal): Fined $10,000
Bill Singer's Comment
An interesting case and I would recommend that you read the SEC Opinion.  I would note the following, as stated in that Opinion at pages 19-20:

In sustaining these sanctions, we note that NASD's National Adjudicatory Council ("NAC"), which considered Strong's appeal from NASD's hearing panel, reduced the sanctions from the nine-month supervisory suspension and $15,000 fine imposed by the hearing panel. In reducing the sanctions, the NAC noted that it did "not find Strong's violations to be egregious" as had the hearing panel. The NAC considered "the circumstances under which Strong was operating," finding that Strong was "the sole compliance person in a 40-person firm that had previously neglected compliance." The NAC also considered, as mitigating, that the misconduct at issue occurred "within months of Strong's joining the Firm and when Strong was attempting to fulfill the broad-based compliance responsibilities put upon him." According to the NAC, "Strong was overwhelmed by the enormity of the responsibilities [and] . . . not equipped to undertake the responsibilities required of him at the Firm." In addition, the NAC found that Strong did not "personally benefit in any way" from his misconduct. Based on those considerations, the NAC determined that "the minimum sanction suggested in the Guidelines for the supervisory and disclosure violations" was "appropriate."

April 2009

Acting through Itzen, Choice 

  • approved a research report for a company that was issued to the firm’s customers, but did not contain a disclosure that the firm had received compensation for investment banking services from the company, and
  • failed to ensure that the research reports contained such disclosure. 

Choice issued subsequent research reports that did not contain such disclosure. 


Choice Investments, Inc.: Censured; Fined $20,000 ($10,000 Jt/severl with Itzen)

Donald Arthur Itzen (Principal): Fined $10,000 jt/sev with Choice; Suspended 20 business days in Principal capacity only.

February 2009
James Stanley Gossett
AWC/2007008653501

Gossett made unsuitable investment recommendations to public customers, in that they were inconsistent with each customer’s financial situation, investment objective, circumstances and needs. In verbal and written communications with customers, Gossett made misleading or unwarranted claims about his investment strategy, particularly regarding investment risks, and made predictions or projections of the future performance of the strategy without providing a sound basis for evaluating his assertions. Gossett prepared and distributed to prospective customers sales literature about his investment strategy that failed to include risk disclosures and provided misleading information about past performance; provided incomplete and/or misleading information to customers about the performance of their investments and/or the account balance; and prepared an account statement for a customer in which he did not report all of the customer’s account holdings and thus reported an account balance that was greater than actual. 

Gossett exercised discretion in firm customer accounts without the customers’ prior written authorization and his member firm’s prior written acceptance. Gossett enlisted the service of a non-registered individual to solicit investors to open accounts with Gossett, promote Gossett’s investment strategy, assist customers with completing application forms and serve as Gossett’s primary point of contact. As compensation for the services, Gossett agreed to pay the individual half of the commissions he generated from trades in the customers’ accounts

In addition, Gossett opened a securities brokerage account with another FINRA member without providing written notice to his member firm and without advising the other firm of his association with a member firm; failed to disclose the account to his member firm after he opened the account; and failed to provide written notice to his member firm that he was engaged in an outside business activity. In response to a request for information, Gossett knowingly provided false and misleading information. 

James Stanley Gossett: Barred
Bill Singer's Comment
Awesome!!!  Just re-print this case and send it around the office. It's a blueprint of nearly everything NOT to do. If this were a pinball game, we would have hit all the bumpers, gotten all the bonuses, and won a free ball at the end -- except, this isn't a game and, in the end, Gossett got barred. Not much of a prize.
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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