- in connection with the commission recapture agreement described above, the firm held, or was in control of, customer funds without establishing a special reserve bank account for the exclusive benefit of the customer in violation of Securities Exchange Act Rule 15c3-3, By holding customer funds and failing to forward the funds to its clearing firm, the firm became a broker or dealer that receives and holds funds for customers, which required it to increase its net capital and establish a reserve bank account for customer protection;
- after a commission recapture agreement was ultimately established for the customer by the firmís clearing firm, the firm deposited into its own checking account a check from the clearing firm which included at least $136,700 in commission rebates due to the customer. Rather than record a liability to the customer, the firm made a journal entry to reduce the commission receivable. The firmís receipt of customer funds increased its minimum net capital to $250,000, a level that the firm did not meet;
- the firm held and segregated security positions in its proprietary account for the benefit of two customers in order to satisfy the obligation of promissory notes and a confidential private placement memorandum (PPM);
- the firm acted in the capacity of a noteholderís agent to facilitate the repayment to firm customers of $2,715,000 of principal plus interest on defaulted notes and warrants issued by an unaffiliated issuer. By doing so, the firm acted in a carrying, transferring and safekeeping capacity for customers, which required the firm to maintain a minimum net capital of at least $250,000. The firmís net capital was below that required minimum, and as a result the Financial and Operational Combined Uniform Single (FOCUS) reports it filed, and its books and records, were inaccurate. The firm also failed to timely file Securities and Exchange Commission (SEC) Rule 17a-11 notices when notified by its designated examining authority that the broker-dealerís net capital was, or had been, below its minimum requirement.
- enforce the firmís WSPs regarding the handling of PPM, subscription documents, and investor funds for private placement offerings sold by the firm;
- effectively supervise the associated personsí handling of such documents so that he did not prevent the associated persons from sending subscription documents directly to the private placement issuer, precluding the firm from conducting adequate oversight or review of the transactions and from retaining transaction-related documents;
- review the firmís private placement sales for suitability, and typically did not review or approve private placement transactions effected by the associated persons he supervised; and
- enforce the firmís WSPs and failed to effectively supervise their use of non-firm email for securities business.
- to investors that the entity had been experiencing cash flow problems and that the entity and other companies affiliated with the real estate developer had failed to make required interest payments to investors; and
- that it was unlikely that the entityís affiliated company would be able to make its scheduled principal payments totaling $10 million that were due to its note holders.
Boppre was a member of his firmís new product committee, which was responsible for conducting due diligence and approving new products at the firm. Boppre knew of an issuerís failure to make payments to its investors and was also aware of other indications of the issuerís problems but approved the offering as a product available for his firmís brokers to sell to their customers. Also, Boppre suspended the offering sales and then reopened the sales after further discussions with issuer executives.
Boppre allowed his firmís brokers to continue selling the offering despite the issuerís ongoing failure to make principal and interest payments, and despite other red flags concerning the issuerís problems. Acting on his firmís behalf, Boppre failed to conduct adequate due diligence of the offering before allowing firm brokers to sell this security; without adequate due diligence, the firm could not identify and understand the inherent risks of the offering and therefore could not have a reasonable basis to sell it. By not conducting adequate due diligence, Boppre failed to reasonably supervise firm brokersí sales of the offering.
While associated with the firm, registered representatives made misrepresentations or omissions of material fact to purchasers of unsecured bridge notes and warrants to purchase common stock of a successor company.
The registered representatives:
- guaranteed customers that they would receive back their principal investment plus returns, failed to inform investors of any risks associated with the investments and did not discuss the risks outlined in the private placement memorandum (PPM) that could result in them losing their entire investment. The registered representatives had no reasonable basis for the guarantees given the description of the placement agentís limited role in the PPM; and
- provided unwarranted price predictions to customers regarding the future price of common stock for which the warrants would be exchangeable and guaranteed the payment at maturity of promissory notes, which led customers to believe that funds raised by the sale of the anticipated private placement would be held in escrow for redemption of the promissory notes.
The Firm, acting through a registered representative, made misrepresentations and/or omissions of material fact to customers in connection with the sale of the private placement of firm units consisting of Class B common stock and warrants to purchase Class A common stock; the PPM stated that the investment was speculative, involving a high degree of risk and was only suitable for persons who could risk losing their entire investment. The representative represented to customers that he would invest their funds in another private placement and in direct contradiction, invested the funds in the firm private placement.
The Representative recommended and effected the sale of these securities without having a reasonable basis to believe that the transactions were suitable given the customersí financial circumstances and conditions, and their investment objectives. The representative recommended customers use margin in their accounts, which was unsuitable given their risk tolerance and investment objectives, and he exercised discretion without prior written authorization in customersí accounts.
Acting through Locy, its chief operating officer (COO) and president, the Firm failed to reasonably supervise the registered representative and failed to follow up on ďred flagsĒ that should have alerted him to the need to investigate the representativeís sales practices and determine whether trading restrictions, heightened supervision or discipline were warranted. Moreover, despite numerous red flags, the firm took no steps to contact customers or place the representative on heightened supervision, although it later placed limits only on the representativeís use of margin. The firm eventually suspended his trading authority after additional large margin calls, and Locy failed to ensure that the representative was making accurate representations and suitable recommendations.
Turbeville, the firmís chief executive officer (CEO), and Locy delegated responsibility to Mercier, the firmís chief compliance officer (CCO), to conduct due diligence on a company and were aware of red flags regarding its offering but did not take steps to investigate.
Acting through Turbeville, Locy and Mercier, the Firm failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability; under the firmís written supervisory procedures (WSPs), Mercier was responsible for ensuring the offering complied with due diligence requirements but performed only a superficial review and failed to complete the steps required by the WSPs; Locy never evaluated the companyís financial situation and was unsure if a certified public accountant (CPA) audited the financials, and no one visited the companyís facility. Neither Turbeville nor Locy took any steps to ensure Mercier had completed the due diligence process. Turbeville and Locy created the firmís deficient supervisory system; the firmís procedures were inadequate to prevent and detect unsuitable recommendations resulting from excessive trading, excessive use of margin and over-concentration; principals did not review trades or correspondence; and the firmís new account application process was flawed because a reviewing principal was unable to obtain an accurate picture of customersí financial status, investment objectives and investment history when reviewing a transaction for suitability. The firmís procedures failed to identify specific reports that its compliance department was to review and did not provide guidance on the actions or analysis that should occur in response to the reports; Turbeville and Locy knew, or should have known, of the compliance departmentís limited reviews, but neither of them took steps to address the inadequate system.
Brookstone Securities, Inc.: Censured; Fine $200,000
David William Locy (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only
Mark Mather Mercier (Principal): Fined $5,000; Suspended from 3 months in Principal capacity only
Antony Lee Turbeville (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only
Meyer verbally informed his supervisors of his outside business activities and his business plans, but failed to provide his firm with prompt written notice of his outside business activities, for which he accepted compensation. Without his relativeís knowledge, Meyer conducted subaccount transfers, or transactions, in an Individual Retirement Account (IRA) the relative held to his personal account, which held only a variable annuity contract. The annuity sub-account transactions reduced the value of the variable annuity contract by $1,395.15 by the time the account was formally transferred to his relative.
Meyer transferred $1,800 from the relativeís IRA to his personal bank account. The firm immediately reversed the transaction as well as reimbursed Meyerís relative $1,395.15 for the accountís reduction in value caused by Meyerís transactions. Meyer has made full restitution to the firm.
Neri improperly created an answer key for a state insurance LTC CE examination when he sat with a registered representative taking the CE examination and provided the registered representative with his opinion as to the correct answers to certain questions, recorded the answers the registered representative selected on a piece of paper, retained the answer key for several months and then transferred the answer key to an email.
Neri improperly distributed that answer key to other employees of his member firm when he sent that email to other wholesalers of the firm; after a wholesaler emailed Neri to inquire whether he had answers for the CE test, Neri sent the email to other wholesalers of the firm. On multiple occasions, Neri improperly assisted registered representatives outside of the firm taking the LTC CE examination by referring to the answer key and providing them with some or all of the examination answers; either in person or over the phone, Neri provided the registered representatives with his opinion as to the correct answers to some or all of the examination questions without reference to the answer key while they were taking the exam. The findings also included that on multiple occasions, Neri took the LTC CE examination, in whole or part, for registered representatives outside of the firm by meeting with registered representatives in their offices, sitting at their computers and either answering all the questions himself without assistance from the representative, or the representative would provide some of the answers, which Neri would enter then into the computer.
Voccia was a brokerage partner with another registered representative, shared clients and commissions and collaborated on outside ventures, including a private company they formed. Voccia and his partner orally informed their member firm they were involved in an outside business activity relating to their company, and the firm gave oral approval with the understanding they would only solicit one firm customer; however, the two partners solicited other investors, including firm customers, without the firmís knowledge and approval.
Voccia made misrepresentations and omissions of material fact when he told prospective investors that the company and its related companies had good chances of success and would be able to sustain themselves even though he had insufficient knowledge of the companiesí finances, and his representations were misleading because he focused on the potential benefits of investing in the company without providing adequate disclosure about the risks. Voccia engaged in capital raising for his company and his related companies; individuals invested approximately $6 million dollars during a five-year period.
Voccia and his partner were able to sell investments without the firmís knowledge because the investments were not held with their firmís clearing firm but were held with firms that their firm allowed its brokers to use to maintain custody of illiquid investments such as their company.
Voccia did not provide the firm with written notice of any of the proposed offerings and did not inform the firm that he had received, or might receive, compensation for selling the offered securities. In addition, the firm did not approve the private securities transactions, did not record them on its books and records and did not supervise Vocciaís participation in the transactions. Moreover, Voccia failed to disclose numerous outside business activities unrelated to his company without prompt written notice to his firm. Furthermore, Voccia failed to amend his Form U4 to disclose material information and failed to respond to FINRA requests for information, documents and to timely appear for testimony.
Puplavaís non-registered assistant had access to his signature guarantee stamp, and without Puplavaís knowledge, permitted the member firmís registered representatives to use the signature guarantee stamp to approve securities business-related transactions and paperwork that required a signature guarantee stamp. Puplava discovered this practice and instructed his non-registered assistant and the registered representatives involved to discontinue the practice, but Puplava did not take back his signature guarantee stamp or take steps to otherwise secure the stamp to prevent its misuse. Puplava had customers sign blank securities business-related forms, including non-brokerage change request forms, mutual fund transfer forms and securities account forms, and retained these forms in his customer files contrary to his member firmís prohibition against this practice.
Peck engaged in a private securities transaction by participating in the sale of a $50,000 secured investment note from an entity to a current client of his firm. Peck failed to provide his firm with prior notice of his participation in this transaction.
Also, the SEC filed a complaint in the United States District Court for the Central District of California against the entity and related parties alleging that they were perpetrating an ongoing $216 million real estate investment fraud.
As the AMLCO and president of his member firm, Grossman failed to demonstrate that he implemented and followed sufficient AML procedures to adequately detect and investigate potentially suspicious activity.
Grossman did not consider the AML procedures and rules to be applicable to the type of accounts held at the firm and therefore did not adequately utilize, monitor or review for red flags listed in the firmís procedures. His daily review of trades executed at the firm and all outgoing cash journals and wires, Grossman did not identify any activity of unusual size, volume or pattern as an AML concern. The firmís registered representatives, who were also assigned responsibility for monitoring their own accounts, failed to report any suspicious activity to Grossman. Until the SEC and/or FINRA alerted Grossman to red flags of suspicious conduct, Grossman did not file any SARs.
Grossman failed to implement adequate procedures reasonably designed to detect and cause the reporting of suspicious transactions and, even with those minimal procedures that he had in place at the firm, he still failed to adequately implement or enforce the firmís own AML program. For example, accounts were opened at the firm within a short period of each other that engaged in similar activity in many of the same penny stocks, and several red flags existed in connection with these accounts that should have triggered Grossmanís obligations to undertake scrutiny of the accounts, as set out in the firmís procedures, including possibly filing a SAR. Additionally,individuals associated with the accounts had prior disciplinary histories, including securities fraud and/or money laundering. Because of Grossmanís failure to effectively identify and investigate suspicious activity,he often failed to identify transactions potentially meriting reporting through the filing of SARs. Moreover, Grossman failed to implement an adequate AML training program for appropriate personnel; the AML training conducted was not provided to all of the registered representatives at the firm.
Furthermore, Grossman failed to establish and maintain a supervisory system at the firm to address the firmís responsibilities for determining whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act of 1933 (Securities Act) and, as a result, Grossman failed to take steps, including conducting a searching inquiry, to ascertain whether these securities were freely tradeable or subject to an exemption from registration and not in contravention of Section 5 of the Securities Act. The firm did not have a system in place, written or unwritten, to determine whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act; Grossman relied solely upon the clearing firm, assuming that if the stocks were permitted to be sold by the clearing firm, then his firm was compliant with Section 5 of the Securities Act.
Grossman failed to designate a principal to test and verify the reasonableness of the firmís supervisory system, and failed to establish, maintain and enforce written supervisory control policies and procedures at the firm and failed to designate and specifically identify to FINRA at least one principal to test and verify that the firmís supervisory system was reasonable to establish, maintain and enforce a system of supervisory control policies and procedures.
The firm created a report, which was deficient in several areas, including in its details of the firmís system of supervisory controls, procedures for conducting tests and gaps analysis, and identities of responsible persons or departments for required tests and gaps analysis. Grossman made annual CEO certifications, certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and registrations; the certifications were deficient in that they failed to include certain information, including whether the firm has in place processes to establish, maintain and review policies and procedures designed to achieve compliance with applicable laws and regulations and whether the firm has in place processes to modify such policies and procedures as business, regulatory and legislative events dictate.
Grossman failed to ensure that the firmís heightened supervisory procedures placed on a registered representative were reasonably designed and implemented to address the conduct cited within SECís allegations; the additional supervisory steps imposed by Grossman to be taken for the registered representative were no different than ordinary supervisory requirements. Moreover, there was a conflict of interest between the registered representative and the principal assigned to monitor the registered representativeís actions at the firm;namely, the principal had a financial interest in not reprimanding or otherwise hindering the registered representativeís actions. Furthermore,Grossman was aware of this conflict, yet nonetheless assigned the principal to conduct heightened supervision over the registered representative.
The heightened supervisory procedures Grossman implemented did not contain any explanation of how the supervision was to be evidenced, and the firm failed to provide any evidence that heightened supervision was being conducted on the registered representative. Also, Grossman entered into rebate arrangements with customers without maintaining the firmís required minimum net capital. Similarly, he caused the firm to engage in a securities business when the firmís net capital was below the required minimum and without establishing a reserve bank account or qualifying for an exemption. Grossman was required to perform monthly reserve computations and to make deposits into a special reserve bank account for the exclusive benefit of customers, but failed to do so.
Duarte borrowed $50,000 in the form of a promissory note from a customer to start a business buying up distressed properties, and in order to do this, he needed money to establish a credit line. hen Duarte received the loan, his member firmís written procedures prohibited employees from accepting or soliciting loans from firm customers/ He has not fully repaid the loan.
Also, Duarte engaged in an outside business activity without providing his firm with written notice of the activity; Duarte failed to disclose or obtain his firmís written permission of his outside business activity of purchasing distressed properties. Duarte made misrepresentations to his firm in an annual compliance certification that he had not accepted any loans from customers and was not engaged in any outside business activities when, in fact, he had already obtained a loan from the customer and was engaged in an outside business activity.
At Hauserís request, firm customers borrowed a total of $202,000 from the cash value accumulated in whole life insurance policies that Hauser previously sold to them. Hauser then borrowed the funds from these customers, pursuant to secured (as to two of the loans) and unsecured (as to one of the loans) promissory notes providing for annual interest. Hauser has not made interest or principal payments on the notes.
Hauser's firmís WSPs prohibit associated persons from engaging in borrowing or loaning funds with a customer, unless the customer is an immediate family member and the firm provides prior written approval; none of the customers from whom Hauser borrowed funds were members of Hauserís immediate family, and Hauser did not seek or receive prior approval for the loans.
While associated with a member firm, Axel, through a company in which he held an ownership interest and co-managed, borrowed $200,000 from two customers in three transactions.
The first loan for $50,000, which Axel later repaid, was contrary to Axelís firmís written policy that prohibited individuals from borrowing money from firm customers, and Axel did not seek or receive his firmís approval for the loan he received from the customer. Prior to receiving the loan, the firmís CCO explicitly stated that Axel did not qualify to raise money with his customers.
Axel left the firm and became associated with another member firm; Axel, through his company, solicited another $50,000 from the first customer, who had now transferred his account to the firm where Axel remained his account representative. Axel did not repay the funds he borrowed in the second loan.
Finally, Axel, through his company, borrowed $100,000 from a second customer. The customer has received partial payment of the loan. Axel accepted these two loans contrary to his firmís written policy that prohibited registered persons from borrowing money from a customer, Axel had not asked for, nor had received, the firmís permission to borrow these funds.
Axel provided false information to his second member firm, when he responded that he never loaned money to, or borrowed money from, a customer, or arranged for a third party to loan or borrow from a customer on a compliance certification.
Euro Pacific failed to timely report quarterly statistical information concerning most of the customer complaints it received to FINRAís then 3070 System.
The firm failed to maintain complete complaint files and did not enforce its WSPs pertaining to customer complaint reporting, and the Uniform Applications for Securities Industry Registration or Transfer (Forms U4) for those representatives who were the subject of the complaints were not timely updated.
The firm failed to enforce its written supervisory control policies and procedures that would test and verify that the firmís supervisory procedures were reasonably designed with respect to the firmís activities to achieve compliance with applicable securities laws, regulations and self-regulatory organization (SRO) rules; the firmís annual NASD Rule 3012 report for one year did not comport with these procedures, and the firm failed to implement its supervisory control procedures to review its producing managersí customer account activity.
The firm prepared a deficient NASD Rule 3013 certification as it did not document the firmís processes for establishing, maintaining, reviewing, testing and modifying compliance policies reasonably designed to achieve compliance with applicable securities laws, regulations and SRO rules. The firm failed to timely file a Financial and Operational Combined Uniform Single (FOCUS) Report and Schedule I Reports.
The firm failed to preserve, in an easily accessible place, electronic emails for one of its representatives for almost a year.
The firm offered and sold precious metal-related products through an entity, but failed to develop, implement and enforce adequate AML procedures related to the business; the firm did not establish and implement policies and procedures reasonably designed to identify, monitor for and, where appropriate, file suspicious activity reports (SARs) for its business processed through its k(2)(i) account. Moreover, the firm failed to implement and enforce its AML procedures and policies related to its fully disclosed business through its then-clearing firm; aspects of its AML program that the firm failed to implement and enforce included monitoring accounts for suspicious activity, monitoring employee conduct and accounts, red flags and control/restricted securities. Furthermore, the firmís procedures provided that monitoring would be conducted by means of exception reports for unusual size, volume, pattern or type of transactions; the firm did not consistently utilize exception reports made available by its then-clearing firm, and the firm did not evidence its review of the reports and did not note findings and appropriate follow-up actions, if any, that were taken. When notified by its clearing firm of possible suspect activity, on at least several occasions, the firm did not promptly and/or fully respond to the clearing firmís inquiries. Such review was required by the procedures for employee accounts, but the firm did not maintain any evidence that such inquiries for employee accounts were conducted. The firmís procedures contained a non-exclusive list of numerous possible red flags that could signal possible money laundering, but the firm did not take consistent steps to ensure the review of red flags in accounts.
The firmís AML procedures reference that SAR-SF filings are required under the Bank Secrecy Act (BSA) for any account activity involving $5,000 or more when the firm knows, suspects, or has reason to suspect that the transaction involves illegal activity or is designed to evade BSA regulation requirements or involves the use of the firm to facilitate criminal activity; because the firm was not consistently reviewing exception reports or red flags, it could not consistently identify and evaluate circumstances that might warrant a SAR-SF filing.
The firm failed to establish and implement risk-based customer identification program (CIP) procedures appropriate to the firmís size and type of business; and the firm failed to provide ongoing training to appropriate personnel regarding the use of its internal monitoring tools as AML program required.
In addition, certain pages of the firmís website contained statements that did not comport with standards in NASD Rule 2210; FINRA previously identified these Web pages as being in violation of NASD Rule 2210, but the firm failed to remove such pages from its website.
Sarian impersonated customers via telephone in order to effect transactions in their accounts. He signed a relativeís name on a brokerage account withdrawal form to effect a transaction in the account.
McGrath failed to reasonably supervise a registered representative who recommended and effected unsuitable and excessive trading in a customerís account. McGrath had supervisory responsibility over the registered representative and was responsible for reviewing his securities recommendations to ensure compliance with member firm procedures and applicable securities rules. McGrath failed to reasonably supervise the registered representative by, among other things, failing to enforce firm account procedures and failing to respond to red flags regarding the registered representativeís trading activity in the customerís account.
The firmís supervisory procedures required McGrath to review account transactions, such as the registered representativeís recommended transactions in the customerís account, on a daily and monthly basis for, among other things, general suitability, excessive trading and churning, in-and-out trading and excessive commissions and fees; the firmís procedures also required that McGrath review all exception reports related to the individuals who he supervised and take appropriate measures as necessary. Through these required reviews, McGrath was aware of red flags of possible misconduct in the customerís account, including frequent short-term trading, excessive commission and margin charges, high turnover and cost-to-equity ratios, and substantial trading losses, and the account frequently appeared on the firmís exception reports; McGrath failed to reasonably respond to and address the red flags in the customerís account.
McGrath never spoke with the customer despite the fact that the firmís compliance department sent several emails to McGrath advising him that the customerís account needed customer contact as required by the firmís WSPs; McGrath never spoke with the customer directly to confirm that he was aware of the activity level in his account or that such activity was appropriate in light of his financial circumstances and investment objectives.
McGrath failed to ensure that an Active Account Suitability Supplement and Questionnaire was sent to the customer within the time frame the firmís WSPs required. Moreover, months after the registered representative began trading in the customerís account, McGrath instructed the registered representative to curtail the short-term trading in the account and hold positions for a longer period; that was the only time McGrath spoke to the registered representative about the customerís account. Furthermore, McGrath reduced the registered representativeís commissions for purchases in the customerís account, but this measure did not have the desired impact; the registered representative actually increased the number of purchases and frequency of short-term trading to offset the effects of the commission reduction until the customer closed the account after suffering losses of approximately $120,000.
McGrath failed to take any action against the registered representative based on his failure to comply with his instructions; among other things, McGrath never restricted the trading in the customerís account, spoke to the customer, placed the registered representative on heightened supervision, recommended disciplinary measures against him to address these concerns, or spoke with the firmís compliance department regarding the supervision of the registered representative. The firm allowed the registered representative to effect transactions in the customerís account for months without obtaining a signed and completed new account form from the customer, and failed to enforce its review of active accounts as the WSPs required. The firm failed to send a required suitability questionnaire to the customer until almost a year after the account had been opened and suffered significant losses, failed to qualify his account as suitable for active trading and failed to perform a timely quarterly review of the account.
J.P. Turner & Company, LLC: Censured; Fined $20,000
James Edward McGrath (Principal): Fined $5,000; Suspended 10 business days in Principal capacity only
Pedigo submitted a fixed annuity contract for his customer with an insurance company. The insurance company issued the annuity contract and sent it to Pedigo in accordance with its selling agreement. The insurance company never received the customerís executed annuity contract confirmation (ACC); and, as a result, mailed letters to Pedigo numerous times requesting that he have the customer sign and return the ACC.
Pedigo informed the insurance company that the customer was deceased and requested paperwork to submit a death claim. According to the insurance company, it never received the death claim paperwork. After receiving a surrender request form that same day, the insurance company contacted Pedigo to inform him that a full surrender could not be processed because the customer was deceased. Amazingly, about a year after the customer had passed, Pedigo falsely informed the insurance company that the customer was still alive. Pedigo faxed the insurance company an ACC which the customer purportedly signed and dated almost 20 days after the customer had died.
At the time of Cramerís termination, she was in possession of another check payable to her in the amount of $65,679.88 written against the account of the parent companyís defined-benefit plan; this check was dated for a certain date before her termination, but Cramer did not present it for payment until a few days after her termination. Cramer sent an email to a representative of the firmís clearing firm requesting that an inactivity fee be reversed; Cramer closed the email with her name, the firmís name/the firmís parent companyís name, and made no reference to the fact that she no longer had a position with either the firm or its parent company.
Garvey regularly caused his firm to permit an unregistered natural person to negotiate, solicit and enter into stock borrow and loan transactions, which are duties customarily performed by a registered securities lending representative. Garvey performed the duties of a securities lending supervisor without being properly registered. Garvey consented and/or caused the continuation of the practice of paying finders on transactions with certain counterparties in which the finder had provided no service, and permitted individual traders to subjectively determine the cut-in transactions on which a finder was to be paid and the amount of the finderís compensation on those transactions even though the finder had not provided service on the transactions.
Garvey caused his firm to create and preserve inaccurate books and records on the stock loan activity on the securities lending desk, in that the firmís automated records of the cut-in transactions were inaccurate, in that they reflected that certain finders had participated in stock loan transactions when, in fact, they had not performed any function. In addition, these false entries were transferred to its accounting records, which inaccurately indicated that payments were made to finders on the basis of services rendered when, in fact, no services had been rendered to justify the payments on the transactions indicated.
Ray solicited prospective investors to purchase promissory notes as a vehicle to fund the start up of a hedge fund and to pay the ongoing operations of the fund; investors purchased more than $675,000 in promissory notes from Ray. Ray represented he could pay above-U.S. market interest rates based in part on the fact he could obtain these rates by investing the funds in a foreign bank; Ray failed to invest the proceeds of the notes with the foreign bank, used some of the proceeds for personal expenses and used proceeds from later sales to pay interest and repay principal amounts due on notes earlier purchasers held.
Ray made materially misleading statements and omissions of fact, including misrepresenting the use of proceeds from the sale of the promissory notes, misrepresenting how and where the proceeds were to be invested, and failing to disclose he was using the proceeds from the sale of promissory notes to pay interest and principal amounts due to earlier note holders. Ray participated in private securities transactions through the sale of promissory notes without providing written notice to his firm describing in detail the proposed transaction, his role therein and stating whether he received, or would receive compensation, and without obtaining his firmís approval.
Legent cleared transactions in accounts a former FINRA member firm introduced, including a corporate account the former member firmís customer, an entity, maintained. The trading activity in the entityís account generated multiple margin calls. Through a course of conduct FINRA alleged involved improper agreements, misleading statements and omissions to disclose material information by the entity and the former member firm, the entity acquired control over assets in qualified and non-qualified accounts customers of another former FINRA member firm previously owned and controlled. Those assets, including assets previously held in qualified accounts, were transferred into the entityís account held at the firm, where they secured margin debits resulting from options trading and short-selling.
Legent firm provided material assistance to the former member firm and the entity in connection with their efforts to obtain additional assets in the entityís account in order to support continued trading on margin. Although there were relevant facts that the former member firm and the entity withheld from, or misrepresented to, the firm, the firm was, or should have been, aware of other facts and circumstances that should have caused it to decline to take, or to inquire further before taking, certain actions the former member firm and its customer requested. which facilitated the asset transfers and placed the other former member firm customers at risk of loss; more specifically, two senior managers of the firm, who are principals, had access to facts and circumstances that, at the very least, should have prompted them to inquire further regarding the nature of the assets being transferred. In addition, as a result of trading in the entityís account after it was transferred from the firm to another broker-dealer, some customer assets were liquidated to meet margin calls, assets that would not have been available for liquidation but for their improper transfer into the entityís account while it was held at the firm.
Howard recommended that a customer have her trust purchase a $500,000 variable annuity that would make payments to her heirs.
Purportedly, the purchase of the $500,000 annuity, issued by an insurance company, would provide the customerís heirs with a monthly income until a certain age. The customer advised Howard that she owned rural real estate, which was held in the trust, and she believed that the property could be sold following her death realizing sale proceeds of approximately $600,000.
Howard arranged for the trust to borrow $500,000 from a bank using the real estate as collateral for the loan and using the proceeds to purchase the variable annuity. The trust had to encumber virtually all of its major assets to secure the loan, including the underlying variable annuity, because the market value of the property was only $375,000. Howard received $38,526.86 in commission for his sale of the variable annuity to the customer.
FINRA found that Howard knew, or should have known, that the cost of the annuity far exceeded the appraised market value of the real estate and the customerís liquid assets, and that the customer could not pay for the variable annuity he recommended without borrowed funds secured in part by the annuity itself. Howard did not have a reasonable basis for believing that his recommendation was suitable for the customer in light of her financial circumstances and needs; Howardís recommendation exceeded the customerís financial capability and exposed her to material risk. In addition, Howard completed the account documents and paperwork for the customerís purchase of the variable annuity, including the variable annuity questionnaire, with false information about the trustís net worth and source of funds. Further, he provided the completed questionnaire containing the false information about the trustís financial situation to his member firm, and the firm retained the document in its records. Moreover, in reviewing and approving the annuity sale, Howardís supervisor reviewed the variable annuity questionnaire; Howard thus caused the firmís books and records to be inaccurate and impeded supervision of the annuity sale.
FINRA received investorsí complaints alleging that Calhoun had solicited them to invest in a foreign currency exchange trading (FOREX) program a foreign entity, which operated with Calhoun's assistance/ The digrunteled investors invested a total of $150,000 in the FOREX program. Ultimately, the entityís FOREX scheme was the subject of federal actions by both the SEC and the Commodity Futures Trading Commission (CFTC).
Calhoun solicited the investors to invest in the entity while he was employed as a registered representative with his member firm. alhounís participation in the private securities transactions was outside the regular course or scope of his employment with his firm; and he failed to provide prior written notice of his role in the transactions to his firm and did not receive the firmís written approval or acknowledgement concerning his participation in the private securities transactions. Finally, he failed to appear for a FINRA on-the-record interview.
Finkin failed to comply with a FINRA request for a document.
White recommended that a customer invest in non-listed real estate investment trusts (REITs) and a tenants-in-common (TIC) interest in undeveloped rural real estate without a reasonable basis to believe that the recommendations were suitable for the customer based on the customerís financial status and investment objectives, and the customerís need for liquidity, preservation of capital, ready access to cash, and safety of principal. The customer instructed White to sell the REITs and White acknowledged receipt of the sell instructions and informed the customer to expect to receive a check for the sale proceeds within one to two weeks, but later refused to process the sell orders.White participated in the sale of TIC interests totaling $3,700,000, outside the course or scope of his employment with his firm and collected selling compensation of approximately $1,653,958 but failed to provide his firm with prior written notice describing the proposed transactions.
Phillips' customers gave him funds to invest in various securities; and he instructed his customers to make their checks payable to a consulting company that Phillips owned and controlled. Phillips deposited the customersí funds into the consulting companyís bank account, which he controlled, often delayed making the investments, and then only invested a portion of the funds his customers gave him. Phillips misused the customersí funds by using those funds to pay the consulting companyís expenses.
Phillips willfully filed a Form U4 with materially false information.
Lenhardt directed an associate to use personal information of some of Lenhardtís customers to establish online access to their accounts at another firm, and through that access, obtain value and performance information relating to whole life insurance policies that the customers held at that firm. Although the purpose for obtaining the information was to include it in personalized financial reports that were prepared for the customers, the access to their accounts and insurance policy information was obtained without the customersí knowledge or consent.
McLean recommended to a customer that he transfer his existing mutual funds to McLeanís member firm, and told the customer that, if he became dissatisfied, he could liquidate the account at no expense. Shortly thereafter, the customer accepted McLeanís recommendation and transferred the mutual funds.
Thereafter, the customer had suffered losses in those mutual fund investments and wanted to liquidate his holdings. Accordingly, McLean reimbursed the customer $252 for the charges he incurred in selling the mutual funds, thereby improperly sharing in the customerís losses. The firmís written procedures expressly prohibited registered representatives from sharing in any benefits or losses with clients resulting from securities transactions.
Krasner made unsuitable recommendations to a customer who was a retiree and inexperienced investor.
Although the customer agreed to each of Krasnerís recommendations, Krasner employed a trading strategy that was not suitable for the customerís particular financial situation. The customer had indicated in account opening documents that he had an investment objective of capital preservation and a low risk tolerance.
Krasner recommended the use of margin to execute trades in the customerís account and at times exposed the customer to inappropriate financial risk. Krasner never read the customerís account opening documents, though they were available to him, and was unaware of the customerís financial situation and risk tolerance, as stated in the account opening documents.
Krasnerís member firmís database and computer platform that he used to place trades, as well as the account statements that were mailed to the customer each month, inaccurately indicated that the investment objective was speculation. In his conversations with the customer, Krasner never confirmed the accuracy of the investment objective. Krasner employed a short-term and speculative trading strategy of short selling stock and using margin. Since Krasner was not fully aware of the customerís stated financial condition, he based his recommendations on the erroneous view that the customer could absorb the high risks of these transactions.
The customer frequently spoke with Krasner on the phone, gave Krasner express permission to execute the recommended trades and informed Krasner that he was willing to engage in some speculation. Furthermore, Krasner based his recommendations on his conversations with the customer and the firmís inaccurate database, not the accurate financial information that was contained in the account opening documents.
Krasner executed solicited trades in the customerís account, while charging the account $51,790 in commissions and fees. Although several of the individual trades were profitable, including commissions, the customerís account lost $54,160 in net value, dropping from a net equity value of $162,571 to $108,410.
Jessup improperly requested and received an answer key to a state LTC CE exam and improperly distributed the answer key to a registered representative outside of his member firm. Jessup was an external wholesaler who marketed an insurance product to financial advisors at financial services firms. Certain states began requiring financial advisors to successfully complete a LTC CE course before selling LTC insurance products to retail customers. Jessupís firm authorized its wholesalers to give financial advisors vouchers from a company, which the financial advisors could use to take CE exams through the company without charge. Firm employees created and circulated answer keys to the companyís CE exam for various states.
The suspension was in effect from October 3, 2011, through November 2, 2011. (FINRA Case #)
A firm customer opened an account with a mutual fund company through Longoria and,acting on Longoriaís instructions, wrote a check to an entity Longoria owned for $12,000 to fund the account. However, Longoria never funded the account and did not return the $12,000 to the customer.
An individual, non-firm customer gave Longoria a check for $5,000 to invest in what Longoria had represented was an exchange traded mutual fund whose performance was tied to that of the Standard and Poor Index. Longoria instructed the individual to make the check payable to the entity he owned. The individual completed and signed forms to open an account, but no account was opened; the individual requested copies of the forms and evidence of the investment, but Longoria did not provide these documents to the individual. The individual repeatedly asked Longoria to return his $5,000; Longoria promised to do so, and eventually gave the individual a check for $5,820, but the check was returned for insufficient funds.
Longoria failed to respond to FINRA requests for information.
Acting through Birkelbach, the Firm failed to adequately supervise to ensure the timely reporting of customer settlements. Birkelbach relied on an unregistered outside consultant to process Rule 3070 filings and amendments to Applications for Broker-Dealer Registration (Forms BD) and Uniform Applications for Securities Industry Registration or Transfer (Forms U4), gave the consultant inadequate instructions and guidance, and did not otherwise ensure that timely and complete filings and amendments were made.
Birkelbach neglected to instruct the consultant to process disclosures or otherwise take action to correct the deficiencies until a later date, even after FINRA advised him of the deficiencies.
Birkelbach and the firm failed to ensure the timely reporting of settlements with customers on 3070 filings and the amendment of Forms BD and Forms U4 to disclose this information.
Birkelbach Investment Securities, Inc.: Censured; Fined $10,000, jointly and severally with Carl Birkelbach
Carl Max Birkelbach: Censured; Fined $10,000, jointly and severally with Birkelbach Invst.; Fined additional $15,000; Suspended 30 days in all capacities; Suspended 90 days in Principal capacity only; Required to requalify by examination as a principal.
A customer instructed Addington to purchase shares of a common stock in his account at Addingtonís member firm. Addington placed an order to purchase the stock and instructed the customer to write a check in the amount of $34,019 made payable to an entity to pay for the purchase. However, Addington did not credit the payment to the customerís account. As a result, Addington's brokerage firm liquidated the shares of the stock in the customerís account for non-payment.
The customer did not promptly learn of the liquidating transaction and instructed Addington to sell the shares of the stock he believed was still in his account. The customer received a $35,500.98 check from Addington drawn on the entityís account which Addington signed; however, when the customer deposited the check in his account, it was dishonored for insufficient funds.
After the customer called Addington and demanded that he repay him; Addington then paid the customer $35,000 in cash. In addition, Addington failed to respond to FINRA requests for information in connection with FINRAís investigation of the allegations in the Form U5 his firm filed.
The Firm failed to have reasonable grounds to believe that private placements offered by two entities pursuant to Regulation D were suitable for any customer.
The Firm began selling the offerings for one entity after its representatives visited the issuerís offices to review records and meet with the issuersí executives; the firm also received numerous third-party due diligence reports for these offerings but never obtained financial information about the entity and its offerings from independent sources, such as audited financial statements.
Despite the issuerís assurances, the problems with its Regulation D offerings continued; the issuer repeatedly stated to the firmís representatives that the interest and principal payments would occur within a few weeks, and the issuer made some interest payments but failed to pay substantial amounts of interest and principal owed to its investors, and these unfulfilled promises continued until the SEC filed its civil action and the issuerís operations ceased.
In addition to ongoing delays in making payments to its investors, the firm received other red flags relating to the entityís problems but continued to allow its brokers to sell the offering to their customers; in total, the firmís brokers sold $11,759,798.01 of the offering to customers.
Despite the fact that the firm received numerous third-party due diligence reports for the other entitiesí offering, it never obtained financial information about the issuer and its offerings from independent sources, such as audited financial statements, and although it received a specific fee related to due diligence purportedly performed in connection with each offering, the firm performed little due diligence beyond reviewing the private placement memoranda (PPM) for the issuerís offerings. The firmís representatives did not travel to the entityís headquarters to conduct any due diligence for these offerings in person and did not see or request any financial information for the entity other than that contained in the PPM.
The Firm obtained a third-party due diligence report for one of the offerings after having sold these offerings for several months already; this report identified a number of red flags with respect to the offerings. Moreover, the firm should have been particularly careful to scrutinize each of the issuerís offerings given the purported high rates of return but did not take the necessary steps, through obtaining financial information or otherwise, to ensure that these rates of return were legitimate, and not payable from the proceeds of later offerings, in the manner of a Ponzi scheme. Furthermore, the firm also did not follow up on the red flags documented in the third-party due diligence report; even with notice of these red flags, the firm continued to sell the offerings without conducting any meaningful due diligence.
The Firm failed to have reasonable grounds for approving the sale and allowing the continued sale of the offerings; even though the firm was aware of numerous red flags and negative information that should have alerted it to potential risks, the firm allowed its brokers to continue selling these private placements.The firm did not conduct meaningful due diligence for the offerings prior to approving them for sale to its customers; without adequate due diligence, the firm could not identify and understand the inherent risks of these offerings.The Firm failed to enforce reasonable supervisory procedures to detect or address potential red flags and negative information as it related to these private placements; the firm therefore failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.
The Firm allowed a statutorily disqualified person to associate with the firm.
The individual acted in an associated capacity for the firm, with its knowledge and consent, by
- keeping regular business hours at the firm,
- maintaining a
- desk at the firmís office,
- a telephone extension at the firm, and
- a firm sponsored email account;
- regularly communicating with customers in an effort to maintain their accounts at the firm and to preserve his relationships with them; and
- handling administrative matters for the firm.
The firm initiated numerous telephone solicitations to persons whose numbers were in the national do-not call registry of the Federal Trade Commission (DNC Registry) at the time of the calls.
Tto achieve compliance with telemarketing rules and regulations, the firm used, and still uses, a system that blocks outbound phone calls to phone numbers in the DNC Registry. In order to call a phone number in the DNC Registry from a firm phone line, the firm must manually place the number on a list in the system (Allow List); calls to phone numbers on the Allow List bypass the screening system, irrespective of whether the number is in the DNC Registry. A firm principal added numerous phone numbers to the Allow List; the numbers came from leads that the firm had purchased. In addition, the firm maintained that it thought the leads consisted solely of business phone numbers that are not subject to certain do-not-call restrictions. Moreover, the firm placed calls to phone numbers that it had added to the Allow List; a substantial percentage were personal phone numbers that were in the DNC Registry when the firm initiated telephone solicitations to them.
Smith misappropriated approximately $231,000 from bank customers by completing credit line advance request forms seeking withdrawals from customer accounts without the customersí knowledge or consent, withdrew the money in cash and used it to pay personal expenses or deposited it into his personal bank accounts. When some of the customers questioned the withdrawals, Smith reimbursed their accounts by making some unauthorized withdrawals from other customer accounts.
Smith pleaded guilty to misapplication of bank funds in the U.S. District Court for the Western District of Louisiana for stealing approximately $231,000 that was entrusted to the bankís care and control.
Slagter participated in private securities transactions without giving written notice to and receiving approval from his member firm before participating in the private securities transactions outside the regular scope of his employment with the firm.
Slagter introduced firm customers and another individual to a principal of a mortgage processing company and the individuals invested in what were purportedly high-yield corporate bonds issued by the company, which were not firm-approved investments; the individuals invested a total of $490,599 in the bonds and lost approximately $475,599. Slagter engaged in an unapproved business activity by working as a loan originator for the mortgage processing company without notifying or requesting approval from his firm.
Slagter trained mortgage representatives to use mortgage software that was owned by the company without requesting or receiving permission from his firm to engage in this outside business activity; Slagter earned $41,744 in compensation from the mortgage processing company while employed with his firm.
Lorie falsified Letters Of Authorization ("LOAs"), which caused his firmís books and records to be inaccurate, and used the LOAs to withdraw customer funds without the customerís authorization; these LOAs contained the purported signature of a customer and the customerís family members and authorized the transfer of checks totaling $21,290.60 to a mortgage company and another $15,000 check to a third-party account. The checks were issued as Lorie requested; neither the customer nor any of his family members authorized or signed the
Lorie failed to respond to FINRA requests for information.
Bianculli entered into an informal agreement with brokers at his member firm to share in commissions relating to undisclosed private securities transactions in an entity, which purported to advance cash to merchants in exchange for the merchantsí future credit card receivable; the entity promised returns of 4 percent or more per month, but it was a Ponzi scheme.
Bianculli helped brokers with servicing a customerís investment but failed to provide his firm with written notice of his involvement in an unapproved private securities transaction. Bianculli provided false and misleading information to FINRA during sworn on-the-record testimony.
Also, Bianculli provided false and misleading statements to his firm in response to a compliance questionnaire distributed by the firm inquiring into the scheme. Bianculli denied meeting any of the owners or principals of the entity and failed to disclose his participation in the customerís investment.
Porporino executed two unauthorized trades in a customerís account without the customerís prior knowledge, authorization or consent, which cost $474,000 and $444,000 respectively, resulted in approximately $37,000 in losses to the customer and netted Porporino approximately $16,200 in commissions.
Contrary to firm procedures that generally prohibited registered representatives from borrowing funds from customers unless they had the firmís presidentís prior written approval, Porporino borrowed $40,000 from a customer without disclosing the loan to his firm; he repaid the loan, including $8,000 in interest. The was unaware of and did not otherwise approve the loan.
The Firm did not retain internal emails firm registered representatives sent or received for three years, and did not retain emails in a non-erasable, non-rewritable format.
The Firm used an internally created email retention system that retained email between firm registered representatives and individuals outside the firm, but did not retain internal email; instead, the firm retained internal email through the use of backup tapes, which the firm archived for less than the required three year period.
The firm implemented a new email retention system an outside vendor created to retain registered representativesí emails, and for an unknown number of emails, there was a difference in the time the firm registered representative sent or received the email and the timestamp on the email as saved in the archive of the new email retention system; in some instances, the difference was a matter of seconds, and as a result, the timestamps on an unknown number of emails in the archive of the new email retention system differed from the times firm registered representatives sent or received those emails.
While attempting to gather emails in response to a FINRA investigation, the firm discovered that, due to a problem with the new email retention system, certain emails were being held in a database of the new system and were not moving to the archive portion of the system.The Firm performed certain upgrades to the new email retention system in an attempt to move those emails from the database to the archiving portion of the system; prior to performing the upgrade, the firm did not copy the contents of the database where the emails were being held. During the upgrade, a default configuration superseded the customized server configuration that the outside vendor had originally utilized for the system, which resulted in a loss of certain header information when those emails were moved from the database to the archiving portion of the system.
In addition, in a statement submitted to FINRA, the firm reported the problem that resulted in email being ingested in the new email retention system without certain header information. Moreover, the new system also malfunctioned during parts of a year, which led to gaps in its email retention and the loss of emails responsive to FINRAís investigation; neither the firm nor the outside vendor was able to determine the cause of the malfunction or the total number of emails lost as a result of the malfunction.
Furthermore, the Firm did not retain or review emails firm registered representatives sent from firm-issued electronic devices to individuals outside the firm.
The Firm did not establish and maintain a supervisory system, including WSPs, reasonably designed to retain emails firm registered representatives sent or received for the required three-year period, to retain emails firm registered representatives sent from firm-issued electronic devices to individuals outside the firm, and to review electronic communications. The Firm did not establish a supervisory system, including WSPs, reasonably designed to detect and prevent malfunctions in the new email retention system.
Budreau exercised time and price discretion beyond the day on which the customer granted such discretion and without the customersí written authorization. Although the firmís policies required all registered representatives to indicate in the order entry system when they use time and price discretion when ordering trades, Budreau failed to make that disclosure.
Budreauís firm discovered his improper exercise of time and price discretion and issued a formal Letter of Education to Budreau reminding him of the rules regarding time and price discretion and instructing him to read compliance memoranda addressing discretionary trading and the recording of orders; Budreau signed the Letter of Education acknowledging his understanding the documentís terms and certifying that he read the relevant policies. Soon after receiving the Letter of Education, Budreau again exercised time and price discretion by purchasing shares of a different security in several customer accounts.
Although Budreau discussed the possibility of purchasing the security with his customers before entering purchase orders into the firmís system, none of the actual purchases occurred on the days when he spoke to his customers, and some of the purchases occurred a week or two after the customers informed him they were willing to purchase the security.
After discussing with his member firm the possibility of him participating as an exhibitor during a dental convention by representing the firm at a booth in the exhibition hall and distributing literature, Lopez did not follow up and formally request permission, contrary to the firmís written procedures. Despite the lack of the firmís approval, Lopez arranged for and participated as an exhibitor representing the firm by staffing an exhibition booth at the convention and distributed, or had available for distribution, literature about the firm and himself.
Lopez provided FINRA with inaccurate and misleading information.
Swank's customer purchased $935,465.50 of an agency bond with Swank at a member firm, and approximately one week later, Swank received a complaint from the customer stating that he misunderstood the bond purchase. Swank sold the position for $933,595.14 and at the same time, the customer demanded $1,850 in realized losses on the transaction and $3,300 accrued interest.
In lieu of the customer making a formal complaint to Swankís firm, the customer and Swank entered into a verbal settlement agreement and Swank paid the customer approximately $5,150 in cash., which Swank failed to advise his firm, orally or in writing, about the customerís complaint, the settlement or the $5,150 payment.
Head conveyed false and exaggerated account values to customers verbally and with falsified documents; and borrowed $20,000 from a customer and has repaid only $1,000 to the customer, contrary to the firmís written procedures prohibiting representatives from borrowing from customers without branch manager or other supervisor approval and the written approval of the firmís compliance department. Head did not request or obtain permission from her firm to borrow money from the firmís customer.
Head settled and/or offered to settle a customer complaint without her firmís knowledge or authorization. Head sent an unapproved and materially false letter to a bank by preparing, signing and mailing a letter to a bank stating that a customerís assets totaled over $4 million in order to assist the customer in obtaining a mortgage loan; although the firmís procedures required that outgoing correspondence be reviewed and approved before mailing. Head neither sought nor obtained approval for the letter.
Head exercised discretion in customer accounts without written authorization; Head neither sought nor obtained authorization from customers or her firm to exercise discretion in their accounts.
Head mischaracterized solicited trades in customersí accounts as unsolicited, causing her firmís books and records to be inaccurate. In addition,
Head repeatedly sent emails and text messages to customers from her personal email accounts, which violated her firmís policies forbidding the use of personal email accounts and mandating that business-related electronic communications with customers occur within the firmís network. Headís use of her personal email account prevented the firm from reviewing her email and text messages, and delayed the discovery of her misconduct in customersí accounts.
Head submitted false and evasive information to FINRA in response to a written request for information; and subsequentlyfailed to appear or otherwise respond to FINRA requests for testimony.
Blake-Zuniga formed a company before becoming associated with his member firm; once he became associated with his firm, he disclosed the company he formed as an outside business activity and described his role as a passive investor with no day-to-day employment or management responsibility.
While still associated with his firm, Blake-Zuniga became a director and the CEO of the company, which was a material change in the nature of Blake-Zunigaís affiliation with his company and, therefore, a new outside business activity of which he was required to provide the firm with prompt written notice. Blake-Zuniga failed to provide the firm with the required notice.
Rodriguez converted and misappropriated $10,000 from the bank checking account of a customer of his member firm and the firmís bank affiliate.
While researching an investment for the customer, a bank employee discovered that Rodriguez had diverted a $10,000 check from the customerís bank checking account and made the check payable to a third party, who was also a bank customer and Rodriguezí close personal friend. The customer neither authorized Rodriguez to make the check payable to the third party nor divert the funds to the third partyís account at the bank. The third party made cash withdrawals totaling $10,000 from the bank account, and gave the money to Rodriguez, who used the funds for his personal benefit.
Ultimately, the bank re-deposited $10,000 into the customerís bank checking account, and as a result of the bankís inquiry, Rodriguez repaid approximately $5,000 to the bank.
Winter participated in private securities transactions without providing prior written notice to her member firm describing in detail the proposed transactions and her proposed role, and stating whether she had received, or might receive, selling compensation in connection with the transactions.
Winter solicited investments from customers of her firm on an entityís behalf; these customers subsequently invested $750,000 in the entity, which pooled money from investors in a common enterprise with the expectation of profit derived from othersí efforts. Winter failed to disclose these private securities transactions to her firm. Winter recommended to firm customers that they invest funds in the entity, without having reasonable grounds for believing that the recommendations were suitable for such customers, based upon the facts disclosed by such customers as to their securities holdings, and financial situation and needs.
Dusenberry borrowed $742,500 from his customers and, in several instances, Dusenberry used the proceeds of one loan to repay an earlier loan from a different customer. Dusenberry failed to repay a total of approximately $500,000 to his customers.
The firm prohibited borrowing money from customers unless the borrowing arrangement fell within certain enumerated exceptions, such as a loan from an immediately family member; regardless of the circumstances, however, employees were required to obtain the firmís written pre-approval for all loans, and Dusenberry neither requested nor received the firmís written pre-approval for any of his loans.
In order to effect one of the loans, Dusenberry signed the customerís name to a Letter of Authorization (LOA) and submitted it to the firm, which caused the firm to transfer $30,000 from the customerís account to another customerís account. In order to effect a loan from a different customer, Dusenberry signed that customerís name to an LOA without her knowledge, authorization or consent, and submitted it to the firm, which caused the firm to transfer $32,000 from the customerís account to another customerís account.
Pletscher exercised discretion in customer accounts despite the fact that his member firmís WSPs strictly prohibited discretionary trading in customer accounts, and he was aware of this prohibition.
The firm required that its registered representatives place trade orders immediately after receiving the customerís authorization for trades, but at times Pletscher received oral authorization from customers to place trades in their accounts, yet he waited several weeks or months before placing the trades.
Pletscher requested to have variable annuity holdings for customers transferred into money market accounts without the customersí authorization. The customers requested the unauthorized transactions be reversed, causing his firm to incur reversal fees of $8,863.37.
Pletscherís firm required its customers review and sign transaction related forms, but Pletscher instructed customers to provide transaction forms that contained only the customersí signatures, which Pletscher later completed and submitted to the firm for processing, despite his firm prohibiting him from accepting incomplete forms from customers. Pletscher knew that by allowing his customers to pre-sign blank forms, he failed to ensure that customers had properly reviewed and understood the agreements they had signed. In addition, Pletscher caused the firmís books and records to be false and misleading and to appear that the customers had agreed to the terms of each form on the date the forms were signed in blank.
Rosas wrongfully converted a customerís funds totaling $14,000 for his personal use by submitting withdrawal requests he forged to his member firm and an annuity company without the customerís knowledge or consent. Rosas completed and forged other customersí signatures on variable annuity withdrawal forms and submitted them to annuity companies, without the customersí knowledge or consent, in an effort to convert funds totaling $45,000 from the customersí variable annuity accounts for his personal use.
As indicated on these forms, the funds were to be made payable to a limited liability company for which Rosas was the president and CEO. One of the annuity companies cancelled the withdrawal requests and the other annuity company placed stop payments on the checks that were issued.
NAME REDACTED executed mutual fund transactions in customersí accounts without their knowledge or authorization.
In an effort to conceal his misconduct, NAME REDACTED falsified his member firmís books and records. Also, he completed and submitted firm switch forms related to the unauthorized transactions he effected in the customersí accounts and falsely represented that he had spoken to each of the customers and had obtained their authorization before executing the trades. NAME REDACTED provided false information relating to the reason why these customers authorized the transactions, and he knew at the time he made these written statements on firm documents that they were false.
NAME REDACTED altered the firmís customer telephone call logs with respect to customersí accounts to falsely show that he had spoken to each of the customers and obtained their authorization to effect the transactions.
Finally, NAME REDACTED accessed the firmsí internal system and changed the telephone number of some customers whose accounts he had effected the unauthorized transactions to incorrect telephone numbers.
Harte participated in the sale of unregistered securities, in violation of Section 5 of the Securities Act of 1933.
Harte and a registered representative at his member firm sold millions of shares of a thinly traded penny stock, resulting in proceeds exceeding $9.3 million for firm customers; the total commissions generated were $481,398.
Harte failed to conduct any due diligence prior to the stock sales; the circumstances surrounding the stock and the firmís customers presented numerous red flags of a possible unlawful stock distribution.
Harte did not determine if a registration statement was in effect with respect to the shares or if there was an applicable exemption; Harte relied on transfer agents and clearing firms to determine the tradability of the stock. Harte failed to undertake adequate efforts to ensure that the registered representative ascertained the information necessary to determine whether the customersí unregistered shares could be sold in compliance with Section 5 of the Securities Act of 1933. Also, he did not consider the determination of the free-trading status of shares to be within his supervisory responsibilities.
Harte failed to follow up on red flags; he was on notice of the inconsistencies between customersí trading experience and activity in their firm accounts but took no action.
In addition, Harte received customer emails which evidenced a greater level of market sophistication than reflected in their account forms but failed to investigate these discrepancies.
Walker's member firm was issued a Letter of Caution following a FINRA examination, which advised of numerous deficiencies in the firmís WSPs; these deficiencies included maintenance of the firmís Form BD, prohibition of commission payments to non-registered entities, designation of an appropriately licensed principal for each of the firmís product lines, maintenance of WSPs at each OSJ, investigation into the qualifications of new hires, obligations of the firm when handling accounts of associated persons employed at other FINRA-regulated broker-dealers, timely providing account records to customers, prompt notification to regulators of deficiencies in required net capital, and prohibition of the sale of unregistered securities beyond the private offeringís expiration dates. The Letter of Caution also indicated that the firmís WSPs were deficient with respect to Regulation S-P.
Although issued only to the firm, the Letter of Caution was delivered to Walker in his capacity as president and chief compliance officer of the firm; thus, Walker had notice of the deficiencies but failed to update and amend the WSPs to correct the deficiencies. A later FINRA examination disclosed the same deficiencies outlined in the Letter of Caution, but Walker failed to update and amend the WSPs to correct the deficiencies. In addition, FINRA determined that Walker failed to establish, maintain and enforce WSPs and supervisory control procedures in the cited areas to ensure compliance with applicable securities laws and regulations, including Regulation S-P.
Marvin misused approximately $145,000 in funds obtained from investors in a limited partnership that he owned and controlled.
Marvin established the limited partnership as a general investment fund and referred to it as a hedge fund. The limited partnership had investors who were Marvinís long-standing friends/customers. Marvin maintained the limited partnershipís brokerage account at his member firm and made all of the investment decisions for the fund, which primarily involved stock transactions; Marvin was also the registered representative for the limited partnershipís account and received commissions from trades in the account.
The general partner of the limited partnership was another entity Marvin owned and controlled. Under the terms of the limited partnershipís offering memorandum, the limited partnership was required to pay an annual management fee of 1 percent to the other entity Marvin owned and controlled. There was approximately $1 million invested in the limited partnership; therefore, the other entity was only entitled to an annual management fee of approximately $10,000, but Marvin wired approximately $145,000 more from the limited partnershipís brokerage account to the other entityís bank account and used those funds to pay his salary and other expenses of the other entity. In addition, Marvin had no authority to withdraw the additional $145,000 from the limited partnershipís account; Marvin repaid the limited partnership for the excess funds he had withdrawn from its account.
At the request of a member firm customer, Bunshaft was directed to make direct payments from one of the customerís brokerage accounts at the firm to pay some of the customerís personal bills; instead, without the customerís knowledge or authorization, Bunshaft initiated $23,471.25 in unauthorized transfers of funds from the customerís brokerage account to pay her own personal credit card charges.
Bunshaft failed to respond to FINRA requests for information.
Gold engaged in an outside business activity without providing prior written notice to his member firm. Prior to joining the firm, Gold entered into an agreement with a company that seeded hedge funds, to provide advisory services, and which permitted the company to publicly disclose that Gold was a member of the advisory board.
Upon his association with the firm, Gold disclosed his ownership interest in a hedge fund seeded by the company and another unaffiliated company, but failed to provide written notice concerning his ongoing affiliation with the company and continued providing it with advisory services. Because Gold terminated the agreement, he did not receive compensation from the company for his work while associated with his firm.
Goel placed a customerís signature on statements he prepared in connection with providing a rationale for his recommendations that the customer sell mutual funds and invest the proceeds in an equity-indexed annuity and a variable annuity, without the customerís knowledge, authorization or consent.
Unbeknownst to Goel, the firm did not require a customerís signature on the registered representativeís statement of rationale.
Blasko engaged in outside business activities without providing prompt notice to his member firm. The firm permitted its representatives to sell fixed annuities only if the transactions were placed through the firmís General Agency (GA) platform; however, Blasko sold fixed annuities to customers, at least two of whom were clients of the firm, and received compensation for these sales. Blaskoís sales were placed through the issuer, not through the firmís GA.
On several occasions, Blasko falsely certified to the firm that he had not engaged in any outside business activities for which he received compensation.
Sencan failed to reasonably supervise the activities of member firm personnel engaged in the charging of excessive commissions, sharing commissions with a non-member and misusing funds on deposit with the firm.
Acting through its head trader, Sencan's firm improperly shared about $4 million in commissions with one of the firmís hedge fund clients and charged excessive commissions totaling over $580,000 in transactions.
Sencan was the head traderís direct supervisor and was aware that the firm had entered into a commission sharing arrangement with the hedge fund client, and he was responsible for reviewing that arrangement and the head traderís trading activities. The firmís procedures required the chief compliance officer (CCO) to periodically review emails firm personnel sent and received. Sencan failed to perform periodic reviews of the head traderís electronic correspondence or otherwise take reasonable steps to supervise his activities.
Acting through its FINOP, the firm misused at least $61,000 in funds on deposit with the firm.
Sencan was the FINOPís direct supervisor but failed to monitor the firmís financial records, perform periodic reviews of the FINOPís electronic correspondence or otherwise take reasonable steps to supervise the FINOPís activities.
Sencan became the firmís AMLCO, and in this position, he was responsible for ensuring that the firmís AML compliance procedures (AMLCP) were enforced but failed to do so. The CIP portion of the firmís AMLCP required the firm, prior to opening an account, to obtain identifying information such as the customerís passport number and country of origin; but acting through Sencan, the firm failed to obtain the identifying information the CIP required for some of its customers (a portion of whom were located outside of the United States). In addition, the firmís AMLCP required the firm to maintain transmittal orders for wire transfers of more than $3,000, and those orders had to contain at least the name and address of the transmitter and recipient, the amount of the transmittal order, the identity of the recipientís financial institution and the recipientís account number; on numerous occasions, a firm customer account wired out funds in excess of $3,000. Sencan did not take steps to ensure that the firm retained information regarding those wires, including the recipientís name, address and account number and the identity of the recipientís financial information. Furthermore, acting through Sencan, the firm failed to provide AML training to its registered personnel.
Sencan was attempting to find transactional business for the firm in medium-term notes (MTNs). As part of an effort to purchase MTNs for resale to its clients, the firm entered into an agreement with a Switzerland-based entity. Sencan signed the agreement on the firmís behalf, and the agreement called for the entity to provide the firm with the opportunity to purchase $100 million (face value) in specified MTNs; however, the agreement included clauses containing material misrepresentations about the firmís ability to purchase MTNs.
The first clause represented that the firm was the actual legal and beneficial owner of cash funds in excess of $100 million on deposit at a major bank. In addition, the second clause was a representation that these funds were free and clear of liens, had been legally earned and could immediately be utilized for the purchase of financial instruments; neither of these clauses was true, as the firm never had $100 million on deposit at any bank at any time.
Spotts wrongfully misappropriated approximately $197,860 from a coworker at his member firm by taking blank personal checks belonging to the coworker and forged the coworkerís name on the checks without the coworkerís knowledge or authorization. Spotts made some of the checks payable to himself and deposited the checks into his personal account, or made the checks payable to credit card companies and other creditors to pay his personal bills.
Spotts failed to appear and testify at an onthe- record interview.
Acting through Ayre, its CCO, Ayre Investments failed to establish and maintain a supervisory system and establish, maintain and enforce WSPs to supervise the activities of each registered person that were reasonably designed to achieve compliance with the applicable rules and regulations related to
- CRD pre-registration checks,
- exception report maintenance and review,
- supervisory branch office inspections,
- approval of transactions by a registered securities principal,
- annual compliance meeting,
- financial and operations principal (FINOP) review of checks received and disbursements blotter,
- NASD Rule 3012 annual report to senior management,
- review and retention of correspondence, Regulation S-P and outsourcing arrangements.
The Firm's WSPs were purchased from a third-party vendor and were intended to meet the needs of any broker-dealer, regardless of the firmís size or business. Acting through Ayre, the Firm failed to tailor the template WSPs to address the firmís particular business activities. With respect to the areas identified above, the firmís WSPs failed to describe with reasonable specificity the identity of the person who would perform the relevant supervisory reviews and how and when those reviews would be conducted; and with respect to the maintenance of electronic communications, the firm completely failed to establish, maintain and enforce any supervisory system and/or WSPs reasonably designed to ensure that all business-related emails were retained.
Acting through Ayre, the Firm violated the terms of a Letter of Acceptance, Waiver and Consent (AWC) by failing to file a required written certification with FINRA regarding the firmís WSPs within 90 days of the issuance of the AWC. Despite being given multiple reminders and opportunities by FINRA staff during a routine examination to file the certification, the firm and Ayre have yet to file the certification the AWC required.
The Firm only had one registered options principal (ROP) who was required to review and approve all of the firmís option trades; for more than half a year, however, the ROP resided in another state and did not work in the firmís main office. Furthermore, the firmís WSPs did not address or explain how the ROP, given his remote location, was to accomplish and document the contemporaneous review and approval of all options trades firm customers placed; the firm executed approximately 450 options transactions, none of which the ROP approved.
The firm failed to maintain and preserve all of its business-related electronic communications, and therefore willfully violated Securities Exchange Act Rule 17a-4.
The Firm permitted its registered representatives to use email to conduct business when the firm did not have a system for email surveillance or archiving. Each firm representative maintained electronic communications on his or her personal computer or arranged for the retention of electronic communications in some other fashion, and the firm relied on representatives to forward or copy their businessrelated emails to the firmís home office for retention. Not all of the representativesí business-related emails were forwarded to the home office, and the firm did not retain the electronic communications that were not forwarded or copied to the firmís home office; as a result, the firm failed to maintain and preserve at least 10,000 business-related electronic communications representatives sent to or received.
Ayre Investments, Inc.: Censured; Fined $10,000 (note: FINRA states that it imposed a lower fine against the firm after it considered, among other things, the firmís revenues and financial resources); Undertakes to review its supervisory systems and WSPs for compliance with FINRA rules and federal securities laws and regulations, including those laws, regulations and rules concerning the preservation of electronic mail communications, and certify in writing to FINRA, within 90 days, that the firm has in place systems and procedures to achieve compliance with those rules, laws and regulations.
Timothy Tilton Ayre: Fined $10,000; Suspended 2 months in Principal capacity only.
Brewer failed to adequately supervise a registered representativeís variable annuity sales activities.
Brewer personally reviewed and approved variable annuity switches of the registered representativeís customers despite the misstatements and omissions on the switch forms and numerous red flags revealing that the transactions were unsuitable. After becoming aware of the inaccurate information and omissions contained in the forms the registered representative submitted, Brewer did not require that all of the deficiencies be corrected on his member firmís books and records and that customers be presented with forms that were completely accurate. At no time did Brewer take any action to reverse the transactions the registered representative had already effected, nor did he take any actions to prevent the registered representative from completing additional unsuitable switches.
Brewer was responsible for replying to the audit reports and implementing adequate systems and procedures relating to the supervision of variable annuities at his firm; although he was made aware of issues in the variable annuities sales review process cited by the firmís Audit Division, he failed to take adequate steps to correct the identified failings. Brewer failed to maintain an adequate system of supervision and follow-up review, and failed to maintain and enforce written procedures reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules in connection with the sale of variable annuities.
Caputo provided falsified account statements to a customer for a personal and a corporate account the customer held at Caputoís member firm, with the intent of leading the customer to believe the all-but-worthless accounts held securities valued as high as $600,000; both accounts had incurred substantial losses.
The accounts were held at Caputoís firm, the customer received account statements through the firmís clearing firms; however, the customer also received fabricated account statements Caputo provided him. The typical one-page fabricated account statement listed the account name and number, the statement period, a false market value, a false cash balance and a false option value. These fake statements were transmitted by facsimile from Caputoís home-office fax number. The false statements the customer received from Caputo reported that the personal account was valued at $292,020.53 and that the corporate account was valued at $325,446.36; in reality the personal account was valued at less than $70 and the corporate account had been closed.
Apparently relying on the values shown on the false statements, the customer contacted Caputo and requested that he wire $120,000 from the corporate account; Caputo advised the customer that there was no money in either account.
Caputo failed to appear and testify in a FINRA on-the-record interview.
Klecka created a non-genuine email purporting to be from the Arizona Department of Insurance (AZ DOI) regarding the agencyís investigation into Kleckaís activities at his former firm, and then provided a copy of the email to the member firm with which he was associated.
Kleckaís firm commenced an internal investigation of Klecka concerning questionable business activities related to his sale of life insurance policies. During the course of the firmís review, it was learned that Klecka was the subject of an investigation being conducted by the state regarding activities that occurred while Klecka was associated with another member firm.
Klecka forwarded an email from his personal email address to his managing director at the firm --the forwarded email was purportedly from the state insurance department, which contained a timeline documenting Kleckaís contact with the agency, and the email bore what appeared to be the typed signature of an investigator with the AZ DOI. However, Klecka subsequently admitted that he was not truthful on the dates and fabricated the email to lead his firm to believe that the state investigation was more recent than it actually was. The forged document provided an explanation for Kleckaís failure to disclose the investigation to the firm earlier than he did.
The firm subsequently terminated Klecka for, among other reasons, creating a non-genuine email purporting to be from the AZ DOI regarding its investigation into Kleckaís activities at his former firm. In addition, Klecka failed to appear for a FINRA on-the-record interview.
Chase wrote fictitious fire insurance policies and fictitious life insurance policies while an insurance company employed him; these policies were written without the insuredsí knowledge and consent.
With regard to the fire insurance policies, in most cases, the billing notifications were sent either to the home of Chaseís relatives, Chaseís former insurance agency address or his residence; as a result, the purported insureds did not receive any communications from the insurance company concerning these policies. By writing these policies, Chase received compensation of approximately $2,725 and he qualified to remain on the insurance companyís career program.
Chase failed to respond to FINRA requests for information and documents.
Anand converted customer funds by wiring funds totaling $51,289 from the customerís account to outside bank accounts of which Anand was associated; the customer did not authorize and had no knowledge of any of the wire transfers Anand made. Anand attempted to wire additional funds totaling $24,000 from the customerís account but Anandís member firm did not complete the wires.
Anand 18 Disciplinarmisappropriated funds from a non-customer (the individual was an employee of a business Anandís relatives owned) by creating a false account, borrowing $49,500 in funds from her 401(k) account without her knowledge or authorization, depositing the money into a bogus account he created in the noncustomerís name at his firm, and then wiring funds out of the account for his benefit. The individual did not authorize Anand to open an account, did not complete or sign any new account opening documents and, in furtherance of the scheme,
Anand created false documents related to the opening of the account which he submitted to his firm, thereby causing his firm to maintain inaccurate books and records. Anand failed to respond to FINRA requests for information and to appear and testify at an on-the-record interview.
While conducting a securities business, the Firm failed to maintain the required minimum net capital. The firmís financial books and records, including the firmís trial balances and net capital calculations, were inaccurate; the firm improperly netted payroll advances against its monthly payroll accrual, improperly included amounts held in a brokerage account as an allowable asset even though the firm did not have a Proprietary Accounts of Introducing Broker/Dealer (PAIB) agreement, failed to accrue some expenses and took a larger deduction for a fidelity bond deductible than it was permitted.
The Firm failed to report to FINRA statistical and summary information for complaints. NASD Rule 3070 reporting was inaccurate in that firm reports for these complaints included erroneous complaint dates, incorrect product codes, inaccurate problem codes and/or identified the wrong registered representative. In connection with some of its registered employees, the firm failed to amend or ensure the amendment of Uniform Applications for Securities Industry Registration or Transfer (Forms U4) to disclose customer complaints and the resolution of those complaints, and the firm also filed late Forms U4 amendments.
The Firm failed to have an adequate system to preserve instant messages (IM) sent or received by registered representatives of the firm; the firm did not archive IMs in a non-erasable, non-rewritable format.
OíLear failed to execute a customerís sale of preferred stocks in her account as instructed, when the customer complained to his member firm, he provided her with a $6,866 check to settle her losses. The customer deposited OíLearís check but it was declined for insufficient funds. Next, OíLear wrote a second check for $6,900, including the non-sufficient fund (NSF) charges, which the customer deposited and the check cleared.
OíLear made this payment to the customer without his firmís knowledge or authorization.
H. Beck Inc. failed to maintain and preserve certain of its business-related electronic and written communications.
Most of the firmís registered representatives are independent contractors operating from ďone-manĒ branch office locations throughout the country; the firmís representatives were allowed to maintain written correspondence at their branch offices; and the firm permitted representatives to send emails from their personal computers. The firm did not have an electronic system to capture emails, but instead required representatives to print and make copies of their emails, which along with their written correspondence were reviewed during annual branch inspections; representatives were required to send emails and written correspondence involving the solicitation of products to compliance for pre-approval. The firm did not have prior system or procedures in place to retain all other emails and written correspondence after the representatives terminated from the firm. and, as a result, the firm did not subsequently retain most of the emails and written correspondence for representatives who terminated from the firm.
Also, the firm did not establish and implement policies and procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions. In addition, the firmís WSPs relating to the reporting of suspicious activity failed to provide reasonable detail, such as the specific reports and documents to be reviewed, the timing and frequency of such reviews, the specific persons to conduct the reviews, and a description of how the reviews would be conducted and evidenced. Moreover, the firmís supervisory procedures did not provide adequate guidelines regarding the reporting of suspicious activity, including when a suspicious activity report should be filed and what documentation should be maintained. Furthermore, although the firm had 140,000 active accounts, it used only a minimal number of exception reports, relying instead on its clearing firms to assist in the review of suspicious activity. The firm failed to conduct adequate independent tests of its AML compliance program (AMLCP), failed to sufficiently test topics and failed to adequately memorialize what was reviewed. The findings also included that with respect to a sample of corporate bond transactions and municipal securities transactions the firm executed, it failed to accurately disclose the receipt time on the majority of the order tickets.
Larson represented to an elderly widow that she could earn a higher rate of return by investing her funds in a particular high-interest savings account; at the time, she was not his member firmís customer. Based on Larsonís recommendation and direction, the elderly widow wrote checks totaling $51,600 payable to the ďW.F.G. Fund,Ē and gave the checks to Larson who, in turn, promptly deposited the checks into a W.F.G. Fund account at a bank. Contrary to Larsonís representations, the W.F.G. Fund was not a high-interest savings account, had no relation to his firmís affiliate bank, and was a basic checking account that Larson owned and controlled. Within two weeks of the receipt and deposit of the customerís checks, Larson withdrew $6,000 and transferred $27,800 to his day-trading account (at another broker-dealer) and $17,500 to his credit union account, converting the funds for his own use and benefit without the customerís knowledge, consent or authorization.
The customer complained to FINRA and others about Larsonís conduct; Larson then returned the funds to her. Larson failed to appear for FINRA on-the-record testimony.
Haeffele was appointed as a co-trustee for a trust and, wrongfully and without authorization, disbursed funds to himself from the trustís mutual fund accounts and checking accounts.
Haeffele was appointed as a co-trustee for another trust, which owned life insurance policies for which Haeffele was the agent of record on, and Haeffele, wrongfully and without authorization, disbursed funds to himself from the life insurance policies held in the name of the trust. Haeffele used the funds from both trusts for his own benefit, thereby converting assets from the trusts.
As trustee, Haeffele received account statements for the first trust from mutual fund issuers, but only provided the trustís creators false and misleading account statements and related correspondence that he created on his computer for the trust. The fabricated account statements and correspondence grossly overstated the value of the trustís assets.
Haeffele failed to provide written notice to his member firm that he had been serving as a trustee for the trusts, and had been receiving compensation for such activities. In addition, Haeffele completed a series of questionnaires submitted to the firm in which he failed to disclose that he was serving as a trustee and receiving compensation.
Pappas converted funds totaling $157,563.75 from customer accounts, without the customersí knowledge or authorization, and attempted to convert an additional $14,260 from another customer account.
Pappas misappropriated the funds by activating the online bill payment feature in the clientsí accounts and then directed payments to his personal credit cards. Pappas placed an unauthorized trade totaling $6,893.43 in a deceased firm customerís account.
Pappas refused to respond to FINRA requests for information and testimony.
Martindell forged the signatures of her immediate supervisor and of her branch manager at her member firm.
Martindell signed the name of her supervisor, a firm financial advisor, to firm documents titled ďAdvice of TradeĒ letters without the financial advisorís authorization or consent and mailed the letters to the customers involved; each of these letters informed a firm customer of trades that had been effected in that customerís account.
Martindell signed her branch managerís name to an internal firm form authorizing the transfer of funds and securities from the account of a customer to a joint account held by the customer and the customerís relative. Martindell signed the branch managerís name on another internal firm form that memorialized the multiple names that another customer could use in signing documents related to his account.
Martindell completed an IRA distribution form for her own account in order to access funds held in that account and Martindell again signed her branch managerís name on this form. In addition, Martindell signed the branch managerís name on these forms without his authorization or consent, and submitted the forms for further processing.
Crump was the CCO at his member firm and utilized his position to convert approximately $14,000 from firm customersí brokerage accounts by using fictitious documents to effect unauthorized transfers of securities and cash from the customersí accounts to a trust account he established at his firm.
Crump transferred securities and cash worth approximately $4,000 from one customerís account by using a fictitious letter of authorization to effect the conversion. The findings also stated that two days before the transfer, Crump used the firmís systems to temporarily change the address on the customerís account to Crumpís attention at his work address, the effect of which was to have correspondence and other notices relating to the account sent to him at his firm.
Crump used a fictitious retirement account distribution form and a fictitious letter of authorization to effect the conversion of securities and cash worth approximately $10,000 from another customerís Individual Retirement Account (IRA) to the customerís cash account, and Crump transferred the securities and cash from the customerís cash account to the trust account he controlled. The customers did not know about or authorize the transfers.Crump used the unlawfully converted funds to pay for his personal and business expenses.
Merrill Lynch failed to enforce its AMLCP and written procedures by accepting third-party checks for deposit into a customerís account that, contrary to the procedures, did not identify that customer by name. As a result, one of its customers, a registered representative at another member firm, was able to move more than $9 million of misappropriated funds through his Merrill Lynch cash management brokerage account.
The registered representative deposited his customersí checks for a purported investment into his personal account at the firm; the investor checks were non-personal checks made payable to the firm and, in most instances, the customer had written the registered representativeís account number on the check. The absence of the registered representativeís name on the checks gave no indication to those outside of the firm, including the registered representativeís investors, that the money was going to the registered representativeís personal account.
In accepting these deposits, the firm failed to follow its written procedures because these non-personal checks were accepted for deposit without containing the name of the firm client who owned the account; had the firm enforced its procedures, the registered representative would not have been able to move the proceeds of his misappropriation scheme through the firm. The Firm disregarded certain indications of the registered representativeís misconduct, such as the fact that he was depositing large amounts of money into, and then moving large amounts of funds out of, an account that had no market investment activity through the use of large dollar checks payable to himself or to cash; and depositing the funds of third parties with whom he had no apparent family or fiduciary relationship. In addition, the Firm did not have internal controls in place to ensure compliance with its deposit acceptance procedures regarding non-personal checks. Moreover, the firm did not have an adequate system to monitor deposit activity in accounts such as the registered representativeís that lacked securities activity and displayed indications of misconduct.
Golembiesky borrowed $30,000 from a customer without his member firmís knowledge or approval. The firm prohibited registered representatives from borrowing money from customers unless that customer was a member of the registered representativeís immediate family and the registered representative had requested and received prior written permission from the firm. The customer was not a member of Golembieskyís immediate family and the loan was thus prohibited under the firmís written procedures.
By the time the firm became aware that Golembiesky had borrowed money from the customer, Golembiesky had repaid the customer $10,000 on the loan. The firmís bank affiliate repaid the balance of the loan to the customerís estate.
Golembiesky entered into an agreement whereby Golembiesky promised to pay the bank $22,275 plus any applicable interest; Golembiesky has reduced the outstanding balance to $10,000.
The Firm failed to preserve, for a period of not less than three years, the first two years in an easily accessible form, all email correspondence relating to the firmís business.
The emails involving research and emails viewed by the firm as administrative or technical were deleted, emails were not indexed and were not easily located; consequently, the firm was not able to locate various emails sent or received in one year in response to FINRA requests. The firm failed to preserve all emails relating to the firmís securities business exclusively in a non-rewritable, non-erasable format as required by SEC 13 September 2011 Rule 17a-4(f)(2)(ii)(A). Not only were individual emails users able to delete emails, in which case, they would not be stored, the medium that the firm used to back-up and store emails was rewritable and erasable. FINRA found that the electronic storage media the firm used did not automatically verify the quality and accuracy of the storage media process, and the firm did not have in place an audit system providing for accountability regarding inputting of records required to be maintained and preserved by electronic storage media. FINRA also found that the firm failed to engage at least one third party who has access to, and the ability to, download information from the firmís electronic storage media to another acceptable medium, and who undertakes to promptly furnish to FINRA information necessary for downloading information from the firmís electronic storage system and provide access to information contained on its storage system. In addition, FINRA determined that the firm failed to retain records evidencing supervisory review of email correspondence of registered representatives relating to the firmís securities business. Moreover, FINRA found that the firm failed to report transactions in TRACE-eligible securities to TRACE that it was required to report, and failed to report the correct price for transactions in TRACE-eligible securities to TRACE. Furthermore, FINRA found that in connection with corporate bond transactions, the firm failed to prepare brokerage order memoranda, in that order memoranda did not show the account for which the order was entered, the time the order was received, the order entry time, the execution time and the identity of each associated person responsible for the account. (FINRA Case #)
Dito obtained possession of a computer flash drive that contained non-public customer account information and mined out selected excerpts for his own use by emailing the information, on separate occasions, to his member firm email address. Among other things, the flash drive contained approximately 350 account statements of customers from a FINRA member firm -- each of the customer account statements contained in the flash drive displayed non-public financial information including customer names, addresses, account numbers, financial positions, broker identification numbers and account values. Subsequent to reviewing the contents of the flash drive, Dito copied customer account information from the non-public customer account information contained in the flash drive.
The first email he sent to his firm email address contained the names and addresses of approximately 300 customers, which Dito had copied directly from FINRA member firm customer account statements contained in the flash drive. Dito intended to use the customer account information contained on the first email to cold-call prospective customers.
The second email Dito sent to his firm email address consisted of a listing of financial positions on the flash drive that were for a FINRA member firm securities account a customer owned that showed the customerís equity stock holdings and their total net value.
Dito failed to fully cooperate with FINRA and answer all of FINRAís questions at an on-the-record examination.
The Firm failed to properly implement its AML procedures to detect potentially suspicious transactions.
The AML procedures were created using a template for small firms available on the FINRA website which provided examples of red flags that would alert employees to suspicious activity. The firm failed to monitor for at least one of the red flags listed in its AML procedures that would alert employees to suspicious activity, and the firm conducted no review of potentially suspicious transactions involving penny stocks. The firmís procedures did not address red flags associated with the receipt and/or sale of physical certificates of penny stocks and restricted securities by the firm or the type of due diligence required to be performed if a stock certificate was received.
Since the firm did not examine the physical stock certificates and did not perform any due diligence on stock certificates presented for deposit, the firmís procedures were deficient, and the firm failed to implement the minimal procedures it did have to detect potentially suspicious activity. The Firm improperly relied on its clearing firm to conduct due diligence inquiries with regard to stock certificates presented for deposit into the firmís customer accounts. In addition, although the firmís procedures listed the red flags that could indicate suspicious activity, many of which were raised by the transactions at issue, the firm failed to review the trading activity to detect these potential red flags and to analyze them to determine if they were suspicious and reportable under the Bank Secrecy Act. As a result, the firm accepted approximately 130 stock certificates representing 439,344,949 shares of 52 different stocks without taking any independent action to learn and/or verify the facts and circumstances to determine if the transactions were suspicious and reportable.
Holody sold equity-indexed annuities (EIAs) to individuals, through insurance companies, with investments totaling approximately $1,002,555, without providing prompt written notice to his member firm; none of these individuals were customers of his firm. Holody received commissions of approximately $79,594.34 from these sales.
The firm prohibited its representatives from selling EIAs not on the firmís approved product list; the annuities Holody sold were not on the approved product list and his acceptance of compensation for the sales constituted engaging in an outside business activity.
Holody recommended that a retired individual liquidate some variable annuity contracts and transfer the proceeds to purchase an EIA an insurance corporation issued. Holody processed all of the paperwork on the individualís behalf to effect the variable annuity contract liquidations to purchase the EIA contract, and the insurance corporation issued a nine-year term EIA contract in the approximate amount of $253,997.37. As a result of these transactions, the individual lost approximately $49,604 in enhanced guaranteed death benefits available under the variable annuity contracts that the individual could never recover. In addition,the insurance corporation EIA contract was also not beneficial to the individual since the variable annuity contracts offered the individual other more favorable features. Moreover, based on the individualís disclosed investment objectives of guaranteed returns on his retirement assets and to provide for his beneficiaries, and the individualís financial situation and needs, Holody lacked reasonable grounds to believe that liquidating the variable annuities to generate funds for the purchase of the EIA contract was suitable for the individual.
Byerly engaged in unsuitable, excessive trading in elderly customersí accounts.
The customers were retirees with conservative investment objectives living on fixed incomes who suffered collective losses of approximately $390,000 during the period of excessive trading. Byerly recommended and effected the transactions without having reasonable grounds for believing that such transactions were suitable for the customers in view of the size and frequency of the transactions, the transaction costs incurred, and in light of the customersí financial situations, investment objectives and needs. Byerly exercised discretion in these accounts as well as in other customersí accounts without the customersí written authorization or his member firmís written acceptance of the accounts as discretionary; his firm did not permit discretionary accounts.
Byerly continuously misrepresented to his firm on annual compliance questionnaires over a three-year period that he did not maintain any accounts in which he had exercised discretion. In response to a written FINRA request seeking information regarding a customer complaint, Byerly submitted a letter to FINRA in which he falsely misrepresented that he had received the customerís prior approval for all trades in the customerís account.
Kimberly and Richard Morrison engaged in outside business activities without providing their member firm with written notice of their outside business activities. For nearly three years, Richard Morrison was the agent for transactions in annuities, which his firm had not approved for sale, that he sold through an insurance agency. In connection with these transactions, Richard Morrison met with customers, recommended that the customers purchase the annuities, completed and signed transaction paperwork and earned approximately $425,000 in commissions.
Richard Morrison failed to disclose the outside activities to his firm on annual questionnaires and actively concealed his outside business activities from his firm.
Richard Morrison had employees of the insurance agency sign paperwork effecting the exchanges; in each of these instances, he signed and was identified as the agent of record on the application that was sent to the insurance company that issued the new policy that was purchased. The insurance agency employees signed the exchange request forms that were sent to Richard Morrisonís firm instructing it to surrender a policy and forward the proceeds for the purchase of a new policy; as a result, his firm did not see that he had recommended and was the agent for the transactions.
In addition, for nearly two years, Kimberly Morrison was listed as the agent for transactions in annuities that took place away from her firm. Moreover, in connection with these transactions, Kimberly Morrison telephoned customers to solicit them to meet with Richard Morrison and/or herself, accompanied Richard Morrison to some meetings with customers, and completed and signed transaction paperwork as the agent of record. Furthermore, the insurance agency paid Kimberly Morrison $7,483.53 in commissions on the transactions; she did not notify her firm of her involvement in any of the transactions, and did not disclose them in her firmís annual broker questionnaire.
Richard Thomas Morrison (Principal): Barred
Kimberly Ann Morrison: Fined $10,000; Suspended 1 year
Baklenko engaged in private securities transactions without prior written notice to, and approval from, his member firm, in that he participated in the sales to firm customers of limited partnership interests in an entity he and a business associate had formed for a total of $1,095,000.
Baklenko and the business associate opened an account with another member firm in their entityís name; Baklenko failed to notify his member firm in writing that he had established the account with the other firm and he failed to notify the other firm, with which he opened the account, in writing that he was associated with a firm. Baklenko effected trades in his entityís account at the other firm, which included securities purchases totaling approximately $176,575 and securities sales totaling approximately $57,109.
Pierson administered an insurance companyís insurance CE instruction program for his member firm, and because of a heavy workload, he got behind in the administration of the program, resulting in expired courses being taught and the late filing of courses, instructor approval requests and attendance rosters with states. To cover up these problems, Pierson issued false CE completion certificates to course attendees and substituted on CE completion certificates the names of state-certified instructors for courses uncertified instructors taught.
CE courses require annual or biannual renewals in some states, and Pierson allowed courses to expire without renewal. Pierson wasnít aware the courses had expired until after they had been taught. On one occasion Pierson issued certificates of completion for approved courses as opposed to the expired courses that were actually presented and did this over approximately a five-year period.
On one occasion Pierson issued CE completion certificates to course attendees for one hour of credit that had not been taught. In addition, Pierson substituted the names of state-certified instructors on CE completion certificates to conceal the fact that the instructors who actually taught the courses were not certified at the time the courses were taught.
Although the Firm sought and received permission to conduct its private placement activity, it failed to timely amend its Application for Broker-Dealer Registration (Form BD), as it did not identify this business on its Form BD until years later.
Acting through Searle, the Firmís president and CCO failed to establish, maintain and enforce an adequate system and written procedures reasonably designed to supervise its placement business; and failed to adequately supervise the placement business conducted by a former registered representative who conducted firm business at an unregistered office. The Firm failed to adequately ensure that its ledgers or other records accurately reflected all of the firmís assets, liabilities, income and expenses. The Firm impermissibly ďnettedĒ the commission revenue it received, failing to reflect the gross amount of commission the firm received and the amount paid to the registered representative who placed the business, thus understating gross revenues and expenses. As a result, the Firm filed inaccurate Financial and Operational Combined Uniform Single (FOCUS) Reports and inaccurate annual audits.
The Firm failed to establish, maintain and enforce adequate WSPs regarding the use of outside emails for firm business and the review and retention of emails; the firm permitted associated persons to use personal email accounts to send and receive emails related to the firmís securities business without capturing, reviewing or retaining them.
In addition, the Firm paid fees and commissions totaling $21 million to non-registered limited liability company (LLC) entities of which the firmís registered representatives were the sole members. Moreover, the Firm improperly paid the non-registered entities rather than paying the commissions and fees directly to the registered representatives who owned the non-registered entities. The suspension was in effect from August 15, 2011, through August 26, 2011. (FINRA Case #)
Searle & Co.: Censured; Fined $47,500 ($10,000 was jointly and severally with Searle)
Robert Southworth Searle: Fined $10,000 joint/several with Searle & Co.; Suspended 10 business days in Principal capacity
Tang opened an account at his member firm on customersí behalf based upon the representations of a registered representative at another FINRA member firm, although Tang never met or spoke directly with the customers. Instead, all of Tangís communications with the customers were through the registered representative.
Tang caused a variable annuity, in the amount of $532,874.02, to be purchased in the customersí account based upon an order from the registered representative, for which Tang received $28,775.20 in net commission for the transaction but his firm never granted him authority to place third-party orders in the customersí account.
Tang failed to notify his firm that a third-party placed a variable annuity order and failed to obtain the firmís approval to cause this third-party order to be executed in the customersí account.
Aretz established an outside business activity and never made a written request to, or received permission from, his member firm to engage in the outside business activity.
In connection with the outside business, Aretz borrowed approximately $242,800 from firm customers without requesting or obtaining permission from his firm, and has yet to repay the loans. Aretzí firm prohibited its registered representatives from borrowing funds from customers without the express written consent of the firmís chief compliance officer or a member of the firmís senior management. Aretz failed to disclose the loans on several annual firm compliance questionnaires and that he failed to respond to FINRA requests for information.
Cross failed to supervise the activities of a registered representative of his member firm in a manner that was reasonably designed to achieve compliance with applicable securities laws and regulations. Cross was the registered representativeís designated supervisor. The registered representative, through her fraudulent scheme, converted to her own use and benefit at least $8 million from clients, including the firmís customers.
The representative persuaded her clients to liquidate existing investments, for the purpose of purchasing other investments, and instructed the customers to make the checks payable to an entity Cross owned and with which she conducted business. Rather than use the clientsí funds to purchase the other investments, she diverted their funds to her own personal use.
In order to conceal her conversion of the clientsí funds, she prepared and sent to the clientsí false account statements, and she concealed from the firm the personal bank account where the clientsí funds were deposited.
Approximately once a month Cross received from the representative a blotter that listed purchases and sales processed through direct applications to issuers. Also, Cross received reports from the firmís insurance affiliate, which showed the representativeís insurance sales activity, except for the business she conducted with other insurers. Some of the representativeís outside insurance business was conducted through Crossí insurance agency; Cross was therefore able to track all of the representativeís business except for a portion of her outside insurance business.
The representativeís income from her securities business and from insurance business conducted through the firmís affiliate was not sufficient to pay her expenses; and that, although it was obvious that the representative had additional income, Cross did not attempt to determine the source of that income. In addition, the securities blotters Cross reviewed showed numerous sales of securities by the representativeís clients and did not show that they had purchased other products with the proceeds of those sales; but Cross did not take note of the liquidations shown on the blotters and make inquiries to determine what happened to the proceeds of those sales.
Moreover, Cross conducted an inspection of the representativeís office; and that the firmís inspection checklist required him to complete a checking account review form for each doing business as (DBA) and outside business activity (OBA) accounts owned or controlled by the representative as well as any other accounts where commissions are deposited, including business accounts, DBA accounts and personal accounts. Furthermore, before the inspection of the representativeís office, Cross participated in the firmís webcast training session regarding office inspections; a significant portion of the training was devoted to the review of checking accounts. As part of the inspection, Cross reviewed account statements for the registered representativeís business account; the representative told Cross that the business account was her only bank account.
There were several reasons why Cross should have known that the representative had another bank account and that some of her commissions were deposited into that account; Cross should have realized that the commissions deposited into the business account represented less than all of the registered representativeís income. Cross knew that the representative frequently sold an entityís annuities and there was no evidence that the entityís commissions were deposited into the business account; and that Cross could also see that the representative did not pay her personal expenses from the business account, a further indication that she had another account. Cross failed to note large deposits that were shown on the business account statements; that the statements showed 35 deposits of $2,000 or more from unidentified sources in a 12-month period, and that the total amount of those deposits was approximately $497,585.
In addition, pursuant to his firmís directives, Cross should have requested documentation showing the sources of those payments; had he done so, Cross would have learned of the personal account where the registered representative had deposited clientsí funds, and thus would have discovered that the representative had received large payments from customers.
The Firm failed to establish and maintain a supervisory system or WSPs reasonably designed to detect and prevent the charging of excessive commissions on mutual fund liquidation transactions.
The Firm failed to put in place any supervisory systems or procedures to ensure that customers were not inadvertently charged commissions, in addition to the various fees disclosed in the mutual fund prospectus, on their mutual fund liquidation transactions. The firmís failure to take such action resulted in commissions being charged on transactions in customer accounts that generated approximately $64,110 in commissions for the firm.
The firm had inadequate supervisory systems and procedures to ensure that a firm principal reviewed, and the firm retained, all email correspondence for the requisite time period; the firm failed to review and retain securities-related email correspondence sent and received on at least one registered representativeís outside email account, and the firm did not have a system or procedures in place to prevent or detect non-compliance.
The firm failed to conduct an annual inspection of all of its Offices of Supervisory Jurisdiction (OSJ) branch offices.
The Firm failed to comply with various FINRA advertising provisions in connection with certain public communications, including websites, one billboard and one newsletter, in that a registered principal had not approved websites prior to use; websites did not contain a hyperlink to FINRAís or Securities Investor Protection Corporation (SIPC)ís website; one website, the billboard and the newsletter failed to maintain a copy of the communication beginning on the first date of use; and sections of websites that concerned registered investment companies were either not filed, or timely filed, with FINRAís Advertising Regulation Department. In addition, websites contained information that was not fair and balanced, did not provide a sound basis for evaluating the facts represented, or omitted material facts regarding equity indexed annuities, fixed annuities and variable annuities. Moreover, websites contained false, exaggerated, unwarranted or misleading statements concerning mutual B shares; the firmís websites and the billboard did not prominently disclose the firmís name, and a website, in connection with a discussion of mutual funds, failed to disclose standardized performance data, failed to disclose the maximum sales charge or maximum deferred sales charge and failed to identify the total annual fund operating expense ratio, and a website, in a comparison between exchange-traded funds (ETFs) and mutual funds failed to disclose all material differences between the two products.
Furthermore,the firm failed to report, or to timely report, certain customer complaints as required; the firm also failed to timely update a registered representativeís Uniform Termination Notice for Securities Industry Registration (Form U5) to disclose required information. The firm failed to create and maintain a record of a customer complaint and related records that included the complainantís name, address, account number, date the complaint was received, name of each associated person identified in the complaint, description of the nature of the complaint, disposition of the complaint or, alternatively, failed to maintain a separate file that contained this information.
The firm failed to ensure that all covered persons, including the firmís president and CEO, completed the Firm Element of Continuing Education (CE). The firmís 3012 and 3013 reports were inadequate, in that the 3012 report for one year was inadequate because it failed to provide a rationale for the areas that would be tested, failed to detail the manner and method for testing and verifying that the firmís system of supervisory policies and procedures were designed to achieve compliance with applicable rules and laws, did not provide a summary of the test results and gaps found, failed to detect repeat violations including failure to conduct annual OSJ branch office inspections, advertising violations, customer complaint reporting, and ensuring that all covered persons participated in the Firm Element of CE. FINRA also found that the firmís 3013 report for that year did not document the processes for establishing, maintaining, reviewing, testing and modifying compliance policies to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws, and the manner and frequency with which the processes are administered. In addition, the firm also failed to enforce its 3013 procedures regarding notification from customers regarding address changes.
Gallagher acted as a principal of his member firm without being registered as such and the firm allowed Gallagher to act in an unregistered capacity.
Gallagher failed to adhere to the heightened supervisory requirements FINRA imposed and the agreements he entered into with three states; because of his controlling role at the firm and the transitory nature of supervision at the firm, he was able to sidestep the heightened supervision requirements. The firm failed to ensure that Gallagherís heightened supervisory requirements from the states and FINRA were being followed, and failed to have a system to adequately monitor Gallagherís compliance.
Gallagher was responsible for the firm adhering to the requirements to establish, maintain and enforce written supervisory control policies and ensuring the completion of an annual certification certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations. The firm failed to conduct the analysis required to determine whether, as a producing manager, Gallagher should have been subjected to the heightened supervision requirements.
The firm failed to establish, maintain and enforce written supervisory control policies and procedures and failed to identify at least one principal who would establish, maintain and enforce written supervisory control policies and procedures. In addition, through Gallagher, the firm, failed to ensure that an annual certification was complete, certifying it had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations.
Moreover, FINRA found that the firm failed to report customer complaints against Gallagher and one customer-initiated lawsuit in which he was listed as a defendant.
Furthermore, the firm failed to make the necessary and required updates to Forms U4 and U5 for representatives to reflect customer complaints, arbitrations and lawsuits within the required 30 days.
Thefirm failed to conduct and evidence an independent test of its AML program, and failed to conduct and evidence an annual training program of its CE program for its covered registered persons.
While testifying at a FINRA on-the-record interview, Gallagher failed to respond to questions.
Gallagher willfully failed to timely amend his Form U4 with material facts. Gallagher appealed the decision to the NAC and the sanction is not in effect pending the appeal.
Vision Securities Inc.: Censured; Fined $60,000
Daniel James Gallagher: Barred
Davis participated in private securities transactions by introducing customers of his member firm and another individual to a principal of a mortgage processing company without giving written notice to, and receiving approval from, his member firm before participating in the private securities transactions outside the regular scope of his employment with the firm.
Davis engaged in an unapproved outside business activity by working as a loan originator with the same mortgage processing company without notifying his firm or requesting its approval. Davis did not request or receive permission from his firm to engage in this outside business activity. Davis earned $12,500 in compensation from the company while employed at his firm.
Boehm entered into a handwritten agreement with a customer of his member firm wherein he agreed to provide financial advisory services to the customer in exchange for older vehicles, which the customer sold to him at a discounted price.
Boehm entered into the business agreement to provide financial advisory services, outside the scope of his relationship with his firm, and without first notifying the firm or obtaining the firmís written approval of the arrangement. His firm's WSPs specifically prohibited registered representatives from entering into outside employment or business activities without obtaining the firmís prior approval.
Smith provided partial responses to FINRA requests for information and failed to provide requested documents. Smith engaged in outside business activity without providing prompt written notice to, and receiving written approval from his member firm.
Smith served as executor of a customerís estate and as successor trustee to the customerís trust. Smith understood that he would receive compensation when he was required to perform the duties, and he did receive compensation for performing the duties of executor and trustee; his firmís procedures required written notice of outside business activities, and the firmís written approval, before a representative could engage in such activity.
Smith never notified his firm that he had accepted the appointment to serve as the executor of the estate, and never received his firmís written approval. The customerís heirs filed a lawsuit against Smith, which resulted in a default judgment against him for $851,985.81; the judgment included compensation for various substantial diversions of funds from the customerís accounts, her trust and her estate, including diversion of annuity funds from the customerís grandchildren to Smithís relatives by substituting his relatives as beneficiaries.
Swartz reported to his member firm that he passed the Series 7 examination when, in fact, he received a failing score.
Swartz submitted to his firm a document that he represented was a photocopy of his score report, which reflected a passing score. Swartz knew, or should have known, that the documents he submitted to his firm were neither the original nor a true copy of the score report as he received it from the testing center, and that they falsely represented that he had passed the examination when he had not.
Cheviron wrongfully converted a total of $75,331.08 from customers by withdrawing funds from a customerís bank account and then took the funds to another branch of the bank, where he deposited the funds into his own personal account. Ultimately, he used the customerís funds to make home improvements to his personal residence.
Chevironís member firm compensated the customer for the funds wrongfully taken from her account; Cheviron has not reimbursed his firm.
Cheviron caused other customers to sign distribution requests to an insurance company with instructions to mail checks to Chevironís attention at several banks and his personal residence. Upon receipt, Cheviron deposited these funds into his personal bank accounts and used the funds for his personal benefit. In an effort to conceal that he was the beneficiary of the customersí funds, Cheviron created false account statements, which he provided to one of the customers.
Beadle used an answer key to complete a state insurance continuing education (CE) exam.
Certain states began requiring financial advisors to complete a long-term care (LTC) CE course and exam before selling LTC insurance products to customers who reside in those states. Beadle was advised that he would be required to complete the LTC CE exam for a particular state before he was able to complete the sale of a policy to a colleagueís relative. Beadle received an email from a wholesaler that included a copy of the stateís LTC CE exam questions, with the answers filled in by hand. Beadle used the answer key to complete the stateís LTC CE exam.
Deutsche Bank held contractual agreements with third-party investment advisers who provided financial services to firm customers through the firmís adviser select program for a fee the customers paid, and the firm customers granted discretionary trading authority to the third-party advisers. The agreements contained a confidentiality clause prohibiting firm employees from using the third-party advisersí portfolio recommendations for other clients.
The firm instituted a written policy and procedure manual distributed to firm employees, including Tubridy, that contained guidelines related to the adviser select account and prohibited shadowing adviser select accounts, but the firm did not implement any specific systems to detect and prevent shadowing; no exception reports were created to identify shadowing, no applicable training was conducted, and no supervisory systems were put in place to monitor accounts for possible shadowing.
In one branch office while Tubridy was responsible for performing trade reviews, shadowing was egregious and continued for years. Although the firm did not implement exception reports to identify shadowing, shadowed trades were flagged for other reasons, which required Tubridy to follow up; she examined and approved shadowed trades on the exception reports, made notations on certain trades, which indicated an awareness of shadowing, but failed to follow up on the information and neglected to raise the issue with compliance or her supervisors.
Through shadowing, firm registered representatives circumvented the fee arrangement the firm had in place for the adviser select program and violated the provisions of confidentiality agreements prohibiting the use of the third-party investment advisersí proprietary information. In addition, the firm and involved registered representatives failed to pay a combined total of over $200,000 to third-party investment advisers. Moreover,the firm failed to establish, maintain and enforce an adequate supervisory system to detect and prevent shadowing, and Tubridy failed to recognize and follow up on ďred flagsĒ of shadowing.
Once the firm learned that shadowing had occurred, with Tubridyís assistance, it conducted an extensive and immediate internal investigation across all branch offices to identify and halt any other shadowing activity.
Deutsche Bank Securities Inc.: Censured; Fined $350,000. In assessing the fine, FINRA took into account financial benefits the firm obtained, and the firmís discovery, reporting, investigation and corrective measures are reflected in the sanctions.
Adrienne Barrett Tubridy: Fined $10,000; Suspended 10 days in Supervisory capacity only; Required to cooperate with FINRA in its prosecution of any other disciplinary action related to these events by, among other things, meeting with and being interviewed by FINRA staff without the need of staff to resort to FINRA Rule 8210, and testifying truthfully at any related hearing.
The Firm failed to evidence any review of incoming or outgoing written and electronic correspondence; failed to review the incoming and outgoing electronic correspondence of its CCOís personal email account that he used to conduct securities related business, and the CCO had business cards with his personal email address included.
The firm failed to maintain its electronic correspondence (email) and electronic internal communications (email) for almost two years, and failed to maintain the incoming and outgoing electronic communications of an individualís personal email account used to conduct business. The firm failed to notify FINRA prior to employing electronic storage media.
The Firm failed to file an attestation by at least one third party who has access and the ability to download information from its electronic storage media to an acceptable media for such records that are exclusively stored electronically. The firmís electronic storage media failed to have in place an audit system providing for accountability regarding inputting of records required to be maintained and preserved, and inputting of any changes to every original and duplicate record maintained and preserved.
Work requested and received the answer key for a stateís LTC CE exam and distributed it to a financial advisor outside of his member firm.
Certain states began implementing a LTC CE requirement that obligated financial advisors to complete a LTC CE course and exam before selling LTC insurance products to customers who resided in that state. In order to help financial advisors obtain the LTC CE requirement, Workís firm provided them with vouchers that allowed financial advisors to take the CE exams for free through a specific company. In addition to providing financial advisors with vouchers, certain firm employees improperly created, requested, received and distributed the answer keys for state LTC CE exams.
Poe borrowed a total of $125,000 from an elderly customer of his member firm without seeking or obtaining his firmís approval for any of these loans.
Poe and the elderly customer memorialized the loans by executing a promissory note in which Poe promised to repay the $125,000 that he had borrowed; Poe has not repaid any portion of the loans.
Poe completed the firmís annual sales questionnaire and falsely answered ďnoĒ in response to a question that asked whether he had received loans from any of his clients or family members who have accounts at the firm within the preceding 12 months. The Firm terminated Poe and, on a Uniform Termination Notice for Securities Industry Registration (Form U5), reported that Poe had been under internal review for violating firm policy by borrowing money from a client.
Subsequently, Poe caused his Form U5 to be amended to include a comment addressing the internal review in which Poe stated, among other things, that the loan at issue was made by the elderly customer, who he had known since adolescence and served as a mentor and pseudo-grandfather. FINRA found that Poe had not known the customer since adolescence and had met the customer several years earlier when he had solicited him to become a client.
Mondello misappropriated $585,376.20 from an elderly customer.
Mondello regularly instructed the customer to give him funds from her savings and checking accounts in the form of cash, personal checks and cashierís checks made payable to him, which the customer believed were for investment purposes. ondello converted the funds to his own use, and diverted funds that the customer gave him to pay life insurance policy premiums to his own personal use.
Cocozza engaged in outside business activities without providing written notice to his member firm. The firmís policies and procedures prohibited its employees from engaging in outside employment or business ownership without prior written approval from a firm supervisor or the firmís compliance department.
Cocozza failed to respond to FINRA requests for information, documents and to provide on-the-record testimony.
Galiani engaged in an investment strategy that resulted in a principal loss of $662,108 in an elderly customerís accounts and provided fictitious account documents to the customer to hide the substantial losses in the account.
Galiani made material false oral representations to the customer concerning the value of his investments and repeatedly told the customer to disregard the confirmations and statements sent to him by Galianiís member firm. Galiani claimed that the majority of the customerís money was held in a third account, which he described to the customer as an institutional account that was not reflected on documents sent by the firm.
The customer subsequently demanded that Galiani provide him with statements for the institutional account; Galiani created and provided the customer with fictitious firm account summaries that overstated the customerís actual holdings at the firm by approximately $600,000. On the same date, Galiani created and provided the customer with a fictitious account statement for the institutional account reflecting a purported value of $682,861.55. The institutional account was a complete fabrication by Galiani; no such account existed and the account number listed on the institutional account statement was related to a closed account previously held by one of Gialaniís relatives.
Gregory served as vice president and board member of a purported charitable foundation he managed with other non-registered principals, and unbeknownst to his member firm, he effected the transfer of approximately $400,000 from member firm customers (most of whom are now deceased) to the foundation as supposed donations. Of that $400,000 Gregory transferred nearly $184,000 to the foundation from the sole known surviving donor customerís brokerage account. For almost seven years, Gregory, in conjunction with the other non-registered principals, collectively converted for their personal use a total of $79,444.70 from the foundation account they controlled, which was maintained at Gregoryís member firm. The money generally was used to fund the educations of the principalsí relatives; Gregory personally converted a total of $26,619.45 of that amount for his own personal use.
For more than a decade while associated with both the foundation and his member firm, Gregory failed to disclose to his firm his officer and director positions and role in a business activity outside the scope of his relationship with his firm; Gregory did not disclose his association with the foundations until after the firm undertook an internal review of his activities related to the foundation.
Gregory assisted an elderly customer in causing a bank to issue him a $40,061.48 check as a gift from the customer, contrary to his firmís WSPs that required associated persons, including Gregory, to notify the firm of, and receive approval for any non-de minimis gifts received from customers, Moreover, the firm's procedures imposed an annual $100 cap on customer gifts. Gregory failed to disclose, and receive written approval for, the $40,061.48 gift, violating his firmís WSPs.
As a result of his violations of the firmís procedures, Gregory impeded his firmís ability to effectively supervise over subjects of regulatory importance, including, but not limited to, issues relevant to customer protection.
As his member firmís president, CEO and registered principal, Paris had overall supervisory responsibilities for the firm, including reviewing and performing due diligence for private placements and for reviewing and approving new products, including the assignment of a new product to a business unit.
Paris signed a sales agreement for a private placement offering and failed to perform due diligence beyond reviewing the private placement memorandum (PPM), and while he had received third-party due diligence reports regarding earlier private placements, he did not seek or obtain a report for the latest offering and did not conduct any continuing due diligence or follow-up because of the limited time between offerings, the similarity of the deals and representations from the issuer that no additional due diligence was necessary. Unlike earlier offerings, there were serious red flags that Paris could not identify without adequate due diligence.
In his firmís sale of several offerings by another issuer, Paris failed to perform due diligence even though his firm received a specific fee related to due diligence purportedly performed in connection with each offering. Paris did not travel to the issuerís headquarters to conduct due diligence and did not seek or request any financial information other than what was contained in the PPM. Once he had concluded that his firm could sell the offerings, Paris did not conduct any continuing due diligence or follow-up, and due to limited time between the offerings, the similarity of the deals and representations from the issuer that no material changes had occurred, he concluded that no additional due diligence was necessary. In addition, Paris did not believe it necessary to pay for due diligence reports for the new offerings because they would say the same thing as previous reports but they did identify numerous red flags. Moreover, Paris should have scrutinized each of the offerings given the high rates of return to ensure they were legitimate and not payable from proceeds of later offerings, as in a Ponzi scheme.
Acting on his firmís behalf, Paris failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations with respect to the offerings.
A firm representative submitted a written request to conduct a live call-in finance- and investment-related radio show to be broadcast in Farsi; the firm had various written procedures relating to the supervision of its representativesí public appearances, which, among other things, required that the first three radio shows be submitted to the firmís advertising compliance department as soon as they had aired and that the advertising compliance department would contact representatives quarterly to request copies of specific shows during a randomly chosen date range for review.
The firm approved the representativeís request and required the representative to provide a translated copy of the show upon a quarterly request, and an unaffiliated third-party translation company was to complete the translation. For five years, the representative, together with another representative, aired approximately 520 shows on a particular radio station; the format was typically a live call-in show, in Farsi, discussing financial issues and investments, but the firm failed to request or review copies or transcripts of the broadcasts.
The Firm failed to have a supervisory system reasonably designed to detect and prevent the misuse of material, nonpublic information by employees through an information barriers system.
The Firm did not have WSPs addressing the creation or distribution of a watch list, which is a list of securities whose trading is subject to close scrutiny by a firmís compliance or legal department, and the firm did not maintain any list of this nature. The firm maintained a restricted list but it was not maintained in the manner its own procedures required; securities were added to the list in a haphazard manner, often after the issuer had signed a private placement agent agreement with the firm. The list did not reflect when a security was added or deleted from the list, and did not identify the contact person.
The firm did not adequately monitor employee trading outside the firm for transactions in the restricted-list securities; the firm permitted employees to maintain securities accounts with other broker-dealers, requiring any employee to have duplicate confirmations and account statements sent to the firm. Firm employees were required to disclose their outside accounts to the firm upon hire and annually in an attestation form, but the firm failed to obtain annual attestations from some employees and did not ensure that it was receiving the required duplicate confirmations and account statements.
In addition, because the firm failed to maintain a watch list, to timely add securities to its restricted list, to record the required restricted list information, and to obtain confirmations and account statements for employee accounts, it could not reasonably monitor its employeesí trading for transactions in restricted or watch-list securities. Moreover,the firm did not have procedures to restrict the flow of material, nonpublic information and routinely shared restricted-list information with unregistered individuals who were firm owners, and occasionally shared with these unregistered individuals the details of investment banking contracts; consequently the firmís procedures were not reasonably designed to prevent violation of securities rules prohibiting insider trading.
Murillo recommended and effected excessive transactions in a customerís account that were unsuitable in light of the customerís financial situation, needs and investment objectives.
Murillo controlled and directed the trading in the customerís account by recommending and executing all the transactions in the account. The customer was unable to evaluate Murilloís recommendations, did not understand the meaning of ďmargin,Ē and was unable to exercise independent judgment concerning the transactions in the account due to his lack of investment knowledge and limited English skills; the customer trusted Murillo completely to make and execute recommendations in his account.
Murillo did not have a reasonable basis for believing that the volume of trading he recommended was suitable for the customer in light of information he knew about the customerís financial circumstances and needs, and given the amount of commissions and fees the customer was charged; and as a result, the transactions Murillo recommended and executed were unsuitable, even if the investment objectives were speculative as reflected on the customerís new account form. The customer told Murillo that he wanted a conservative retirement account set up because he was nearing retirement age and could not risk any losses with his funds; nevertheless, the new account forms listed the customerís investment objective as speculation and his risk tolerance as aggressive.
The trades were excessive in number and resulted in excessive costs to the customerís account, and the vast majority of the transactions in the customerís account were effected through the use of margin and resulted in the customer incurring additional costs in the form of margin interest. In addition, Although the customer signed a pre-completed margin agreement, along with other pre-completed new account forms Murillo sent to him, the customer did not understand margin and did not realize that Murillo was effecting trades on his account on margin. Moreover, owing to the customerís lack of investment knowledge and inability to decipher his monthly account statements, the customer was unaware that he had a margin balance and did not understand the risk of the margin exposure in his account; at one point, the customerís account had a margin balance of approximately $106,818.52 while the accountís equity was approximately $67,479.98. The transactions on margin Murillo effected in the customerís account were unsuitable for the customer in view of the size and nature of the account and the customerís financial situation and needs.
While employed as a risk arbitrage research analyst with a member firm, REDACTED lied during conference calls convened for him to respond to questions FINRA posed regarding his involvement in Internet blogging activity.
Throughout his employment with the firm as a research analyst,REDACTED regularly posted responses to columns and articles published on Internet financial blog/media sites.REDACTED made his blog postings using different aliases and posted his comments on the blog sites during business hours using his firm computer.
Jan attempted to arrange an outside third-party business loan for a prospective client without obtaining written authorization or otherwise notifying his member firm; if successful, Jan would have received a referral fee. The potential client agreed and Jan, using his personal email account on his home computer, sent the prospective client a detailed client information sheet from an outside lender; the document Jan sent required the prospective client to provide numerous pieces of information relating to the potential loan, including a passport number, business tax ID number and bank account information. Jan requested a copy of the potential clientís passport and a copy of a bank guarantee or standby letter of credit for review and acceptance. Although Jan used his personal email account, his signature block identified him as a financial consultant with his firm.
Jan engaged in business outside the scope of his relationship with his firm without providing prompt written notice to his firm, and Janís conduct was contrary to his firmís written policies and procedures. Along with conducting outside business with a prospective client through his personal email account, Jan admitted to attempting to solicit business from an unspecified number of other customers using his personal email account. In addition, at times, Jan communicated with a customer who had firm accounts through his home email account about details relating to an asset that was to be deposited in one of the customerís accounts. Moreover, Jan knew that his firmís procedures required approval of his email and he thereby circumvented his firmís supervisory procedures and compromised the firmís ability to supervise and monitor his communications with the public.
Sabado offered and sold entitiesí oil and gas investments to several of her clients without her member firmís knowledge or consent.
The SEC filed a partially settled civil injunctive action alleging that the entities and an individual had fraudulently sold investments in Texas oil and gas projects, raising approximately $22 million from investors nationwide. As a result of Sabadoís recommendations, some of her current firm clients made investments with the entities totaling $491,880.
Sabado failed to provide her firm with prior notice of her participation in these securities transactions.
While employed by his member firmís New York Positions Services (NYPS) Group, Associated Person Garaventa was responsible for processing corporate actions. In that capacity, he
Garaventa entered, or caused to be entered, numerous false journal entries into the firmís electronic system to transfer and credit at least $59,349 of unreconciled customer funds to other NYPS suspense accounts that Garaventa was using to misappropriate funds. Garaventa misappropriated customer funds from an SEC settlement fund by entering, or causing to be entered, numerous false journal entries into his firmís electronic system to credit SEC checks totaling approximately $120,395 to the other NYPS suspense accounts he was using to misappropriate funds.
Garaventa entered, or caused to be entered, into the firmís electronic system check requests against the suspense accounts that Garaventa was using to misappropriate funds; in this way, Garaventa misappropriated at least $179,744 of customer funds for his own benefit. Garaventa misappropriated funds from the firm by entering, or causing to be entered, numerous false journal entries into the firmís electronic system to transfer and credit approximately $1,786,052 from different firm sources, including the firmís Foreign Exchange accounts, leftover balances from corporate actions and accumulated American Depositary Receipt (ADR) fees, commingled with funds from other sources, to the NYPS suspense accounts; Garaventa then entered, or caused to be entered, into the firmís electronic system check requests to be issued against those funds.
- funds from a firm counterparty; the counterparty calculated a payment to the firm related to a corporate action based on an incorrect tax withholding rate, which resulted in a $1,000,000 overpayment by the counterparty, which was credited to an NYPS suspense subaccount;
- approximately $320,422 of the $1,000,000 overpayment by entering numerous false journal entries into the firmís electronic system, transferring the funds to other NYPS suspense accounts that he was using to misappropriate funds, and caused checks to be issued against those funds by having NYPS employees who reported to him enter check requests on his behalf, which Garaventa approved and used the identification number and password of another NYPS employee who reported to him to enter check requests; one of the checks contained funds from other firm sources; and
- an additional $228,031 from other undetermined sources by entering numerous false journal entries into the firmís electronic system to transfer those funds to other NYPS suspense accounts he was using to misappropriate funds, and caused checks to be issued against those funds, which had been commingled with funds from other sources.
FINRA also found that Garaventa issued, or caused to be issued, approximately 50 false check requests and entered, or caused to be entered, hundreds of false journal entries in the firmís systems to foster his misappropriation of funds from the firm, its customers and a firm counterparty.
Garaventa failed to respond to FINRA requests for information.
Taylor received $11,000 from a customer purportedly for an investment in Taylorís relativeís business; however, Taylor did not provide the customer with a written loan agreement, purchase agreement or any other documentation memorializing the transaction.
The customer gave Taylor a cashierís check for $11,000, made payable to Taylor; Taylor negotiated the check and received $11,000 in cash from his financial institution. Only after his member firm confronted him did Taylor return the funds to the customer, thereby misusing the funds for several weeks.
Brandt provided written notice to his firm that he was engaged in sales of secured real estate notes outside the regular course and scope of his employment with the firm; however, the firm failed to recognize that the notes were securities and allowed Brandt to continue selling them without further supervision. Brandt again disclosed his sales of the notes on his annual Outside Business Questionnaire (OBQ) form, following which the firm determined that the notes were actually securities and ordered him to stop selling the notes and remove any mention of note sales from his OBQ. Thereafter, Brandt submitted a new OBQ devoid of any mention of note sales.
Brandt sold a note to a customer and received a commission of $3,459.21 for the sale although he failed to obtain the firmís prior written approval to sell the note. Brandt sold additional notes to other customers without receiving any compensation for those sales and obtaining the firmís prior approval. The total value of the notes Brandt sold, after submitting the new OBQ devoid of any mention of note sales, was $637,293.21. In addition, Brandt recommended and sold notes totaling $805,000 to other customers who were referred to him without having reasonable grounds for believing that his recommendations were suitable for these customers.
Moreover, Brandt failed to obtain information about these customersí investment objectives, risk tolerances, financial circumstances or other information upon which he could reasonably base a suitability determination. Furthermore, Brandt relied upon representations from the referring individuals that they had analyzed the customersí profiles and determined the notes to be suitable for the customers. Brandt received at least $54,450.00 in commissions for these sales.
Camarillo entered into a contract with a company to sell its private placements, and sold approximately $370,000 of these private securities to his customers, receiving over $13,000 in commissions, without providing notice to, or receiving approval from, his member firm.
Camarilloís firmís written procedures, which he attested to reading and understanding, instructed employees to provide notice to the firmís compliance department and to seek the firmís written approval prior to engaging in any securities transactions not executed through the firm. The company provided Camarillo with sales literature, and without submitting the brochure to his firm for approval, he distributed the brochure to his customers; the brochure contained several unwarranted, exaggerated and misleading statements, omitted material facts and ignored risk while guaranteeing success.
Camarillo did not have a reasonable basis to recommend that his customers purchase the securities, had no experience selling these types of products and did not conduct proper due diligence. Camarillo did not sufficiently understand the products offered through the company or how the investments were managed; all of Camarilloís customers who invested in the products informed Camarillo that they were seeking preservation of capital and viewed the investments as a retirement investment. Camarillo did not investigate the claims made in the sales literature that the returns were guaranteed, he had no basis to recommend the investment to customers seeking preservation of capital, and his recommendations to invest in the company were unsuitable.
Camarilloís customers lost tens of thousands of dollars by relying on his recommendation, because even after partial reimbursement from the companyís court-ordered receivership, Camarilloís customers only recouped 69 percent of their investment. Moreover, the products, as marketed, were securities, the sale of which required Camarillo to possess a Series 7 license; at the time he sold the securities, Camarillo held only a Series 6 license.
The Firm failed to develop and enforce written procedures reasonably designed to achieve compliance with NASDģ Rule 3010(d)(2) regarding the review of electronic correspondence. Although the firm had certain relevant procedures in place, it did not have a satisfactory system for providing designated principals with access to such correspondence for review; instead, the firm relied on registered representatives to forward any emails involving customers to a central email address, which was accessible to the firmís president and chief compliance officer (CCO), for review.
The firm did not have effective procedures to monitor its representativesí compliance with the email forwarding requirement; instead the firm relied on branch inspections to monitor compliance, but, because the firmís branch offices were non-Office of Supervisory Jurisdictionís (OSJs), they were inspected infrequentlyóonce every three years.
During the infrequent branch office inspections, the firm generally failed to conduct adequate reviews of representativesí personal computers to determine if they were complying with the email forwarding requirement; other than some very limited reviews during the inspections, the firm failed to provide for surveillance and follow-up to ensure that email correspondence review procedures were implemented and adhered to.
The firm failed to enforce its written procedures requiring a designated principal to conduct a daily review of business-related electronic correspondence and to evidence that review by initialing the correspondence.
Acting through Dochinez, the firmís president, chief executive officer (CEO) and a firm principal, failed to establish, maintain and enforce an adequate system of supervisory control policies and procedures that tested and verified that its supervisory procedures were reasonably designed with respect to the activities of the firm, its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where the need was identified by such testing and verification. In addition, The firmís supervisory control policies and procedures failed to address the requirements of designating a principal responsible for the firmís supervisory control policies and procedures; testing and verification to ensure reasonably-designed supervisory procedures; updating the firmís written supervisory procedures (WSPs) to address deficiencies noted during testing; designating a principal responsible for the annual report to senior management on the firmís system of supervisory controls procedures, summary of test results, significant identified exceptions, and any additional or amended procedures; identifying producing managers and assigning qualified principals to supervise such managers; using the ďlimited size and resourcesĒ exception for producing managersí supervision, including documenting the factors relied on in determining that the exception is necessary; electronically notifying FINRA of its reliance on the limited size and resources exception; reviewing and monitoring all transmittals of customer funds and securities; reviewing, monitoring and validating customer changes of address and customer changes of investment objectives; and providing heightened supervision over each producing managerís activities. Moreover,acting through Dochinez, the firm failed to conduct independent tests of its AMLCP.
Trustmont Financial Group, Inc.: Censured; Fined $10,000 joint/several; Fined additional $20,000
Peter Daniel Dochinez: Censured; Fined $10,000 joint/several
Without authorization, Franz took possession of checks payable to the investment adviser firm where he was employed, deposited the checks, which totaled about $21,000, to a personal bank account, and converted a portion of the funds to his own use and benefit.
Franz was the broker of record for a money market mutual fund account that an investor owned, and while the investor was out of state and without his knowledge or authorization, Franz contacted the mutual fund company multiple times and instructed it to issue checks to the investor drawn against his money market account. The mutual fund company issued checks payable to the investor totaling about $271,250 and mailed them to the investorís residence in Ohio.
Franz obtained possession of the checks at the investorís residence and, without the investorís knowledge or authorization, Franz forged his signature on the checks, deposited the checks to a personal bank account and converted a portion of the funds to his own use and benefit and remitted the rest to the investor.
Christensen sold approximately $650,000 in a companyís promissory notes to customers without providing his member firm with written notice of the promissory note transactions and receiving the firmís approval to engage in these transactions.
Based upon expected interest payments from the promissory notes, some of the customers also purchased life insurance policies from Christensen and another registered representative the firm employed. These customers expected to use the promissory note interest payments to pay for the life insurance premiums.
Christensen received direct commissions from the company related to the sale of the promissory notes to customers and received commissions from the sale of life insurance products to the customers, who intended to fund those policies with the interest payments from the promissory notes.
The company defaulted on its obligations and the customers lost their entire investment. The customers who also purchased life insurance based upon the expectation that they would receive interest payments from their investment relinquished their policies and the firm compensated them for the premiums paid, but the customers did not receive any reimbursement for the investments in the company that sold the promissory notes.
Christensen completed a firm annual compliance questionnaire, in which he falsely stated that he had not been engaged in any capital raising activities for any person or entity; had not received fees for recommending or directing a client to other financial professionals; had not been personally involved in securities transactions, including promissory notes, that the firm had not approved; and had not assisted a client with an application for investments not available through the firm or contracted or otherwise acted as an intermediary between a client and a sponsor of such investments without the firmís prior approval.
Finally, Christensen failed to respond to FINRA requests for documents and testimony.
Acting through Locy, Brookstone Securities did not have WSPs addressing due diligence requirements for third-party placements.
Acting through Locy, Brookstone failed to conduct an adequate due diligence of a third-party private placement offering before Locy approved the offering of shares to customers. Locyís due diligence efforts did not include any investigation into an equity fund, despite acknowledging that he knew very little about it or the third-party placement and could not get any solid information about the fund, including pending litigation or financial statements. Locy knew nothing about the fund that was not contained in a PPM the issuer prepared, but accepted that the firm representatives forming the offering had conducted due diligence and relied on their opinion of the fund. Locy acknowledged the representatives had limited, if any, experience forming a private placement.
The firm's representatives sold or participated in sales of shares to customers without notifying Locy or anyone else at the firm, which caused those sales to not be recorded on the firmís books and records.
Brookstone Securities, Inc. and David William Locy: Censured; Fined $25,000 jointly/severally
The Firm failed to properly archive its business-related electronic communications for individual users in some of its Offices of Supervisory Jurisdiction (OSJs).
The Firm stored these emails on stand-alone servers or individual machines only, which theoretically permitted individual users to delete incoming or outgoing emails, and thereby failed to properly preserve its business-related electronic correspondence.
The firm failed to
- review business-related electronic communications for the individuals and an additional user;
- evidence its review of individualsí business-related electronic communications as the firmís WSPs required; and
- provide notification and thirdĖparty attestation to FINRA regarding the use of electronic storage media 90 days prior to employing such media.
Smith improperly accepted $15,300 in cash gifts from a customer and her relative.
The customer and her relative gave Smith cash gifts when they visited their safe deposit boxes. Smith was given and accepted a cash gift during a visit to the customerís home. At the time Smith accepted the gifts, he was aware that the bankís code of conduct where he was employed prohibited employees from accepting gifts from customers.
This matter came to light when the customer offered cash to another bank employee after assisting her with her safe deposit box; the employee refused the gift and reported the matter to his supervisor. When Smithís supervisor questioned him, Smith admitted to accepting gifts from the customer, and his employment was terminated.
Baker requested, received and distributed answer keys for long-term care (LTC) continuing education (CE) exams to member firm representatives, and asked other firm representatives to distribute LTC CE answer keys to outside financial advisors.
Certain states implemented an LTC CE requirement that obligated financial advisors to complete an LTC CE course and exam before selling LTC insurance products, including the product Baker sold, to customers who resided in that state. In order to help financial advisors obtain the LTC CE requirement, Bakerís firm provided them with vouchers that allowed financial advisors to take CE exams for free through a specific company. In addition to providing financial advisors with the vouchers, certain firm employees improperly created, requested, received and distributed answer keys for state LTC CE exams.
Henry added information to an earlier copy of a private placement investor questionnaire that had previously been signed by a customer. The questionnaire itself had been completed by the customer while Henry was registered with a prior member firm and was later replaced at that prior firm by a different version; Henry maintained a copy of the earlier signed copy.
In response to an inquiry made by Henryís new firmís CCO regarding the source of a particular stock in the customerís account, Henry utilized the earlier copy of the previously signed questionnaire from the customer that Henry had in his files and made alterations to the document by adding on the updated requested information sought by the CCO. Henry presented that altered document to the CCO without disclosing that he had made the alterations and by making the alterations to the questionnaire, he caused the document and, consequently, the firmís records to be inaccurate.
Martin misappropriated at least $81,670 from her employer and its owner through the use of credit cards and checks for unauthorized purposes.
Without authorization, Martin used her employerís personal credit cards and business credit account to purchase personal items, totaling at least $34,516, and used her employerís business checking account, without authorization, to issue checks for personal items exceeding $1,603. The Martin issued checks from the business account to herself and made cash withdrawals for herself without authorization; these withdrawals exceeded the actual business expenses by at least $23,385. Martin issued, or caused to be issued, checks to herself for unauthorized bonus payments totaling at least $22,166.
Martin failed to appear for FINRA on-the-record testimony.
Naefke circumvented his member firmís guidelines regarding investing in illiquid investments by submitting documents, including illiquid investment letters and account information forms, that falsified and exaggerated customersí net worth which in turn permitted investments in amounts that the firm would have otherwise prohibited and that were unsuitable for the affected customers.
The firm had internal guidelines that limited the amounts customers were permitted to invest in illiquid investments; the internal policy further stated that illiquid investments for older investors required additional review and consideration pertaining to their needs for liquidity and income. Naefke submitted documents that knowingly falsified customersí net worth, causing his firmís books and record to be inaccurate and customers to invest in illiquid investments in amounts that his firm would have otherwise prohibited; and Naefke impeded his firmís ability to adequately supervise the suitability of his recommendations.
On three illiquid investment letters, Naefke falsely stated that a
- 50-year-old customerís adjusted net worth was $2,000,000, when in fact it was about $150,000;
O at least two account information forms, Naefke falsely stated that an
- 87-year-old customerís net worth was between $1,000,000 and $2,999,999, when, in fact, it was approximately $250,000; and
O four illiquid investment letters, Naefke falsely stated that the
- 87-year-old customerís adjusted net worth was $1,000,100.
Naefke recommended and sold illiquid investment interests in publicly registered non-traded real estate investment trusts (REITs), direct participation programs and a limited partnership to customers totaling about $299,000. When Naefke made the recommendations and sales, he did not have reasonable grounds for believing that the recommendations were suitable based on each customerís other security holdings, financial situation and needs.
Tieger convinced his junior partner to call an annuity company and impersonate his relative for the purpose of confirming a $275,000 withdrawal from one of the relativeís variable annuity contracts.
The relative attempted to make a distribution from his variable annuity and after growing frustrated with the withdrawal process, instructed Tieger to take care of it. After multiple requests, Tiegerís junior partner agreed to make the telephone call using the relativeís cellular phone, spoke to the annuity company representative and, pretending to be Tiegerís relative, asked the representative to process the contract withdrawal. The junior partner answered the representativeís questions by reading from a script that Tieger had prepared. Tieger watched the junior partnerís call from outside a glass conference room.
After Tieger left the office building, the junior partner called the representative back to inform him that he was not the relative and that he had called because someone standing next to him asked him to impersonate the relative.
Associated Person Miller converted $19,736.76 from her member firm.
In her capacity as assistant to the branch manager, Miller had authority to request that checks be issued from the branch office general ledger account to pay for branch expenses. Miller caused checks to be issued off the branch office general ledger to her boyfriend for construction work at the branch that was never performed. Each check was created in an amount equal to or less than $500 so that she could authorize the payments without the need for another firm managerís approval.
Miller caused another check to be issued to herself from the branch office general ledger. Miller reported to branch management that she did not receive her paychecks and obtained replacement checks totaling $1,035.80 from the branch, with the understanding that she would return her paychecks to the branch if she received them; when Miller received her paychecks, she deposited them into her personal account without reimbursing her firm.
Miller failed to respond to FINRA requests for information and documents.
Gelb solicited individuals, including customers at his member firm, to invest in entities that were purportedly engaged in the export and import business with a manufacturer based in China.
Gelb raised approximately $1.8 million from investors and received approximately $79,500 from the entities as compensation derived from his solicitation of, and directing investors to, the entities.
Private Securities Transaction
Gelb was aware of his firmís policies and procedures, which specifically prohibited its registered representatives from participating in any manner in the solicitation of any securities transaction outside the regular scope of their employment without approval. Gelb signed annual certifications attesting to this knowledge and failed to notify his firm about his solicitation of investors for the entities because he did not expect the firmís approval of the product.
Gelb failed to obtain adequate information about the investment and instead relied upon unfounded representations, including guarantees that the investorsí principal would be protected despite the fact that, at no time, had Gelb seen any financial documentation for the entities. The information available on the Internet about the entities was limited to the companiesí own website.
FINRA determined that despite the highly risky nature of the investment, Gelb led the customers to believe that the investment he was recommending was a safe and secure investment and, in some cases, Gelb was aware that customers were taking out home equity lines of credit on their homes to fund their investments in the entities. Customers who invested in the entities Gelb recommended had low risk tolerances and had investment objectives of growth and/or income, and Gelb did not have a reasonable basis for recommending the entities to the customers.
Gelb utilized an outside email account, without his firmís knowledge or consent, to conduct securities business.Although the firm was aware of the outside email account, Gelb had not been approved to utilize that email address to conduct securitiesrelated business and by operating an outside email account for securities-related business without the firmís knowledge and consent, Gelb prevented his firm from reviewing his emails pursuant to NASD Rule 3010(d).
Without the customer's authorization or knowledge, Scarcello effected an online wire transfer of $8,024.54 from a bank customerís account for his personal use and benefit.
Scarcello obtained an ATM card linked to the customerís account and used the card to make withdrawals totaling over $12,000 from the account, using the funds for his personal benefit without the customerís authorization or knowledge. When the customer discovered the funds were missing and confronted Scarcello, Scarcello executed an unauthorized wire transfer of $20,000 from the line of credit of another bank customerís account to the customerís account, thereby converting approximately $32,000 from two bank customersí funds for his personal benefit.
Scarcello failed to respond fully and completely to FINRA requests for information and to appear for an on-the-record testimony.
Veile borrowed $800 from one of his customers at his member firm. The loan was not reduced to writing and had no repayment terms, and Veile did not disclose this loan to his firm and the firm had a policy prohibiting representatives from borrowing money from customers.
Veile paid back the customer after FINRA began its investigation. Veile completed an annual compliance statement for the firm in which he falsely stated that he had not engaged in any prohibited practices, including borrowing from or lending to a client.
The Firm failed to ensure that it established, maintained and enforced a supervisory system and written supervisory procedures (WSPs) reasonably designed to achieve compliance with the rules and regulations concerning private offering solicitations.
The firmís procedures were deficient in that they failed to specify, among other things, who at the firm was responsible for performing due diligence, what activities by firm personnel were required to satisfy the due diligence requirement, how due diligence was to be documented, who at the firm was responsible for reviewing and approving the due diligence that was performed and authorizing the sale of the securities, and who was to perform ongoing supervision of the private offerings once customer solicitations commenced. As a result of the firmís deficient supervisory system and WSPs, the firm failed to conduct adequate due diligence on private placement offerings. The Firm's WSPs required due diligence to be conducted on every private placement it offered, and required that such review had to be documented; the firm failed to enforce those provisions with respect to an offering. Had the firm conducted adequate due diligence, it reasonably should have known that the company had defaulted on its earlier notes offerings and that there was a misrepresentation in the private placement memorandum (PPM) with respect to principal and interest payments to investors in the earlier offerings. The Firm failed to take reasonable steps to ensure that it timely learned of the missed payments on the earlier notes offerings and disclosed them to prospective investors in the notes. Due to the firmís lack of due diligence, DeRosa sold notes issued to customers, and in connection with those sales, the firm and DeRosa mischaracterized and/or negligently omitted certain material facts provided to investors. DeRosa sold $833,000 of the notes to customers and generated approximately $37,485 in gross commissions from the sales of the notes. Through DeRosa and another registered representative, the Firm solicited customers to invest in another companyís stock but failed to conduct adequate due diligence.
The owner of an investment banking firm represented that the customersí funds would be wired to a client trust account at a bank and then forwarded to an escrow account, which a third party would control, before being invested; the firm did not take any steps to verify this claim before wiring the customer funds to the account. No one at the firm verified the existence of the client trust and escrow accounts, and, after the funds were wired, no one requested or received a bank account statement to verify the receipt and location of the funds; the firm failed to question why the wire instructions failed to reference the client trust account in the bank account title section on the form, but instead referenced the investment banking firm. Instead of directing the customersí money into the escrow account, the owner of the investment banking firm kept the funds in bank accounts he controlled and used the funds for his own benefit.
In addition, in connection with his sales of the companyís stock, DeRosa disseminated to prospective investors a presentation he had received from the owner of the investment banking company, which summarized the offering. Moreover, the presentation constituted sales literature but did not comply with the content standards applicable to communications with the public and sales literature. Furthermore, the presentation failed to provide a fair and balanced treatment of risks and potential benefits, contained unwarranted or exaggerated claims, contained predictions of performance and failed to prominently disclose the firmís name, failed to reflect any relationship between the firm and the non-FINRA member entities involved in the offering, and failed to reflect which product or services the firm was offering.
Garden State Securities, Inc.: Censured; Ordered to pay jointly and severally with DeRosa, $300,000 in restitution to investors. FINRA did not impose a fine against the firm after it considered, among other things, the firmís revenues and financial resources
Kevin John DeRosa (Principal): Fined $25,000; Ordered to pay jointly and severally with Garden State $300,000 in restitution to investors; Suspendedfrom association with any FINRA member in any capacity for 20 business days, and Suspended from association with any FINRA member in any Principal capacity only for 2 months.
The Firm made material changes in its business operations without first filing an application and obtaining FINRA approval.
The Firm increased the number of its registered representatives, an increase of 80 percent over the number of representatives provided for in its membership agreement, and increased the number of its registered and non-registered branch offices, an increase of 113 percent over the number of branch offices provided for in the membership agreement.
While registered at member firms, Kelly failed to provide written notice to each firm that he was employed by or accepted compensation from other persons as a result of business activities that were neither passive investments nor within the authorized scope of his relationship with his firms.
Kelly was primarily responsible for the operation of a company, having handled its formation, negotiated its loan agreements and controlled its finances, including investments and distributions and received direct and indirect compensation. Kelly formed additional entities, filed registration documents, served as their registered agent and took out loans on their behalf, which were business activities unrelated to his relationship with his member firms.
Kelly failed to disclose these companies to his member firms and falsely represented on his qualifying questionnaire for his most recent firm that he did not and would not engage in any outside business activities without prior notification to, and written consent from, the firm.
Kelly participated in private securities transactions without prior written notice to his firms describing in detail the proposed transactions, his proposed role therein, and stating whether he received, or might receive, selling compensation.
Poland allowed a representative of a non-FINRA member insurance company to improperly assist him in completing a state insurance LTC CE exam.
The representative sat with Poland for half of the time it took him to complete the exam, and the two discussed the topics covered on the exam, and as a result, Poland received assistance on some of the answers on the exam. After completing the exam, Poland completed an exam certification form/declaration of compliance, and despite having received assistance on the exam, he signed the form and inaccurately certified that he completed the exam without assistance from any outside source.
Vinas converted approximately $3.3 million from customers, mostly Mexico-based, while he was associated with member firms and served as the registered representative responsible for these customersí brokerage accounts.
Vinas asked customers to sign blank documents, including firm documents that were printed in English when none of the customers spoke or read English, but they complied with Vinasí request.
A variable credit line account was opened at Vinasí firm in the customersí name, and Vinas submitted or caused to be submitted applications requesting increases in the credit line that the firm approved, but the customers had not authorized the opening of the credit account or the subsequent credit increases, nor were they aware of the existence of the credit account. Vinas forged, or caused to be forged, customer signatures on Letters of Authorization (LOAs) and had a customer sign blank LOAs, which he submitted to his firm purportedly authorizing the transfer of customer funds without these customersí authorization or knowledge. Vinas submitted, or caused to be submitted, to another member firm fraudulent verbal LOAs without the customersí authorization or knowledge, which allowed him to wire funds from the customersí accounts. In addition, Vinas presented false account documents to the customers, which reflected fictitious account balances although he had closed the account after taking the last remaining funds from the account.
Vinas failed to respond to FINRA requests to appear and provide testimony.
Campbell failed to enforce his member firmís heightened supervisory procedures with respect to one of its representatives.
According to those procedures, Campbell was responsible for determining the scope of the heightened supervision and ensuring that the representativeís supervisor was enforcing the heightened supervision plan. The firm required that the plan be individualized based on the representativeís disciplinary history. Campbell placed a representative on heightened supervision because of his disciplinary history, and the plan Campbell prepared was deficient because it was not tailored to that representativeís history of engaging in private securities transactions and did not provide for any material additional supervision beyond the usual steps that were taken to oversee other firm representatives. Campbell failed to ensure that the plan was implemented and, as a result,the following actions that were required pursuant to the plan were not undertaken:
- a log was not created of the representativeís trades,
- certifications were not made to the compliance department that the heightened supervision plan was implemented, and
- and an annual review of the plan did not take place.
Mehlman facilitated securities investments away from his member firm and received compensation as a result of the sales.
Workikng with others through an entity, Mehlman distributed secured investment notes in a company to insurance agents who in turn marketed the notes, which were securities. The entity sold approximately $60 million in the notes and generated more than $6 million in gross commission revenues from which Mehlman received approximately $430,000 from the sales. The investments were not made through Mehlmanís firm and Mehlman did not provide written notice to, or obtain approval from, his firm prior to facilitating the investments.
Cyrus failed to supervise representatives at her member firm who made unsuitable recommendations to customers at their firm.
Cyrus was responsible for supervising the representatives but failed to take appropriate action to supervise the representatives that was reasonably designed to prevent their violations and achieve compliance with applicable rules. Cyrus failed to adequately review and follow up on the over-concentration of the customersí liquid assets in preferred stocks and the risks associated with those securities.
Leon recommended that a couple invest $167,000 in a private securities transaction without providing notice of his proposed role in the transaction to his member firms.
Leon formed a company through which he sought to operate an independent branch of a broker-dealer and did not have reasonable grounds to believe that the recommended investment in the company was suitable for the couple in light of their investment objectives, financial situation and needs; the recommended investment was too risky for the customers, who were a retired couple of limited means. The recommendation led to most of their investable assets being overconcentrated in the security.
Prior to its dissolution, the company made interest and principal payments totaling approximately $26,000 to the couple, who lost approximately $141,000 on their investment in the company.
Leon failed to respond completely to FINRA requests for information and documents.
Cruz participated in an outside business activity without providing her member firm with prior written notice.
An individual offered Cruz $3,000 in exchange for referring firm clients and others with available credit on their personal credit cards who would invest in his newly created business. The individual failed to pay those who invested in his business as promised. Cruz misrepresented to her firm her involvement in the outside business activity on a compliance her firm review conducted. Upon admitting her involvement in the outside business activity to her firm, the firm immediately suspended Cruz, conducted an internal investigation and later terminated Cruz.
Iskric misused his member firmís funds by using the firmís corporate credit card for personal purposes, including purchases of gift cards from various retailers. The amount of unauthorized charges was in excess of $10,000.
While registered with a different member firm, Iskric failed to timely update his Form U4 with material information.
National Securities failed to have reasonable grounds to believe that certain private placements offered pursuant to Regulation D were suitable for customers. Acting through Portes, as the firmís Director of Alternative Investments/Director of Syndications, National failed to adequately enforce its supervisory procedures to conduct adequate due diligence as it relates to an offering. Portes and the firm became aware of multiple red flags regarding an offering, including liquidity concerns, missed interest payments and defaults, that should have put them on notice of possible problems, but the firm continued to sell the offering to customers. Acting through Portes, the Firm failed to enforce its supervisory procedures to conduct adequate due diligence relating to other offerings.
Portes reviewed the PPMs for these offerings and diligence reports others prepared, but the review was cursory.The due diligence reports noted significant risks and specifically provided that its conclusions were conditioned upon recommendations regarding guidelines, changes in the PPMs and heightened financial disclosure of affiliated party advances, but the firm did not investigate, follow up on or discuss any of these potential conflicts or risks with either the issuer or any third party. In addition, acting through Portes, the Firm failed to enforce reasonable supervisory procedures to detect or address potential ďred flagsĒ as related to these offerings; and the firm, acting through Portes, failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.
National Securities Corporation: Censured; Odered to pay a total of $175,000 in restitution to investors.
Matthew G. Portes (Principal): Fned $10,000; Suspended from association with any FINRA member in any principal capacity only for 6 months.
Palumbo activated ATM cards, linked them to bank customer accounts and affected unauthorized ATM withdrawals from the customersí accounts, which totaled approximately $36,895.
Palumbo did not have permission or authority from the customers or the bank to link the ATM cards to the customersí accounts or withdraw funds from the accounts. Palumbo effected a $1,000 direct cash withdrawal from another customerís account without permission or authority from the customer or bank. These transactions did not involve funds from an account held at a FINRA-regulated entity.
Kennedy continued recommending and effecting put options trading in a customerís account even though he knew that the trading was unsuitable because the customer was unemployed and the risk was inconsistent with the customerís financial resources, investment objectives and risk tolerance.
Kennedy recommended that an elderly couple invest $50,000 in a put options trading strategy with approximately $57,000 to be invested in mutual funds and bonds with none of the mutual funds to be used for put options trading. The customersí account, which had approximately $267,298.55, suffered realized and unrealized losses of $195,046.40 due to Kennedyís put option trading strategy and the liquidation of mutual funds to cover losses from the put options trading and to meet margin requirements of securities that were purchased in the customersí account due to the put options trading.
Simha borrowed approximately $51,000 from customers at his member firm in order to complete renovations on his house.
The loans were not reduced to writing and had no repayment terms; the customers had been Simhaís friends for many years, and one was his relative. The firm had a policy prohibiting representatives from borrowing money from customers; one of the loans was repaid before Simha disclosed it to the firm and the other loans have since been forgiven by the customers.
Simha sent an email to a former customer requesting a share of the profits that were made in the customerís account while the account was with the firm. In that email, Simha represented that FINRA was auditing the customerís account, but this was not correct; the client never sent Simha the share of the profits he requested.
Prestige, acting through Kirshbaum and at least one other firm principal, were involved in a fraudulent trading scheme through which the then-Chief Compliance Officer (CCO) and head trader for the firm concealed improper markups and denied customers best execution.
As part of this scheme, the CCO falsified order tickets and created inaccurate trade confirmations, and the hidden profits were captured in a firm account Kirshbaum and another firm principal controlled; some of the profits were then shared with the CCO and another individual.
The trading scheme took advantage of customers placing large orders to buy or sell equities. Rather than effecting the trades in the customersí accounts, the CCO placed the order in a firm proprietary account where he would increase or decrease the price per share for the securities purchased or sold before allocating the shares or proceeds to the customersí accounts; this improper price change was not disclosed to, or authorized by, the customers, and this fraudulent trading scheme generated approximately $1.3 million in profits for the firmís proprietary accounts. Kirshbaum was aware of and permitted the trading. In an account that Kirshbaum and another firm principal controlled. 47 percent of the profits from the scheme were retained. In furtherance of the fraudulent trading scheme, the CCO entered false information on the corresponding order tickets regarding the share price and the time the customer order ticket was received, entered and executed; the corresponding trade confirmations inaccurately reflected the price, markup and/or commission charged and the order capacity.
In addition, acting through Kirshbaum, Prestige entered into an agreement to sell the personal, confidential and non-public information of thousands of customers to an unaffiliated member firm in exchange for transaction-based compensation from any future trading activity in those accounts. In connection with that agreement, Kirshbaum provided the unaffiliated member firm with the name, account number, value and holdings on spreadsheets via electronic mail. Furthermore, Kirshbaum granted certain representatives of that firm live access to the firmís computer systems, including access to systems provided by the firmís clearing firm, which provided access to other non-public confidential customer information such as Social Security numbers, dates of birth and home addresses. Prestige and Kirshbaum did not provide any of the customers with the required notice or opportunity to opt out of such disclosure before the firm disclosed the information, as Securities and Exchange Commission (SEC) Regulation S-P requires.
Acting through Kirshbaum, Prestige failed to establish and maintain a supervisory system, and establish, maintain and enforce written supervisory procedures to supervise each registered personís activities that are reasonably designed to achieve compliance with the applicable rules and regulations regarding interpositioning, front-running, supervisory branch office inspections, supervisory controls, annual compliance meeting, maintenance and periodic review of electronic communications, NASD Rule 3012 annual report to senior management, review and retention of electronic and other correspondence, SEC Regulation S-P, anti-money laundering (AML), Uniform Application for Securities Industry Registration or Transfer (Form U4) and Uniform Termination Notice for Securities Industry Registration (Form U5) amendments, and NASD Rule 3070 reporting. FINRA found that the firm failed to enforce its procedures requiring review of its registered representativesí written and electronic correspondence relating to the firmís securities business. In addition, the firm failed to establish, maintain and enforce a system of supervisory control policies and procedures that tested and verified that its supervisory procedures were reasonably designed with respect to the activities of the firm and its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where testing and verification identified such a need. Moreover, the firm failed to enforce the written supervisory control policies and procedures it has with respect to review and supervision of the customer account activity conducted by the firmís branch office managers, review and monitoring of customer changes of address and the validation of such changes, and review and monitoring of customer changes of investment objectives and the validation of such changes. Furthermore, firm failed to establish written supervisory control policies and procedures reasonably designed to provide heightened supervision over the activities of each producing manager responsible for generating 20 percent or more of the revenue of the business units supervised by that producing managerís supervisor; as a result, the firm did not determine whether it had any such producing managers and, to the extent that it did, subject those managers to heightened supervision.
Acting through one of its designated principals, Prestige falsely certified that it had the requisite processes in place and that those processes were evidenced in a report review by its Chief Executive Officer (CEO), CCO and other officers,and the firm failed to file an annual certification one year. The findings also included that the firm failed to implement a reasonably designed AML compliance program (AMLCP). Although the firm had developed an AMLCP, it failed to implement policies and procedures to detect and cause the reporting of suspicious activity and transactions; implement policies, procedures and internal controls reasonably designed to obtain and verify necessary customer information through its Customer Identification Program (CIP); and provide relevant training for firm employeesóthe firm failed to conduct independent tests of its AMLCP for several years. Acting through Kirshbaum and another firm principal, the firm failed to implement policies and procedures reasonably designed to ensure compliance with the Bank Secrecy Act by failing to enforce its procedures requiring the firm to review all Section 314(a) requests it received from the U.S. Department of the Treasuryís Financial Crimes Enforcement Network (FinCEN); as a result, the firm failed to review such requests. In addition, Kirshbaum and another principal were responsible for accessing the system to review the FinCEN messages but failed to do so. Moreover, FINRA found that the firm permitted certain registered representatives to use personal email accounts for business-related communications, but failed to retain those messages.
Furthermore, the firm failed to maintain and preserve all of its business-related electronic communications as required by Rule 17a-4 of the Securities Exchange Act of 1934, and failed to maintain copies of all of its registered representativesí written business communications. The firm failed to file summary and statistical information for customer complaints by the 15th day of the month following the calendar quarter in which the firm received them. The findings also included that the customer complaints were not disclosed, or not timely disclosed, on the subject registered representativeís Form U4 or U5, as applicable.The Firm failed to provide some of the information FINRA requested concerning trading and other matters.
Prestige Financial Center, Inc. : Expelled
Lawrence Gary Kirshbaum (Principal): Barred
Kirkpatrick sold millions of unregistered shares of stock for accounts opened at his member firm on his customersí behalf, realizing approximately $9.3 million in proceeds for the customers without taking the necessary steps to determine whether his customersí unregistered shares could be sold in compliance with Section 5 of the Securities Act of 1933.
Kirkpatrick signed new account forms for the customers, did not review them in depth, neither met nor spoke with the customers, and communicated with them solely via email and instant message. Kirkpatrick failed to conduct the necessary due diligence prior to the entityís stock sales from the customersí accounts; the circumstances surrounding the entityís stock and the firmís customers presented numerous red flags of a possible unlawful stock distribution.
The sales through one of the customersí accounts at Kirkpatrickís firm realized approximately $5.8 million in proceeds for the customer, and another customer realized approximately $3.5 million in proceeds; the total commissions generated for these sales were $481,398 of which Kirkpatrick received commissions totaling $91,466.
Kirkpatrick admitted that he did not determine if a registration statement was in effect with respect to the customersí entity shares, or if there was an applicable exception; instead he relied on the issuerís transfer agent to determine if the entity stock the customers deposited could be sold.
Kirkpatrick did not review the customersí incoming stock questionnaires, nor did he request or review the stock certificates, which indicated information about how and from whom the shares were purchased, whether the customer was affiliated with the issuer and whether the stock was restricted. In addition, Kirkpatrick noticed that the accounts seemed to have the same trading pattern, yet he failed to investigate and failed to make any effort to determine the source of the customersí shares.
Page converted a total of $1,207,440.61 from retail customer brokerage accounts by arranging for transfers of funds from the customersí accounts, by way of one check and automated clearing house (ACH) debits, for payment of a corporate credit card account held in her name, without the customersí authorization.
Page provided false information to a Certified Public Accountant (CPA) who was acting on one of her customerís behalf with respect to some of the ACH debits made from that customerís brokerage account totaling $286,330.72, each debit having been made payable to Pageís corporate credit card account.
Page told the CPA that the debits were made to fund an outside real estate investment in which she had placed a portion of the customerís investment portfolio. Page fabricated an account statement purportedly demonstrating that the customer had an ownership interest in a particular REIT when no such ownership existed, and faxed the fabricated statement to the CPA. When the CPA sought further information about any dividends arising from the REIT investment, Page falsely explained to the CPA that while dividends were expected, they would not be forthcoming until the following tax year.
By deliberately deceiving one of her customerís appointed representatives in such a fashion, Page, in the conduct of her securities business, failed to observe high standards of commercial honor and just and equitable principles of trade.
Acting through Searle, the Firm shared approximately $326,000 worth of profits in the account of a customer of another FINRA member firm. Neither the firm nor Searle contributed financially to the customerís account; and, therefore, neither could share in the profits in direct proportion to their financial contributions to the account.
The Firm failed to establish, maintain, and enforce adequate WSPs related to sharing in profits and losses in FINRA member firmsí customer accounts.
Searle & Co.: Censured; Fined $10,000 jointly/severally with Searle; Fined Additional $5,000
Robert Southworth Searle: Censured; Fined $10,000 jointly/severally with Searle & Co.
Donahue requested, received and improperly distributed the answer key for a state LTC CE examination to a financial advisor outside his member firm.
Certain states began requiring financial advisors to successfully complete an LTC CE examination before selling long-term care products to retail customers. The firm authorized its wholesalers to give financial advisors vouchers from a company, which the financial advisors could use to take the LTC CE examinations without charge. Donahue was an internal wholesaler at a firm who supported the selling efforts of external wholesalers who marketed an insurance product to financial advisors at financial service firms. Firm employees, other than Donahue, created answer keys for the companyís LTC CE examinations for various states, and distributed them to other firm employees.
Newman converted $10,166.34 by using her member firmís corporate credit cards to pay for a personal vacation and misappropriating her firmís credit card rewards points for her personal use.
Newman did not have the firmís permission or consent or the authority to charge her personal vacation to her firm issued credit cards or appropriate reward points for her own use.Newman did not inform anyone at her firm or memorialize or otherwise create a record of these charges. She reimbursed the firm for the charges but not for the credit card rewards points. Newman intentionally created fictitious and false entries in the firmís books to cover up her conversion of firm funds for her personal benefit.
UBS failed to update the company codes in the client-based database after the individual responsible for that task left the firm.
The emails indicating that the company codes had been added were not sent to the firmís Client Management Team (CMT) by another group at the firm, the Core Client Data Services Group (CCDS).
UBS employed Client Data Strategist (CDS), a senior officer in CMT. The CDS was in charge of producing a business object report that combined the research and revenue information for each client to create required non-investment banking disclosures in equity research reports. Unfortunately, the CDS continued to produce the business object report without confirming that the company codes were updated -- because the CDS continued to produce the reports, a file was created and uploaded in the firmís central disclosure database, even though it contained incomplete information.
Since the reports were completed, email alerts were not triggered at the end of the process, and as a result of the failures during the update process, equity research reports the firm published failed to include one or more required non-investment banking disclosures (non-investment banking compensation, non-investment banking securitiesrelated services and non-securities services). As a result of certain information contained in the firmís central disclosure database not being updated due to the update process failure, research analysts creating and sending information about the impacted subject companies to media outlets in connection with public appearances failed to disclose the firmís non-investment banking related compensation and the types of services (non-investment banking securities-related services and non-securities services) it provided during the prior 12 months.
Moreover, the firm failed to adequately implement its supervisory procedures concerning compliance with NASD Rule 2711(h), and the firm failed to conduct follow-up and review to ensure that its employees were performing their assigned responsibilities of collecting and updating data to generate accurate disclosures, and to have a verification process to confirm that each group was performing its task to ensure the flow of updated information at each stage had accurate disclosures. The firm failed to adequately implement its written procedures that provided for step-by-step guidance for updating the required disclosures in the relevant databases in order to reasonably ensure that they were disclosed in the research reports and in public appearances.
Stern charged personal expenses on her corporate credit card totaling approximately $5,200. Stern made approximately $2,700 in payments to the bank affiliate of her member firm for the personal expense which she charged on her corporate credit card.
The bank notified Stern on several occasions about a number of aged items that were charged on the card for which no employee expense reports were submitted by Stern. Subsequently, the bank notified Stern that her card was two payments past due and it was being suspended.
Stern then admitted that she had made the personal purchases on her corporate credit card. Stern also made a $500 payment to the bank and thus reduced the outstanding amount owed due to her personal use of the corporate card to $1,984.
Sternís employment at her firm and the bank were terminated for improper use of the corporate credit card.
Chakrabortti failed to ensure proper disclosure of his personal financial interests in the securities of companies that were subjects of his research reports and public appearances, although FINRA conceded that he informed his firm of his ownership interest in each security, gave advance notice of all transactions in these securities to the firmís compliance department and provided the firm with a record of the transactions.
Certain of the research reports Chakrabortti co-authored included information reasonably sufficient upon which to base an investment decision in the companies in which he held shares, among other securities, but the reports did not disclose his personal financial position in some of the companies.
Chakrabortti made public appearances at which he mentioned one or more equity securities of individual companies but did not disclose his personal financial position in the securities in some of the companies. Because Chakraborttiís disclosure of his personal financial holdings was incomplete in certain research reports and public appearances, these communications violated NASD Rule 2210(d)(1)(A), which requires sales material, including research reports, to provide a sound basis for evaluating the facts relating to the securities covered in the reports. Moreover, after disclosing all of his personal financial holding to his firm, Chakrabortti did not ensure that these holdings were subsequently disclosed in certain research reports, which caused his firm to publish incomplete research reports.
Also, Chakrabortti did not inform his firm of certain of his public appearances in a timely manner, and did not obtain the firmís approval to discuss certain issuers during his public appearances, and these omissions caused the firm to have incomplete records of his public appearances.
Ameriprise failed to establish, maintain and enforce a supervisory system reasonably designed to detect and prevent one of its brokerís misconduct. The broker who was registered with the firm forged customersí signatures on various financial documents that he submitted to the firm for processing. The broker agreed to pay certain fees for customers without alerting the firm in order to avoid complaints from these customers. The broker agreed to a Bar.
An Ameriprise surveillance analyst became aware of potential forgeries by the broker and failed to follow up with a timely investigation, and the firmís supervisory system did not ensure that a timely investigation was conducted.
The firm had implemented a new set of procedures for its surveillance department through which the firm discovered that the investigation of the broker had not been completed, and the firm promptly reassigned the matter to other surveillance personnel. The firm completed its investigation of the broker nearly two and a half years after it first opened the investigation and found ample evidence of repeated forgeries by the broker, whose employment was then terminated.
The Firm failed to adopt and implement WSPs reasonably designed to supervise its research analysts and ensure that its research reports complied with NASD Rule 2711. Although the firm maintained some relevant WSPs, those procedures did not provide any real guidance to its employees about the specific steps they needed to take to achieve compliance with Rule 2711. The WSPs required that all public appearances by firm analysts be approved by the research director, that the appropriate disclosures be made to the media outlet, that a record documenting the disclosures provided to the media be maintained, and that the firmís marketing department receive a copy of such disclosure. The WSPs made the research analyst responsible for meeting these obligations but provided little or no guidance on how these tasks could be successfully carried out or supervised.
The WSPs contained provisions broadly describing what portions of draft research reports could and could not be provided to covered companies, but failed to provide specific guidance to firm employees regarding the manner in which these requirements were to be fulfilled.
The WSPs permitted the research department to send sections of a research report to a subject company before publication to verify the accuracy of information in those sections, provided that a complete draft of the research report was first provided to the compliance department.
The Firm sent research report excerpts to a subject company before its compliance department had received a complete draft of the report, and in one of those instances, the complete draft was not sent to the compliance department. Moreover, in connection with public appearances by its research analysts, the firm failed to retain records that were sufficient to demonstrate compliance by those analysts with the disclosure requirements of NASD Rule 2711(h).
While serving as a church treasurer, Severt took approximately $20,000 in funds from the church without the churchís authorization. Severtís relative subsequently repaid the funds.
Severt failed to respond to FINRA requests for information.
Sheedy engaged in private securities transactions without providing written notice to, or obtaining written approval from, his member firm.
Sheedy facilitated two firm customersí investments in securities issued by an entity in the form of investment agreements.Sccording to the investment agreements the entity issued, the company invested in and brokered life settlement contracts. Sheedy participated in the customersí investments by reviewing the customersí investment agreements, providing the customers with wiring instructions for the issuer, providing status updates to the customers regarding their investments and telling the customers to call him if they had any questions about their investments.
Sheedy utilized an unapproved personal email account to communicate with the customers.
The customers invested a total of $350,000, and pursuant to the terms of the customersí investment agreements, the customers were to receive return of their principals plus a total of $42,000 within five days of the end of their investment period for which certain life settlement contracts were invested. Neither of the customers received the return of their investment principal or the promised investment returns. All of their funds were lost all of their funds were lost.
Contrary to his member firmís prohibition on accepting loans from customers, Kepes borrowed $50,000 from a customer in the form of a loan, not documented and not backed by collateral, was a ďbridge loanĒ pending payment of the firmís annual retention bonus, to assist Kepes with a number of immediate expenses.
Kepes held the loan for six months and 20 days, repaying $53,000 to the customer. Kepes encouraged the same customer to loan $30,000 to a realtor to assist in ďflippingĒ (buying, repairing and then selling) a house. The customer advanced the funds as a favor to Kepes, without documentation or collateral, but the realtor never repaid the loan. Kepesí firm paid the customer $30,000 to compensate her for the money the realtor failed to repay.
Kepes accepted a $1,000 check as a gift from the customer although firm policy prohibited accepting gifts in excess of $100.
Moreover, contrary to firm policy and without informing his firm, Kepes entered into an Advisory Board Agreement to serve as an independent contractor for a privately held business and was compensated by stock options with some of the shares being exercisable on the date the agreement was signed, in recognition of services already provided prior to signing the agreement. Furthermore, Kepesí supervisor directly informed him that he could not join the company advisory board or engage in other activities called for by the agreement when compensated by stock options; nevertheless, Kepes signed the agreement and engaged in various activities called for by the agreement. Subsequently, Kepes requested approval to participate on the Advisory Board without informing his firm that, prior to his request, he signed the agreement and began service as an independent contractor to the company. After the request was denied, Kepes continued his service to the company as an independent contractor without informing his firm until the firm terminated him.
In his capacity as the vice president of compliance, McKee failed to supervise certain aspects of his member firmís securities business.
Acting on his firmís behalf, McKee failed to
- establish and maintain a supervisory system or written supervisory procedures reasonably designed to detect and prevent the firm from charging excessive commissions on mutual fund liquidation transactions;
- adequately supervise the firmís communications with the public;
- adequately supervise the firmís compliance with NASD Rule 3070 and Uniform Termination Notice for Securities Industry Registration (Form U5) reporting provisions and customer complaint recordkeeping requirements; and
- comply with NASD Rules 3012 and 3013, in that the Rule 3012 and 3013 reports that he prepared on his firmís behalf were inadequate.
Thee firmís 3012 report for one year was inadequate because it failed to provide a rationale for the areas that would be tested, failed to detail the manner and method for testing and verifying that the firmís system of supervisory policies and procedures were designed to achieve compliance with applicable rules and laws, and did not provide a summary of the test results and gaps found. The 3012 report also failed to detect repeat violations including, the failure to conduct annual Office of Supervisory Jurisdiction (OSJ) branch office inspections, advertising violations, customer complaint reporting and ensuring that all covered persons participated in the Firm Element of Continuing Education.
The firm's 3013 report for one year did not document the processes for establishing, maintaining, reviewing, testing and modifying compliance policies to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws, and the manner and frequency with which the processes are administered. In addition, the firm failed to enforce its 3013 procedures regarding notification from customers regarding address changes.
Cronister participated in the sales of a total of $266,302.51 in Universal Lease Programs (ULPs) to public customers and failed to provide his member firms with prior written notice and failed to obtain the firmsí prior written approval; Cronister received approximately $33,080 total in commissions.
Cronister engaged in outside business activities and accepted a total of $64,491.64 in checks from a ULP issuer made payable to a corporation he wholly owned; the checks were for sales of ULPs made by independent agents of his corporation. Cronister failed to provide prompt written notice of his outside business activities to his member firms. Cronister participated in a face-to-face interview with a compliance officer at one of his firms, acknowledged that all forms of outside business activities must be disclosed on an outside business activity form and must receive the firmís written approval prior to engaging in any outside business activity but never provided oral or written notification that he was engaged in outside business activity and receiving overrides on the sale of ULPs by other individuals.
Von Lumm borrowed $5,000 from one of his customers and executed a promissory note stating that the loan was to be paid in full by a certain date, with $1,000 interest. Von Lumm repaid approximately $2,100 to the customer but did not disclose the loan to his member firm, which prohibited its representatives from borrowing from customers.
The same customer gave Von Lumm $500 towards the purchase of auto and homeowners insurance, but Von Lumm failed to procure any insurance policies for the customer and did not immediately return the funds to the customer. Pursuant to the customerís request, Von Lumm wrote a note to the customer promising to return the $500 and has since returned the funds to the customer.
Von Lumm provided an incomplete response to FINRA requests for information and failed to appear for testimony.
Lichtenstein intentionally provided false testimony during a FINRA on-the-record interview regarding his knowledge of, and participation in, private securities transactions involving solicitation and sale of private placements within the branch for which he was employed as the branch manager.
Lichtenstein participated in the sale of private securities in the total amount of $234,303.68 to customers without his member firmís prior written approval.
Lichtenstein failed to reasonably supervise a branch office for which he acted as a branch manager. In response to a request to sell private placements at the branch, which Lichtensteinís firm had specifically denied, stating that no one at the branch had approval to sell any private placements and Lichtenstein was aware of this prohibition, he learned of other private placements being sold by a branch registered representative and failed to inform the firmís compliance department of the sales.
Because Lichtenstein was responsible for the review of electronic mail at the branch, he knew, or should have known through email review, of red flags indicating the sale of additional private placements but did not conduct additional investigation and did not inform the firmís compliance department of the red flags.
Anton effected fictitious trades in securitized Small Business Administration (SBA) loans, totaling $82,652,497, in order to reduce his member firmís SBA deskís inventory levels.
Anton effected the fictitious trades to purported institutional buy-side customers and by doing so, Anton could gradually sell the SBA securities and eventually comply with the firmís prescribed inventory level. The fictitious trades created the false impression that Anton had purportedly sold SBA securities to certain of the firmís institutional customers and that the firmís SBA desk had decreased overall inventory levels by a total of $75 million. Anton purportedly sold each of the fictitious SBA securities to other broker-dealers instead of institutional customers; and by entering the fictitious sales of the SBA securities at a price above the mark-to-market price, Anton created the false impression that he had avoided selling the SBA securities at a loss.
Anton manipulated forward the settlement dates for the trades to afford him additional time to try to sell the SBA securities. In 30- day forward settlement intervals, Anton cancelled and corrected trades in the same pool of SBA securities at the same transaction quantity, which triggered the creation of a ďcancel & correctĒ ticket. In addition, a firm employee discovered a discrepancy in the SBA securitiesí reporting position and reported the observation to the firmís management, which investigated and noted the repeated pattern of cancellation and corrections relating to the SBA security trades in 30-day intervals.
Although Anton neither colluded with any other firm employees to enter the fictitious trades nor did he personally benefit from the fictitious trading, he misrepresented to certain non-supervisory firm staff that he had mistakenly effected the trades and that he would correct the errors. Furthermore,when Antonís managers confronted him, he admitted that he effected false trades and manipulated the corresponding settlement dates.
The Firm failed to preserve all of its business-related electronic communications. The Firm attempted to preserve such communications by burning them to a non-rewriteable, non-erasable disc on a monthly basis, but the process was deficient because it did not result in all such communications being saved to the disc. The Firm did not identify this deficiency in its audit of its electronic communications preservation system.
In contravention of its written supervisory procedures, permitted registered representatives to use outside or non-firm-sponsored email accounts to send and receive securities business-related emails. The firmís preservation process did not capture these emails that were sent to or from those accounts; therefore, the firm did not retain and review them.
The firm relied exclusively on electronic storage media to preserve its business-related electronic communications but did not retain a third party who had the access or ability to download information from its electronic storage media.
Lombardi improperly transferred confidential and proprietary information outside of his member firm for purposes other than the firmís business.
Lombardi sent to
- a non-affiliated, third-party member firm internal compliance reports of his member firm that contained non-public personal information regarding customers;
- his personal email address
- internal documents of his firm that included non-public personal information of individuals derived from a request by Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury and the firmís internal summary regarding certain registration requirements; and
- documents with another firm customerís non-public personal information.
In each of these instances, Lombardi acted without the firmís authorization and knowledge, and contrary to its written policies and procedures. By sending a report with confidential, non-public personal customer information to a non-affiliated third party, Lombardi caused his firm to violate SEC Regulation S-P.
By transferring information from a FinCEN list to his personal email account, Lombardi acted for purposes other than those provided for under FinCEN regulations, and thereby caused his firm to violate FinCENís regulations.
Lombardi knew of his firmís policies regarding the dissemination of confidential and/ or proprietary information, knew or should have known that SEC Regulation S-P prohibits financial institutions from disclosing non-public personal information about a customer to non-affiliated third parties unless certain notice is given to the customer and the customer has not elected to opt out of the proposed disclosure, and knew, or should have known, that information derived from a FinCEN request may not be used for any purpose other than in accordance with FinCEN regulations. In addition, Lombardi signed an affirmation and a certification that he had read and would comply with a Code of Business Conduct and Ethics applicable to firm employees and would comply with the firmís written policy governing confidentiality of information and use of office equipment. Moreover, Lombardi signed a registered representative agreement in which he agreed that confidential and proprietary information about the firm and/or about existing and prospective firm customers may not be disseminated without requisite permission, and agreed to safeguard confidential and proprietary information from disclosure.
Shankster failed to respond to FINRA requests for information and documents.
Shankster participated in private securities transactions without providing prior written notice to his member firm.
Benson engaged in outside business activity, outside the scope of his employment with his member firm, when he facilitated the sale of his relativeís company to an individual without providing prompt written notice to his firm of the dealings and, as compensation for facilitating the acquisition, accepted a finderís fee in the form of 50,000 shares of stock in the newly formed corporation.
Benson provided the individual with $11,000 to be used to pay expenses of the newly formed corporation, and in exchange, Benson acquired 1.1 million shares of stock in the corporation. The shares of stock were securities, the transaction was conducted entirely apart from Bensonís employment with his firm, and Benson did not give his firm prior written notice of, and the firm did not give him prior written approval of, the transaction.
Roberts sent unapproved emails from his personal email address to his member firmís customers and a potential investor that consisted of emails with attached documents containing misrepresentations and misleading statements that he created on his home computer that were written on his firmís letterhead.
Roberts misrepresented that his firm would approve the issuance of a line of credit of up to $10 billion to a firm customer and a potential investor if certain conditions were met. Roberts attached another document concerning the issuance of a multi-billion dollar line of credit to additional emails he sent to a firm customer.
Roberts did not provide copies of the documents for review and approval to his firm. By attaching documents that contained misrepresentations and misleading statements to emails sent to a firm customer and a potential investor, Roberts exposed his firm to significant potential liability. Roberts sent an unapproved email from his personal email to another firm customer and attached a letter on firm letterhead with wire transfer instructions in connection with certificates of deposit. In addition, Roberts forwarded the unapproved correspondence from his home computer, thereby bypassing the firmís surveillance systems and preventing the firmís review and approval.
Orendorff failed to respond to FINRA requests to appear for an on-the-record interview.
Further, Orendorff, in an attempt to correct errors made on a customerís signed asset transfer disclosure form that his firm had returned to him for correction and resubmission obtained the customerís signature on a blank asset transfer disclosure form, affixed the customerís signature from the blank form to revised forms and submitted the forms to his member firm instead of having the customer sign a corrected form. When the firm questioned Orendorff about the documents, he admitted to altering and submitting them. Thereafter, the firm terminated Orendorffís employment because the firm prohibited its representatives from affixing signatures to documents and required original signatures on each form.
Larsen convinced an elderly bank customer to surrender annuities totaling approximately $355,000, which he deposited into the customerís bank checking account. Larsen debited the customerís bank checking account approximately $94,000 and purchased a bank check in that amount payable to an entity and opened an account at that entity for the customer; Larsen then executed an internal form with the entity that effectively changed the name on the account to an entity that Larsen owned and controlled, thereby misappropriating the customerís money, without the customerís authorization.
Larsen, took approximately $261,000 from the customerís bank checking account at his member firm kept $4,500 for his personal use, gave $1,250 to the customer and had a bank check issued for the remaining approximately $255,000 payable to the entity Larsen owned and controlled, and deposited the funds into a checking account at the bank in the entityís name.
Larsen used a debit card associated with the checking account in the name of his entity to make purchases for his personal benefit totaling approximately $72,000, which was funded by proceeds from the customerís bank checking account, without the customerís authorization.
When the customer reviewed his bank statements and noted that some of his money was not in the bank account, he made inquiries to the bank and the bank sued Larsen to recover funds that he had transferred out of the customerís bank account. The bank was able to recover approximately $183,000 from Larsen, which it used to repay the customer and paid the customer an additional $171,000 to make him whole.
Larsen failed to respond to FINRA requests for documents.
Evans converted securities and funds in the joint brokerage account of customers, without their knowledge, authorization or consent, and deposited the funds into his personal checking account, converting an aggregate total of $60,000.
Evans forged a customerís signature on checks linked to the customersí bank account and made the checks payable to ďcashĒ or to himself. Evans forged the customerís signature on a cash withdrawal form linked to the customersí bank account. Without the customersí knowledge, authorization or consent, Evans sold securities totaling $30,000 from their brokerage account, transferred $10,000 to their bank deposit account and applied $10,000 to their brokerage account margin balance.
Evans failed to respond to FINRA requests for a signed, written statement regarding its investigation.
The Firm failed to properly supervise and properly register its foreign finders; and it had no written procedures concerning its use of foreign finders.
The Firm terminated the registrations of all its foreign associates and made them foreign finders; thereafter, the firm employed foreign finders and no foreign associates. Many of the firmís foreign finders were previously registered foreign associates at the firm who worked on the premises of the firmís affiliated broker-dealer. As registered sales representatives and foreign associates for the firm, they acted as general securities representatives engaging in securities activities for non-U.S. residents, citizens or nationals.
Whenthe firmís foreign associatesí registrations were terminated with FINRA and re-affiliated as foreign finders, their job functions were supposed to be limited to those of a foreign finder. As such, the firmís foreign findersí sole involvement with the firm should have been the initial referral of non-U.S. customers; however,all of the firmís foreign finders serviced customer accounts, processed new account documents and letters of authorization (LOAs) for customers containing confidential client information and serviced customer accounts -- these activities went well beyond the initial referral of non-U.S. customers to the firm.
Also, given the expanded roles of the firmís foreign finders, they should have been registered as foreign associates; however, the firm failed to register any of its foreign finders as foreign associates.
A concerned customer visited the firmís affiliateís branch office and explained that a foreign finder of the firm had provided him with an account statement that differed from the statement he recently received from the firmís clearing firm. In response,the Firm immediately instituted an internal investigation into all accounts the foreign finder had introduced to the firm. The firm discovered that unauthorized statements had been provided to customers by its rogue foreign finder. Those unauthorized statements inflated market values and net worth. Further, the rogue foreign finder altered correspondence that he forwarded to customers by making the documents incorrectly appear as if the firm had authorized them.
The firm contacted and interviewed every customer the rogue foreign finder introduced to the firm, which revealed that some of the customers had received false statements; and that the false statements inflated customersí account values by over $2 million U.S. dollars. The investigation led to the rogue foreign finderís termination, foreign finders being discontinued, written supervisory procedures being added, the firmís supervisory system being enhanced and substantial compensation paid to affected customers. The Firm claimed that it inspected the offices of its foreign finders, including the rogue foreign finder, to ensure that they were properly supervised, but failed to document or memorialize the office inspections and other supervisory activities in any way.
A former associated person and employee of Morgan Stanley in its New York Position Services Group (NYPS) misappropriated approximately $2.5 million from the firm, institutional firm customers and a firm counterparty by entering, or causing to be entered, numerous false journal entries into the firmís electronic system to transfer and credit money associated with corporate actions.
The former employee entered, or caused to be entered, into the firmís electronic system requests for checks to be issued to his shell corporation against the suspense and/or fee accounts that he was using to misappropriate funds. The former employee entered some check requests himself, which NYPS employees that reported to him later approved. The former employee caused employees who reported to him to enter check requests, and he used the identification number and password of another NYPS employee who reported to him to enter the remaining check requests; he later approved all of the check requests.
Morgan Stanley failed to establish and implement an adequate system of follow-up and review of journal entries and adequate procedures for reviewing and approving check requests related to corporate actions.
No review procedures
The firm did not have any procedure to review the former associated personís check requests and journal entries.
In addition, the firm failed to properly supervise the former associated person and failed to detect that he entered, or caused to be entered, false check requests and false journal entries related to corporate actions, which allowed him to misappropriate approximately $2.5 million from the firm, its institutional customers and a firm counterparty.
The firm introduced a new system, the Summary of Manual Journals (SOMJ), to replace the review of all journal entries and require the review and approval of journal entries that the firm determined to be high priority. Furthermore, these journal entries remained on the SOMJs until a supervisor reviewed and approved them, and the former associated person was assigned to review and approve all high-priority journal entries flagged on the SOMJs, including his own.
The firm assigned some NYPS supervisors, all of whom reported directly to the former associated person, to review and approve journal entries flagged on SOMJs, but nobody was assigned to review high-priority journal entries entered by anyone not on one of those teams, including the former associated person. The firm failed to have a system to inform NYPS management if journal entries flagged on the SOMJs were not approved. The former associated person made numerous journal entries, some of which were flagged as high-priority; he approved several of them; many were not reviewed and were listed on the SOMJs pending approval at the time of his termination.
Check requests NYPS personnel entered were required to be approved by another NYPS employee, but the firm did not require the person approving the check to be a supervisor or have supervisory responsibility; as a result, NYPS associates approved check requests an NYPS supervisor entered, and entered check requests on a supervisorís behalf, which the supervisor subsequently approved. In addition, FINRA determined that the firm did not require any review to determine if the check request was associated with a corporate action and the approver simply ensured that all the required information was included in the check request.
The Firm approved advertising materials a registered representative used in his retail equity-indexed annuity (EIA) business conducted at workshops for senior citizens that contained false, exaggerated, unwarranted or misleading statements. The firm failed to document, with a principalís signature or initial, its approval of a piece of advertising material the representative used and failed to maintain a record of its approval of a piece of the representativeís advertising material.
The firm did not supervise the representativeís workshops, in that it did not require him to produce a copy of the script for the workshops and did not attend any of the live workshops to confirm that the contents of the workshops complied with NASD rules and that only firm-approved materials were being used. If the firm had required the representative to submit a script and had attended his workshops, it would have discovered that he made statements, used materials and engaged in conduct that violated NASD Rules 2110 and 2210, and could have prevented further violations of these rules.
Ortiz took and failed the Series 63 examination several times, and shortly after becoming employed with his member firm, he told the firm that he had passed the Series 63 exam. When the firm questioned Ortiz about his claim to have passed the Series 63 exam, he provided the firm with a photocopy of a fabricated score report that purported to establish his passing grade on the Series 63 exam.
Also, Ortiz provided the firm with information and documents through which he falsely represented his college credentials.
Mahler improperly created answer keys to state insurance continuing education (CE) exams a company administered.
The companyís president approached Mahler on different occasions and offered to provide him with answers to the companyís CE exams. The president provided Mahler with the answers to the CE exams over the phone or by handing copies of the answers to Mahler, and Mahler used these answers to create answer keys for the exams.
Mahler improperly distributed the answer keys to an employee at his member firm and to multiple registered representatives outside of his firm. On multiple occasions, while he was an external wholesaler, Mahler provided assistance to non-firm registered representatives while they were taking a state annuity examination for CE credit. Mahler was in the offices of some registered representatives while they were taking the annuity examination; some of these registered representatives asked Mahler to give them the answers to certain of the questions on the examination, which Mahler provided.
Mahler failed to supervise in that he gave one direct report answer keys to state insurance CE exams.
Respondents failed to put any heightened supervisory measures in place for a branch manager or to follow up on ďred flags.Ē Notwithstanding the branch managerís remote location, prior disciplinary history, outside business disclosures or his disclosure that he was potentially under financial stress and unable to meet financial obligations, the Firm and Long failed to put any heightened supervisory measures in place or to follow up on the red flags after he disclosed information on a compliance questionnaire, for which the affirmative answer required that he attach a separate sheet providing complete details about the disclosed activities, which Long did not complete or enforce. Also, the firmís and Longís heightened supervision of the branch manager was inadequate in that it consisted only of inspecting his office annually and speaking on the phone on a fairly regular basis. Long inspected the branch managerís branch office, and although she was aware that the manager was involved in certain outside business activities, based on the disclosures that he made on his Uniform Application for Securities Industry Registration or Transfer (Form U4), she admitted that she did not inspect any files or financial records associated with his disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.During a subsequent inspection, Long again did not review documentation regarding the branch managerís disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.
Additionally, the branch manager had participated in private securities transactions wherein he had raised more than $1.5 million from investors, many of whom were firm customers.
In addition, the firm and Long failed to review or retain email communications on the branch managerís outside email account, and Long did not review his outside email account during her inspections of his branch office. Moreover, FINRA found that the firm did not have any supervisory procedures regarding the review and retention of email communications on outside email accounts.
Portfolio Advisors Alliance, Inc.: Censured; Fined $35,000
Marcelle Long: Fined $7,500; Suspended in Principal/Supervisory capacity only for 30 days
Oftring was responsible for supervising a former registered representative of his member firm and failed to take appropriate action to reasonably supervise her to detect and prevent her violations and achieve compliance with applicable rules in connection with a customerís account. Among other things, Oftring failed to take reasonable steps to follow up on certain indications of potential misconduct that should have alerted him to the representativeís violations.
The representative engaged in excessive, short-term trading in the customerís account, which resulted in losses of approximately $60,000; the account was subject to frequent margin calls and transfers from a third-party account to satisfy margin calls in the account, and once, the representative transferred funds back to the third-party account by forging the customerís signature on an LOA.
Oftring was aware of
- the active trading in the customerís account and knew that the representative was effecting securities transactions in the account while it had a negative balance, but he never stopped the representative from trading and never contacted the customer to discuss the activity; and
- and approved the transfer of funds between the customerís account and the third-party account, and accepted the representativeís explanation for the same without contacting the customers involved in the transfers.
Chima engaged in a pattern of unsuitable short-term trading and switching of unit investment trusts (UITs), closed-end funds (CEFs) and mutual funds in retired and/or disabled customer accounts without having reasonable grounds for believing that such transactions were suitable for the customers in view of the nature, frequency and size of the recommended transactions and in light of their financial situations, investment objectives, circumstances and needs. Some of the transactions were effected through excessive use of margin and without ensuring that customers received the maximum sales charge discount. In furtherance of his short-term trading strategy, Chima engaged in discretionary trading without prior written authorization, falsified customer account update documents and mismarked trade tickets for each of the customersí accounts, stating that the orders were unsolicited when, in fact, they were solicited.
The transactions generated approximately $450,000 in commissions for Chima and his firm, and approximately $370,000 in losses to the customers; some customers also paid over $75,000 in margin interest. In numerous UIT purchases, none of which exceeded $250,000, Chima failed to apply the rollover discount to which each customer was entitled.
Chima caused his member firmís books and records to be false in material respects, in that he provided false information on customer update forms for customersí accounts, signed the forms certifying that they were accurate and submitted them to his firm.
Acting through Erickson and Brewer, the Firm:
- sold the private placement offerings of a company formed exclusively to acquire and provide growth to its parent company and a limited liability company for which Brewer was a director, without disclosing to the investors material facts that:
- the parent company had defaulted on a $2.5 million loan,
- had reported an operating loss of $1,622,912 for one calendar year and an approximate operating loss of $4.5 million for another calendar year, and
- had defaulted on interest payments to note-holders.
- continued to sell the limited liability companyís private placement offering to new investors, knowing that it had defaulted on its interest payments to existing investors and without disclosing that material fact to new investors.
The firm sold the private placement offerings to non-accredited investors without providing them with the financial statements required under Securities and Exchange Commission (SEC) Rule 506, resulting in the loss of exemption from the registration requirements of Section 5 of the Securities Act of 1933. Because no registration statement was in effect for the offerings and the registration exemption was ineffective, the firm sold these securities in contravention of Section 5 of the Securities Act of 1933.
Acting through Erickson, the Firm conducted inadequate due diligence related to its sale of the offerings in that it failed to ensure the issuers had retained a custodian to handle certain investorsí qualified funds prior to accepting investment of Individual Retirement Account (IRA) funds into the offerings.
Ating through Erickson and Brewer, the Firm offered to sell and sold the companyís private placement offering by distributing to the public a private placement memorandum (PPM) containing unbalanced, unjustified, unwarranted or otherwise misleading statements; among other things, the PPM implied that the parent company was not experiencing financial difficulty and failed to disclose that it reported a significant loss one year. In addition, the investors in the companyís notes were not provided with financial statements for either the company or the parent company. Moreover, the PPM was misleading in that it failed to state clearly how offering proceeds would be used, lacked clarity regarding the relationship between the issuer and its affiliates, and failed to provide the basis for claims made regarding the performance expectations of the issuer or its affiliates.
Furthermore, the firm failed to establish adequate written supervisory procedures related to its sales of private placement offerings, in that the firmís procedures failed to require that financial statements be provided to investors when private placement offerings are sold to non-accredited investors, pursuant to SEC Rule 506.
The Firm allowed Brewer to be actively engaged in managing the firmís securities business without being registered as a principal and a representative although Brewer signed and submitted an attestation to FINRA stating he would not be actively engaged in the management of the firmís securities business until he completed registration as a representative and principal. Among other things, Brewer reviewed and revised the firmís recruitment brochure, approved offer letters to prospective firm registered representatives, dictated the structure of new representativesí compensation, including the level of commissions and loan repayment terms, and instructed firm personnel to send private placement offering documents to prospective investors.
The firm maintained the registrations for individuals who were not active in the firmís investment banking or securities business or were no longer functioning as registered representatives.
The Firm conducted a securities business on a number of days even though it had negative net capital on each of those dates. The firmís net capital deficiencies were caused by its failure to classify contributions from the parent company as liabilities after the firm returned the contributions to the parent company within a one-year period of having received them, and improperly treating its assets as allowable even though all of its assets had been encumbered as security for a loan agreement the parent company executed. Moreover, the Firm had inaccurate general ledgers, trial balances and net capital computations, and filed inaccurate Financial and Operational Uniform Single
Brewer Financial Services, LLC: Expelled
Adam Gary Erickson (Principal) and Steven John Brewer: Barred
The Firm made certain unsecured loans to its parent that exceeded the parameters set forth in SEC Rules 15c3-1(e)(1)(i) and (ii), thereby triggering its reporting obligation. Through its financial and operations principals (FINOPs), Guerra and Robles, the Firm provided notices to FINRA at the beginning of several months of loans that it anticipated making during the course of the month, but the notices did not comply with the requirements of SEC Rule 15c3-1(e)(1); the firm did not provide adequate advance notice of loans that exceeded the 30 percent threshold on numerous occasions and did not provide subsequent notice of unsecured loans that exceeded the 20 percent threshold on other occasions. Guerra and Robles, as FINOPS at the firm, were responsible for providing the required notices on the firmís behalf but failed to do so.
The Firm had inadequate excess net capital for a year because it failed to include in its net capital calculation certain positions in Latin American and other debt securities held in firm accounts at its clearing firms, and did not report these positions as assets on its balance sheet or apply haircuts to these positions in its computation of net capital; deficiencies ranged from at least $900,000 to at least $13.7 million and all of the positions relevant to the net capital deficiency had later either paid down their principal or were sold by the firm.
The firm engaged in securities transactions in which commissions were split between the firm and a nonregistered foreign person with the person receiving most of the commissions and the firm getting the balance. In addition to making the initial referrals, the non-registered foreign person, along with the firm, among other things, negotiated the terms of the transactions, which the firm executed. The firm did not properly reflect the payment to the finder on its books and records, and also did not disclose the compensation arrangement as required.
Moreover, the Firm did not maintain adequate books and records concerning proprietary positions the firm held at separate clearing firms for over a year; this included failing to reflect the positions on any of the firmís internal books and records, failing to maintain documents related to the processing of the transactions such as the electronic or paper order tickets and the trade confirmations, failing to maintain documents related to the supervision of the transactions, and failing to appropriately reflect its liabilities and assets on financial documentation the firm maintained. Furthermore, although FINRA staff advised the firm that its procedures related to SEC Rule 15c3-1(e) were not reasonably designed to achieve compliance with that rule and needed to be amended, the firm failed to amend its procedures to establish supervisory procedures reasonably designed to ensure compliance with the rule.
Guerra engaged in outside investment activities through a limited liability company that used his firmís address, and he failed to provide prompt written notice of these business activities to his member firm.
Bulltick, LLC: Censured and Fined $300,000
Javier Guerra (Principal): Fined $20,000; Suspended 10 business days
Victor Manuel Robles (Principal): Fined $10,000; Suspended 5 business days
Blanchard participated in private securities transactions when a client of his accounting firm purchased promissory notes an individual issued. The findings stated that Blanchard failed to provide written notice to his firm describing in detail the proposed transactions with the individual issuing the promissory notes, his proposed role therein, and stating whether he had received or might receive selling compensation in connection with the transactions. Blanchard introduced the client to the individual, and the client invested a total of approximately $325,000 in the individualís promissory notes as a result of Blanchardís referrals.
The individual paid Blanchard about $16,434 in selling compensation for his referral. The customer lost approximately $290,000 as a result of the investment, and the firm made full restitution to Blanchardís client even though he was not a customer of the firm.
Brown failed to reasonably supervise a registered representative of his member firm who churned a customer trust account and recommended investments to the elderly beneficial owner of the trust account that were inconsistent with the customerís investment objectives, financial situation and needs.
Brown served as the assistant branch manager for his firmís branch office and, as such, was one of the individuals at the firm with supervisory responsibility over the registered representatives at the branch office. There were numerous red flags indicating that the registered representative was churning the trust account and recommending unsuitable investments to the customer:
- the appearance of the account on numerous exception reports concerning active and aggressive trading;
- the accountís relatively substantial fluctuations in value, including relatively significant declines in value in a certain year;
- the customerís age;
- the $2,500 monthly withdrawals that the customer was taking from the account; and
- the prior customer complaints against the registered representative.
Despite these red flags, Brown failed to take adequate supervisory action reasonably designed to prevent the representativeís churning of the trust account and recommendations of unsuitable investments to the customer.
Genitrini advertised guaranteed returns on investments of up to 20 percent per year on a website belonging to a company he wholly owned. Genitrini claimed that his company was a full-service investment firm and would, among other claims, provide high-yield investment opportunities. The website declared that the company invested nationwide and all industries were considered, but did not disclose the nature of the investment product or the risks of investment.
Genitriniís ads appeared on other websites guaranteeing returns, and his companyís contemplated private placement documents provided no assurance that by following its current investment strategy, it would be successful or profitable, although the subscription agreement also stated that the investments the company carried might be volatile and present operational risks.
Genitriniís Internet ads constituted communications with the public; were not based on principles of fair dealing and good faith; were not fair and balanced; did not disclose risks associated with the investment; guaranteed promising returns that were exaggerated, unwarranted or misleading; and the predictions of performance were also exaggerated or unwarranted.
Genitriniís private offering of securities, which involved promissory notes his company issued according to the private placement memorandum, was not made pursuant to an effective registration statement filed with the SEC; the offering was intended to be made pursuant to the exemption from registration in Section 4(2) of Rule 506 of Regulation D of the Securities Act of 1933, which prohibits offers or sales of securities by any form of general solicitation or general advertising. Genitriniís use of the Internet and his companyís website violated Section 5 of the Securities Act of 1933, and guaranteeing returns in the offer of securities over the Internet violated Section 17(a)(1) of the Securities Act of 1933.
In addition, Genitrini falsely described his work with his company on his member firmís outside business activity disclosure form and also failed to disclose that he maintained a website for the company; Genitrini told his firm, in writing, that his business and website were for tax-planning services.
Eppler disclosed his outside business activities to his member firm as part of a branch office review and reported that he was engaged in the sale of new and renewal sales of a particular companyís insurance products that his firm did not approve for sale. In response to the disclosure, Eppler was informed, orally and in writing, that he should discontinue selling those products and he could only receive renewals on prior sales.
Eppler was sent an email reminding him of deficiencies found in the branch examination, which included his sale of the particular insurance products, and that he was to discontinue selling the insurance products. Eppler responded to the email by advising the firm that all of the deficiencies had been corrected, which was untrue because Eppler continued to sell the non-approved insurance products and received $967.79 as commissions from the sales.
Epplerís branch office was again reviewed, and as part of that review, Eppler reported his outside business activities and reported that he was receiving commissions only for renewals of the non-approved insurance products, which was false, in that Eppler continued to sell new non-approved insurance policies, for which he received compensation. Eppler engaged in these activities without giving prompt written notice to his firm that he was continuing to sell new non-approved insurance policies.
McLean failed to provide written notice of his involvement in unapproved private securities transactions to his member firm and lied to his firm during monthly supervisory meetings. McLeanís member firm prohibited its registered representatives from engaging in any private securities transactions unless they were personal investments and only after obtaining the firmís prior written approval, but McLean referred a customer and another individual to someone who was raising monies for real estate projects. These individuals invested approximately $75,000 in promissory notes with entities controlled by the individual to whom McLean referred them, and McLean received $1,500 in cash for the referrals. Because of concerns stemming from items reported on McLeanís personal credit report, his firm placed him on heightened supervision and, among other things, McLean was required to meet with his supervisor monthly to discuss securities-related and outside business activities; but not once during these meetings did McLean disclose his involvement with the individual. On seven separate occasions, he signed statements affirming that he was not engaged in outside business activity beyond those already disclosed and that it was unnecessary to update his Form U4.
While employed by another member firm, McLean acted as an agent for an entity not affiliated with his firm and over which his firm had no control, without providing written notice to his firm or receiving his firmís approval to serve in this role. In addition, as an agent for the entity, McLean introduced individuals to an individual through whom they invested in a purported diamond mining operation. Moreover, these individuals entered into promissory notes, investing more than $40,000 with an entity the individual controlled. Furthermore, in addition to making referrals, as an agent for the entity, McLean was expected to provide financial and consulting advice to investors once their investments began earning profits, and in exchange, McLean stood to earn $2 million worth of shares in a company the individual controlled.
McLean failed to respond fully to FINRA requests for documents and information.
Ivan executed an agreement purportedly on the firmís behalf, in which a non-customer corporation agreed to pay the firm a $35,000 refundable deposit in exchange for the firm agreeing to act as an exclusive placement agent to assist the corporation in arranging for $8 million dollars in debt financing. Subject to the agreement, Ivan instructed the corporation to wire the $35,000 deposit to a personal brokerage account he controlled at another FINRA member firm. Instead of using the funds as he represented to the corporation and in accordance with the terms of the signed agreement, Ivan diverted the corporationís funds by wiring $25,000 of the deposit to another business entity that was supposedly going to assist the corporation with arranging the financing and used the remaining $10,000 for his personal benefit. The debt financing for the corporation never materialized, and the corporation did not receive the return of its $35,000 deposit.
Ivan made untruthful statements and provided false documents to FINRA when he untruthfully represented in his written response to FINRA that he had forwarded the $35,000 from the corporation to a business entity assisting with the financing, and that he did not receive any compensation or payments relating to his participation in arranging the financing. Ivan provided FINRA a document purporting to be an account statement for his outside brokerage account, which falsely reflected a wire transfer of $35,000 out of his account to a business entity assisting with the arrangement of financing, when in fact, the wire transfer amount had only been $25,000. That brokerage account statement had false entries for the figures representing the total amount of checks written and the total amount of checking, debit card and cash withdrawals.
Moreover, Ivan held a financial interest in a brokerage account maintained at another FINRA member firm without giving prompt written notification to the firm that he had such an account, and without notifying the other brokerage firm of his association with his member firm. Furthermore, Ivan falsely answered ďN/AĒ on the firmís outside brokerage account new hire certification form when requested to list every brokerage account over which he had full or partial ownership.
Bartlett signed customersí names to documents related to purchases of mutual funds and insurance products without authorization. Although the customers authorized Bartlett to purchase the securities or insurance products for them, only one of the customers orally authorized Bartlett to sign his name.
Bartlett signed customersí names to new account applications, client profiles, risk questionnaires, insurance applications and transaction confirmation forms. In one instance, Bartlett forged a customerís name because he was concerned that he would lose a substantial commission if he went back to the customer to obtain her signature on a form.
The Firm implemented a succession plan that resulted in the transfer of ownership from the firmís chairman and majority shareholder to his relatives who were at that time minority shareholders, and the transfer represented 27.91 percent of the voting shares in the firmís holding company. The failed to file for FINRA approval of a material change in ownership or control
- at least 30 days prior to a 25 percent or greater indirect change in ownership or control; and
- related to the transfer until several years after the transfer had taken place.
The Firm did not have available, for examination by FINRA staff, facilities for immediate, easily readable projection or production of micrographic media or electronic storage media images and for producing easily readable images, as SEC Rule 17a-4(f)(3) (i) required. The firm maintained certain records in electronic formats but failed to notify its examining authority, FINRA, prior to employing electronic storage media. The firm did not have in place an audit system providing for accountability regarding inputting of records required to be maintained and preserved under SEC Rules 17a-3 and 17a-4 to electronic storage media. The firm was required to have the results of such an audit system available for examination by FINRA staff. The firm failed to provide the required access to allow a third-party vendor to download information from its electronic storage media and file the required undertakings with the proper authorities, including FINRA.
Cohen sold equity indexed annuities (EIAs), issued by an insurance company that was not a FINRA member, outside the scope of his employment with a member firm, and without providing the firm prompt written notice of the business activity. Cohen effected undisclosed EIA sales totaling over $1.5 million and received compensation totaling about $176,000 from the transactions. Cohen effected the sales directly with the insurance company that issued the EIAs rather than through the insurance company affiliated with his firm.
Cohen completed an outside business activities questionnaire for the firm in which he falsely represented that he was not licensed as an insurance agent for the purpose of selling fixed insurance with any entity other then the insurance company affiliated with the firm and its approved programs, and that he had not engaged in any outside business activity.
Acting through Homnick, the firmís president, chief compliance officer (CCO) and AML compliance officer (AMLCO), the Firm failed to comply with AML requirements. The Firmís AML compliance program, which Homnick implemented, did not fully comply with the requirements of the Bank Secrecy Act (BSA) or the regulations thereunder, and violated NASDģ Rules 3011(a) and (b). The AML procedures in effect required the firm to make a preliminary risk assessment for each existing and potential customer of the firm, and the firmís representatives were required to document any significant information they learned pursuant to such risk assessment, but the firm did not create or maintain written risk assessments for its customers.
The firmís AML procedures required scrutiny of the activities of each firm customer organized as a limited liability company (LLC); specifically, for LLC customers, the firm and its registered representatives were to assess the correlation between their business activities and their formation documents and to conduct further investigations to determine the customerís risk profile. These assessments and determinations of risk profiles were not conducted. Several accounts that were LLCs that engaged in suspicious transactions did not provide formation documents.
The AML procedures had a section that described the process firm employees were to use to report suspicious customer activities, but these procedures were not followed. In addition, registered representatives were required, upon detection of suspicious activity in customer accounts, to consult with one of the firmís designated principals, one of whom was Homnick; no firm representative reported to, or consulted with, the firm principals about suspicious customer activities. Moreover, the firmís procedures identified a form called the Preliminary Suspicious Activity Report (P-SAR); the purpose of the form was to identify, in writing, suspicious activities for Homnickís internal review, but no P-SARs were completed or submitted. Furthermore,Homnick was assigned the responsibility for filing Suspicious Activity Reports (SARs) and was responsible for drafting, implementing and maintaining the AML program and procedures at the firm, but he did not file any SARs and did not consider filing any SARs. FINRA also found that numerous suspicious transactions were conducted by firm customers, and the firm, acting through Homnick, did not conduct a reasonable investigation, in that they failed to file a SAR, consider filing a SAR or document rationale for not filing a SAR.
Grand Capital Corp.: Censured; Fined $20,000 (In light of the firmís revenues and financial resources, among other things, a lower fine was imposed.)
Eliezer Gross Homnick: Fined $10,000, Suspended in Principal capacity only for 1 month; and Required to complete eight hours of anti-money laundering (AML) training.
Adler participated in private securities transactions when customers of his accounting firm and customers of his member firm purchased promissory notes an individual issued. Adler failed to provide written notice to his firm describing in detail the proposed transactions with the individual issuing the promissory notes, his proposed role therein, and stating whether he had received or might receive selling compensation in connection with the transactions.
Adler introduced his clients to the individual and they invested a total of approximately $2.5 million in the individualís promissory notes as a result of Adlerís referrals. The individual paid Adler approximately $16,434 in selling compensation for his referral. The customers and the investors lost a total of approximately $2,103,375 and the firm made full restitution to Adlerís clients even though some were not customers of the firm.
Kurzmann borrowed $5,000 from one of his customers at his member firm. The loan terms were not memorialized in writing, and when the borrowing occurred, Kurzmannís firm prohibited its representatives from borrowing money from customers. Kurzmann did not obtain the firmís approval to borrow money from the customer and did not disclose to the firm that he had borrowed money from a customer; moreover, the borrowing arrangements did not otherwise meet the conditions set forth in NASD Rule 2370(a)(2).
Kurzmann served as the treasurer and as a board member of an incorporated scholarship fund. As the fundís treasurer, he received monthly account statements for a securities account that the fund owned at a FINRA member firm; Kurzmann was the representative for that account. and he provided board members, orally and in writing, materially false information about the total value of the fundís investments, in that he overstated the total value of the fundís investments.
Rivera borrowed a total of approximately $19,000 from a firm customer, signing promissory notes for the loans, contrary to firm policy that prohibited representatives from borrowing from a customer unless the customer was an immediate family member and the representative received the firmís prior written approval. The customer was not a family member and Rivera never informed the firm of the loan.
Rivera failed to repay the funds in full and his firm entered into a settlement with the customer, repaying the $17,700 still owed to the customer; Rivera did not make any contribution to the settlement.
Gould converted more than $1,315,000 from customers who had purchased annuities from him by, among other deceptive means and devices, convincing his customers to sign blank annuity withdrawal request forms, which he subsequently completed with instructions to the insurance companies to transfer his customersí funds to a bank account held in the name of a company he owned and controlled. In some instances, the withdrawal request forms contained a medallion signature guarantee that he improperly obtained.
Gould converted funds from other annuity customers by using withdrawal request forms that contained customersí signatures to direct insurance companies to transfer funds from the customersí annuities to his bank account. Gould unlawfully converted customer funds from customersí brokerage accounts by, among other deceptive means and devices, improperly transferring funds from their brokerage accounts to the bank account he owned and controlled. The customers either did not authorize or were not aware of the conversion resulting from the transfer of funds from their annuities and brokerage accounts to Gouldís bank account.
Gould used the unlawfully converted funds to pay for his own personal and business expenses; none of the customers were aware he was withdrawing funds for his personal use. On numerous occasions, Gould falsified documents to make it appear that customers had authorized the transfer of funds from their annuities and brokerage accounts to his bank account, and in some instances, effectuated these transfers by convincing customers to sign withdrawal request forms, some of which were blank.
Kramer failed to reasonably supervise a registered representative of his member firm who churned a customer trust account and recommended unsuitable investments to the trust accountís elderly beneficial owner. Kramer served as a compliance officer for his firm, and as such, was one of the individuals at the firm with supervisory responsibility over the registered representatives at a branch office.
There were numerous red flags indicating that the registered representative was churning the trust account and recommending unsuitable investments to the customer. The red flags cited by FINRA were the:
- appearance of the account on numerous exception reports concerning active and aggressive trading;
- accountís relatively substantial fluctuations in value, including relatively significant declines in value in a certain year;
- customerís age;
- $2,500 monthly withdrawals that the customer was taking from the account; and
- prior customer complaints against the registered representative.
Despite these red flags, Kramer failed to take adequate supervisory action reasonably designed to prevent the representativeís churning of the trust account and recommendations of unsuitable investments to the customer.
Sibert failed to provide written notice to, and receive written approval from, his member firm for his participation in private securities transactions, and lied to his firm about his activities in these transactions. Sibertís firm prohibited its registered representatives from participating in any manner in the sale of any security, registered or unregistered, not processed through the firm, without prior written approval, but Sibert solicited his firmís customers and potential customers to invest in his company, which was purportedly raising monies to invest in real estate developments and gold-mining operations. Some of these individuals invested over $1 million with Sibertís company and some invested over $800,000 in promissory notes.
Sibert signed an annual compliance questionnaire falsely stating that he was not engaging in private securities transactions.Sibert failed to fully respond to FINRA requests for information and documents, and failed to respond to a FINRA request to appear for testimony.
The Firm failed to establish, maintain and enforce a supervisory system and written procedures relating to private offerings the firm sold to its customers. The firmís supervisory system and written procedures for private offerings were deficient; they did not identify due diligence steps to be taken for private offerings. The firm approved for sale, and sold, various private offerings by an entity that raised approximately $2.2 billion from over 20,000 investors through several Regulation D offerings.
The entity made all interest and principal payments on these Regulation D offerings until it began experiencing liquidity problems and stopped making payments on some of its earlier offerings; nevertheless, the entity proceeded with another offering. The firmís due diligence for the offering consisted merely of reviewing the PPM and investor subscription documents, without seeking or obtaining financial documents or information from the issuer regarding the offering, nor did the firm obtain any due diligence report for the offering or visit the issuerís facilities or meet with its key personnel. The firm approved for sale, and sold, a total of $258,597.16 to its customers for interests in another entityís private offering. In addition, the firm failed to conduct due diligence for these offerings; among other things, it did not obtain offering documentation beyond the investor subscription documents. Moreover, the firm sold additional unregistered offerings to its customers and failed to conduct adequate due diligence for each of these other offerings.
Mata participated in private securities transactions without prior written notice to, and prior written approval or acknowledgment from, his firm for these activities. Mata participated in outside business activities and failed to provide prompt written notice to his firm regarding these activities, for which he received compensation totaling $21,417.44.
Mata participated in numerous sales seminars with customers in which he failed to obtain prior written approval from a firm principal for the sales literature used in his seminars; failed to file the sales literature used in his seminars, which included information on variable contracts, with FINRAís Advertising Regulation Department; and used sales literature in his seminars that was not fair and balanced, contained exaggerated or unwarranted claims, and contained predictions of performance.
McRoberts effected private securities transactions without requesting and receiving her member firmsí permission. McRoberts sold $142,128 in promissory notes secured by pooled life settlements. Prior to engaging in these transactions, while associated with one of the firms, McRoberts had signed an Acknowledgement of Receipt and Review of Compliance Procedure Manual which stated that no private securities (or other investment or insurance) transaction may in any way be participated in by a representative unless the compliance director approves it in advance. Despite McRobertsí acknowledgement of the firmís procedures, she failed to give written notice of her intention to participate in the sale of the securities to, and failed to obtain written approval from, her firm prior to the transactions. McRoberts effected private securities transactions while registered with another member firm and also failed to give written notice of her intention to participate in the sale of the securities, and failed to obtain her firmís written approval prior to the transaction. McRoberts received $9,600 in commissions from the transactions. In addition,
McRoberts failed to conduct adequate due diligence and thus had no reasonable basis to determine whether the investments were suitable for her clients.
Acting through Lapkin, the Firm failed to enforce its heightened supervisory procedures for a representative placed on heightened supervision based on his prior disciplinary history. Lapkin was responsible for implementing the heightened supervision plan, which required review of the representativeís correspondence on a daily basis, review of all of the representativeís transactions prior to execution, quarterly reviews with the representative of his business, and quarterly review of the representativeís journal of all conversations that resulted in any business. Lapkin did not perform any of the required steps and the firm failed to take any steps to ensure that he followed the plan. The firm, acting through Lapkin, allowed a representative to continue using a website, which is deemed an advertisement pursuant to NASD Rule 2210, that promoted investments to be made through the firm, even though it violated the content standards of the rule. The website failed to provide a sound basis for evaluating the investment products being promoted, and contained exaggerated, incomplete and oversimplified statements comparing alternative investments to traditional investment products. Also, the website further made unsubstantiated claims by identifying investments as ďpremierĒ alternative investments and stating that alternative investments can help dampen volatility and provide protection in down markets without providing a credible basis for these claims. In addition, the website also compared alternative investments to publicly traded investments, but failed to disclose all of the material differences between the investments, including the risks associated with the alternative investments.
Acting through Lapkin, the Firm allowed its representatives to sell shares of a fund through a flawed PPM that failed to disclose that the fundís manager had been terminated from his member firm because, according to his Uniform Termination Notice for Securities Industry Registration (Form U5), he had misreported, falsely input and reported late into the firmís internal booking systems for bond transactions, and that the fund manager had misreported numerous nondeliverable forward transactions, causing false profits on his profit and loss statements. Lapkin was aware of the content of the fund managerís Form U5 and knew that the PPM was silent about it. This omission was material because, as disclosed in the PPM, the fundís trading decisions relied primarily on the fund managerís knowledge, judgment and experience.
Puritan Securities, Inc. nka First Union Securities, Inc.: Censured, Fined $10,000 (A lower fine was imposed after considering, among other things, the firmís revenues and financial resources.)
Nathan Perry Lapkin: Fined $10,000; Suspended in Principal capacity only for 15 business days.
The Firm and Hsu failed to preserve electronic communications related to the firmís business when Hsu and another registered representative of the firm sent and received electronic communications related to the firmís business using personal email accounts that were not linked to the firmís email preservation system; the firmís failure to preserve electronic communications was considered willful.
Hsu and the firm failed to comply with AML rules and regulations in that they failed to access the Financial Crimes Enforcement Network (FINCEN) and review records, failed to develop and implement a written AML program reasonably designed to achieve compliance with the BSA and implementing regulations, and failed to properly conduct annual independent tests of its AML program for several years. Hsu signed and submitted certifications to FINRA that contained inaccurate information regarding preservation of emails in compliance with SEC Rule 17a-4. Hsu willfully failed to amend his Form U4, to disclose material information.
Pyramid Financial Corp.: Fined $55,000 jointly and severally with Hsu
John Hsu a/k/a Juan Hsu (Principal): Fined $55,000 jointly and severally with Pyramid; Fined an additional $10,000; Suspended 45 business days in all capacities; Barred as a Principal only.
RR falsely prepared a letter on the letterhead of one of his member firmís institutional customers without the customerís or firmís knowledge or authorization. RR addressed the letter to the customerís plan vendor, directing the plan vendor to change the commission split on the customerís 457 plan to reflect that RR would receive a 100 percent commission; originally, the customerís plan revenue reflected a commission split of 96 percent to RR and 4 percent to another registered representative.
RRís member firm agreed to have commission revenues flow solely to him in the short term after the other registered representative resigned, but advised him that he needed to obtain a letter from the customer acknowledging his role as the sole broker of record due to the other registered representativeís resignation. The letter purportedly authorized RR to receive 100 percent of the commission from the plan revenue, and RR forged the signature of the customerís plan controller without her knowledge or authorization. RRís firm policy prohibits a registered representative from signing a customerís signature to any paperwork, regardless of whether the customer has given permission to do so, and prohibits a registered representative from signing a clientís name on any form, with or without the clientís authorization.
Davidson recommended and participated in securities transactions outside the scope of his employment with his member firm when he recommended that clients, nearly all of whom were firm customers, participate in a managed foreign currency exchange-trading program; these clients invested $2,682,518.19, for which he received $3,894.64 in compensation for the referrals.
Davidson did not provide prior written notice, or any notice at all, to the firm of his involvement with the transactions, nor was the firm aware of Davidsonís recommendations and referrals until two months after his resignation when a customer complained about her losses. The clients Davidson referred to the securities transactions lost more than $2.4 million of the approximately $2.68 million they had invested in the managed foreign currency exchange-trading program.
Davidson signed a customerís name to multiple account-related documents without her knowledge or consent.
As her member firmís CCO, Bush was responsible for creating, maintaining and updating her firmís Written Supervisory Procedures (WSPs) and for conducting due diligence for private offerings. Bushís firm approved for sale, and sold, various private offerings, and for one offering, Bushís due diligence consisted of reviewing the PPM and investor subscription documents, but she did not seek or obtain financial documents or information from the issuer regarding the offering, did not obtain any due diligence report, did not visit the issuerís facilities or meet with its key personnel. Bush did not take steps to ensure, or otherwise verify, that other firm principals were conducting any due diligence of the offeringís issuer.
The firm and Bush obtained a third-party due diligence report after firm customers had already invested in the offering. In regards to a third private offering that her firm approved for sale and sold, Bush conducted due diligence after the product had been sold to customers -- and her due diligence consisted of obtaining investor subscription documents without obtaining PPMs for the offerings, did not obtain any due diligence report from an independent third party and did not meet with any executives to understand the nature of the offerings.
Bushís firm sold additional, different unregistered offering to customers, and Bush, acting in her capacity as CCO and the designed principal for private offerings, failed to conduct due diligence for each of these other offerings.
Moreover, the firmís supervisory system and the firmís written procedures for private offerings Bush drafted and maintained were deficient because the procedures Bush drafted and maintained did not identify, in any detail, specific due diligence steps to be taken for private offerings or identify specific documents to be obtained for private offerings the firm was contemplating selling. Furthermore, the firmís written procedures for private offering due diligence were conclusory, non-specific and lacking in the requisite minimum detail regarding steps to be taken and firm personnel responsible for such steps.
As her member firmís CCO, Bush was responsible for creating, maintaining and updating her firmís Written Supervisory Procedures (WSPs) and for conducting due diligence for private offerings. Bushís firm approved for sale, and sold, various private offerings, and for one offering, Bushís due diligence consisted of reviewing the PPM and investor subscription documents, but she did not seek or obtain financial documents or information from the issuer regarding the offering, did not obtain any due diligence report, did not visit the issuerís facilities or meet with its key personnel. Bush did not take steps to ensure, or otherwise verify, that other firm principals were conducting any due diligence of the offeringís issuer.
The firm and Bush obtained a third-party due diligence report after firm customers had already invested in the offering. In regards to a third private offering that her firm approved for sale and sold, Bush conducted due diligence after the product had been sold to customers -- and her due diligence consisted of obtaining investor subscription documents without obtaining PPMs for the offerings, did not obtain any due diligence report from an independent third party and did not meet with any executives to understand the nature of the offerings.
Bushís firm sold additional, different unregistered offering to customers, and Bush, acting in her capacity as CCO and the designed principal for private offerings, failed to conduct due diligence for each of these other offerings.
Moreover, the firmís supervisory system and the firmís written procedures for private offerings Bush drafted and maintained were deficient because the procedures Bush drafted and maintained did not identify, in any detail, specific due diligence steps to be taken for private offerings or identify specific documents to be obtained for private offerings the firm was contemplating selling. Furthermore, the firmís written procedures for private offering due diligence were conclusory, non-specific and lacking in the requisite minimum detail regarding steps to be taken and firm personnel responsible for such steps.
Adler participated in private securities transactions when customers of his member firm and his accounting firm purchased promissory notes an individual issued. Adler failed to provide written notice to his firm describing in detail the proposed transactions with the individual issuing the promissory notes, his proposed role therein, and stating whether he had received or might receive selling compensation in connection with the transactions.
Adler introduced the customers to the individual and they invested a total of about $700,000 in the individualís promissory notes as a result of Adlerís referrals. The individual paid Adler approximately $16,434 in selling compensation for his referral. The customers lost approximately $630,000, and the firm made full restitution to Adlerís clients even though one was not a customer of the firm.
The Firm proceeded with new business operations prior to obtaining FINRA approval. The firm filed an Application for Approval of Change of Business Operations to move its futures business operations from fully-disclosed clearing to omnibus clearing operations, and while it requested expedited processing of its application, it did not wait for approval before commencing omnibus clearing.
FINRA notified the firm by letter that it had conducted an initial review of the application and requested additional information regarding the firm and the proposed change in business operations. The firm provided the requested information to FINRA by letter, in which it notified FINRA that it made the required net capital increases and went live with its omnibus arrangement although FINRA had neither concluded its review of the application nor granted the firmís request for provisional approval to effect the change from fully disclosed to omnibus clearing operations.
At the time the firm was undergoing the approval process for its application, the firm was also contemplating a change in its business operations to prime brokerage. The firm informed FINRA that prior to conducting any full scale prime brokerage business, it intended to submit a separate Rule 1017 application. In addition, the firm submitted another Application for Approval of Change of Business Operations requesting approval to conduct prime brokerage business, which FINRA approved, although the firm had been engaging in unapproved prime brokerage activity prior to approval.
Hernandez converted a total of $98,559.12 from elderly customers for his own personal use and benefit. Hernandez received checks totaling $14,378.27 from a customer to be deposited into the customerís brokerage account at his member firm for investment purposes; however, he did not invest those funds -- instead, he deposited the checks into his personal checking account.
Without any authorization, Hernandez withdrew $60,220.85 from a checking account belonging to a customer of his firmís bank affiliate and then deposited those funds into his personal investment account, converting the proceeds for his own use and benefit. Similarly, he withdrew without any authorization, another $24,000 from that same customerís account and deposited the funds into his personal checking account.
Hernandez failed to respond to FINRA requests for information and documents.
The sanctions were based on findings that Alvin and Donna Gebhart engaged in private securities transactions without prior written notification to, or prior approval from, their member firm. The findings stated that Alvin and Donna Gebhart sold unregistered securities that were not exempt from registration, and recklessly made material misrepresentations and omissions in connection with the sale of securities. Donna Gebhartís suspension is in effect from June 7, 2010, through June 6, 2011.
Alvin Waino Gebhart Jr.: Barred
Donna Traina Gebhart: Fined $15,000; Suspended 1 year; Must requalify by exam in all capacities.
Guaimano engaged in pre-arranged trading of CMO bonds in a proprietary trading account of his member firm. Guaimano effected CMO bond trades, consisting of paired purchases and sales, in the firmís proprietary trading account with a registered principal and trader as the contra-party. Each pair of matched transactions was pre-arranged and directed by the registered principal. The registered principal and Guaimano traded the bonds at prices consistent with the current market for the securities; simultaneously, the registered principal agreed to repurchase them from Guaimano, at a specified time, at an agreed-upon price that usually provided Guaimanoís firm with a profit. Guaimano participated in pre-arranged transactions in which he did not take a profit, but as a result of the riskless principal CMO transactions in the proprietary account, Guaimano generated trading profits, markups and interest income for his firm of approximately $455,144.23.
Guaimano participated in the pre-arranged trading with the principal as an accommodation based upon Guaimanoís belief that the principal was ďrefreshingĒ his CMO bond inventory in order to maintain positions he wished to maintain and still be in technical compliance with inventory risk controls at his employer relative to the length of time positions that could be held in proprietary accounts. Guaimano knew, or should have known, that the pre-arranged nature of the trades, particularly the agreement that the principal would repurchase the securities in short order, caused beneficial ownership of the securities to remain with the principalís employer.
Guaimano should have known that the principalís effort to create the appearance of compliance with the inventory restrictions by liquidating positions could only succeed if the principal concealed from his employer the fact that he had committed to repurchase the bonds from Guaimano at the same or a higher price. Furthermore, Guaimano should have known that his participation in the pre-arranged transactions enabled the principal to deceive his employer as to its inventory positions and risk.
Miller caused a research report to be published on a website that he had previously operated when he was the owner and president of a former FINRA member firm. Miller caused a press release to be issued by a public relations firm announcing the research report that was distributed to financial wire services. Miller did not inform or obtain approval from his member firm where he was registered regarding either the intention to publish the report on the former FINRA member firmís website, or cause a press release to be issued announcing the research report. Neither the website nor the press release were approved by signature or initial and dated by a principal of firm where Miller was registered.
Millerís firm filed an application with FINRA seeking approval for the firm to produce and distribute research reports. Miller was aware that the application had been filed and at the time the research report was published and the press release issued, the application was still pending and FINRA had not approved it. In addition, even though Miller knew that his firm had filed the application, he took no steps to ascertain whether or not the application had been approved. Moreover, he caused his firm to engage in the production and distribution of a research report at a time when it was not approved to do so. Furthermore, the research report and press release contained false information that stated it was prepared by a member firm although it had withdrawn its membership and was no longer a FINRA member firm.
Rials misappropriated approximated $70,000 from her member firm. Rials, as operations manager of her firmís branch office, had authority to approve credits to customer accounts up to a specified dollar amount without additional approval. Rials used this authority to credit reimbursements totaling approximately $50,000 for non-existent fees and expenses in accounts belonging to her friends and family. Rials then withdrew the credited amounts from family accounts or received cash or checks from friends for the credited amounts.
Rials submitted expense reports for approximately $20,000 in personal expenses, falsely identifying them as legitimate business expenses. Rials improperly accessed her supervisorís computer and approved some of her own expenses reports.
Contreras engaged in private securities transactions by recommending that customers invest in promissory notes, which were not approved investments of his member firm. Contreras failed to provide written notice to his firm describing in detail the proposed transactions and his proposed role therein, and stating whether he had received, or might receive, selling compensation in connection with the transactions.
The company that issued the promissory notes filed for Chapter 13 Bankruptcy, and all of Contrerasí customers lost their entire investment.
Contreras borrowed approximately $65,000 from his customers, contrary to his firmís written procedures prohibiting registered representatives from borrowing money or securities from any prospects or customers, including non-firm prospects/customers, and Contreras failed to pay back any of the money he borrowed.
Contreras failed to respond to FINRA requests for information and testimony.
In connection with the sale of investments in a film production company, Flowers made fraudulent misrepresentations and omitted to disclose material information. Flowers collected at least $92,000 from investors, falsely representing that he would use their funds to finance a film production business and promising exorbitant, guaranteed returns. Instead of investing the funds, Flowers misused $30,498 to repay other investors and pay for personal expenses without the investorsí knowledge, consent or authorization.
Flowers made recommendations to a customer to invest in private placement offerings that were unsuitable in light of the customerís financial situation, investment objective and financial needs.
Flowers attempted to settle away customersí complaints without his member firmís knowledge or consent.
Flowers signed an attestation form for a firm acknowledging that email communications with the public must be sent through the firmís email address and copied to the compliance department, but Flowers communicated with customers via unapproved, outside email accounts without his member firmsí knowledge or consent, and as a result of his outside communications, his member firms were unable to review his emails to firm customers. In addition, Flowers engaged in private securities transactions without providing prior written notice to, and receiving prior written approval from, his member firms.
Chew engaged in a
- private securities transaction, by purchasing shares of stock via subscription agreement, outside the regular scope of his employment with his member firm and without providing prior written notice of this private securities transaction to the firm; and
- outside business activity, as the president and sole owner of an entity, without providing prompt written notice to his firm.
Chew made false statements and attestations to his firm when he completed compliance questionnaires and annual attestations on which he declared to the firm that he had not personally invested in any private security transaction outside of the firm, that he was not ďengaged in any outside activity either as a proprietor, partner, officer, director, trustee, employee, agent or otherwise,Ē and that he did not participate in any outside business activities except for those previously disclosed to, and approved in writing by, the firm.
Kang made loans totaling at least $294,000 to a firm customer who was also a close personal friend. The loans were in the form of cash and checks to the customer and undertaken to assist the customer in meeting her business obligations.
Although the customer had signed promissory notes, she died and Kang has not been fully repaid. At the time she made the loans, Kang was aware that her member firm did not permit loans from or to customers unless they were immediate family members; however, Kang did not obtain pre-approval from her firm prior to lending monies to the customer, nor did she otherwise inform the firm of the loans.
McDermott effected transactions, including checks, debits and automatic teller machine (ATM) withdrawals, in the aggregate amount of approximately $11,403 on her personal account at her member firmís subsidiary, for which she did not have sufficient funds. McDermott opened a personal account at the subsidiary from where she began effecting transactions in amounts that she knew, or should have known, exceeded her available balance. This pattern continued, with McDermott causing transactions to occur on her account without sufficient funds until her account showed a month-ending deficit of $4,756, which included non-sufficient funds (NSF) charges of $2,130. The write-offs in the amount of $1,056 and a deposit of $3,700 reduced the deficit in her account to zero.
During a second period, McDermott again effected transactions on the account when she knew, or should have known, she had insufficient funds to cover the transactions. She failed to make a single deposit during this time to pay for the transactions, which caused her account to have a deficit of $7,049, which included NSF charges of $430.
McDermott's firm terminated her employment as a result of her conduct.
Guelinas converted at least $500,000 from the brokerage accounts of senior citizen customers of her member firm by signing, without authorization, wire transfer requests which resulted in the conversion of the funds from the customersí accounts to outside bank accounts she controlled and to third parties; the customers did not authorize the transfers. Without authorization, Guelinas signed
- wire transfer requests,
- real estate purchase agreements and
- a promissory note
on senior citizen customersí behalf.
Guelinas arranged and participated in real estate investments with senior citizen customers of her member firm and received compensation.
Also, Guelinas received compensation from a rental apartment she owned and failed to disclose the real estate investments, the compensation from the investments or the rental income to her member firm.
Finally, Guelinas failed to disclose material information on her Form U4.
Bauer failed to disclose material information to her member firms and never completed a Form U4 amendment to answer relevant questions until after her firm terminated her.
Moyer effected discretionary transactions in a customerís account without obtaining the customerís or his member firmís written authorization. The customer and her relative each had an account for which Moyer was the broker, and a company they owned together had an account for which Moyer was the broker as well. Moyer spoke regularly to the relative about transactions in all the accounts, but only received prior authorization for the transactions in the customerís account from her for a minimum of the transactions, and the customer had not given her relative trading authority over her account.
Moyerís firm had not permitted its registered representatives to exercise discretion in customer accounts during this time.
Johnson affixed the signatures of members of the public on documents to open a joint account and transfer mutual fund shares into the account, without their knowledge and consent, and submitted the forms to her member firm for processing. Johnson had a registered sales assistant execute a ďSignature GuaranteeĒ for the customersí signatures on the account transfer forms, based on Johnsonís representation to the assistant that she witnessed the customers sign the documents, which she knew was not true. During all relevant times, Johnsonís firm had a policy which prohibited representatives from signing documents or requesting anyone to sign documents on another personís behalf, even if that person gave permission to do so. Johnson affixed one of the customerís signature on a Letter of Instruction, which directed a member firm to sell $25,000 worth of the mutual fund that the customer owned, and forward the proceeds to Johnson. Although the customer authorized the transaction, Johnson affixed the customerís signature to the document without the customerís knowledge or consent, and bypassed her firmís internal procedures requiring its operations department to review the document prior to submission to the mutual fund.
Johnson altered portions of an Individual Retirement Account (IRA) Distribution Request Form that another customer had completed by changing the date and dollar amount on the form; she then submitted the altered form for a distribution of funds. Although the customer authorized the distribution of funds, Johnson altered the form without the customerís knowledge and consent.
The Securities and Exchange Commission (SEC) sustained the sanctions following appeal of a National Adjudicatory Council (NAC) decision. The sanctions were based on findings that the firm and Biddick converted and misused customer securities. The SEC affirmed the NACís findings that the firm and Biddick intentionally caused the transfer of securities from customersí accounts to the firmís account without any prior authorization from, or notification to, these customers. The findings also stated that the firm and Biddick then sold a portion of the converted shares and used some of the proceeds for the firmís operating expenses.
Mission Securities Corporation: Expelled
Craig Michael Biddick: Barred
The Firm and Biddick were ordered to pay $38,946.06, plus interest, in disgorgement to firm customers.
The Firm failed to file required amendments to Uniform Applications for Securities Industry Registration or Transfer (Forms U4), filed late Forms U4 amendments and filed inaccurate Forms U4. The Firm filed late amendments to Uniform Termination Notices for Securities Industry Registration (Forms U5), filed inaccurate Forms U5 and filed a Form U5 that failed to disclose a customer complaint against a registered representative.
- failed to report statistical and summary information regarding a customer complaint,
- failed to timely report statistical and summary information regarding customer complaints, and
- filed inaccurate reports of statistical and summary information regarding complaints.
Colletti filed, or caused to be filed, an initial Form U4 with a member firm on which he willfully failed to disclose material information.
McKinnon recommended the purchase of bonds, bond funds and annuities to an elderly customer who entrusted McKinnon with funds for their purchase. McKinnon deposited the funds into his personal bank account and made improper use of the funds, which included payment of personal expenses.
McKinnon accepted additional funds from the customer, which he used for personal expenses, and accepted additional funds from the customer in exchange for a promissory note he signed. McKinnon did not notify his member firm nor obtain its approval prior to entering into this arrangement with the customer. McKinnon provided false and misleading statements during FINRA testimony regarding the amount of funds he had accepted from the customer, the disposition of the funds and his purchases of securities for the customer in connection with the receipt of the funds.
Keys made untrue statements and omissions in connection with the sale of a security; specifically, Keys recommended that a customer invest $1.1 million in a promissory note and represented to the customer that the promissory note was secured by $1.1 million in United States Treasury Bonds, when in fact, no such bonds existed. Keys provided wiring instructions to the customer in connection with the recommended purchase directing her to wire funds to the bank account of the issuing entityís owner. Keys failed to investigate and discover that no treasury bonds existed, and instead relied on information he was given during a conference call initiated by the issuerís owner to an unknown individual who claimed to be a representative of a well-known financial institution, the purported current custodian of the bonds; and Keys failed to investigate whether the unknown individual was in fact the financial institutionís employee.
At the time of Keysí recommendation to the customer, he did not disclose the compensation, direct or indirect, that he expected to receive. The first time the customer discovered that any commission would be paid in connection with the sale of the note was when she received the note itself, delivered several weeks after she had wired the funds for the purchase; the note disclosed that a commission would be paid in connection with the note, but it erroneously stated that $50,000 would be paid to Keysí member firm, and it did not disclose that Keys wholly owned the entity that received an additional $50,000. Keys was responsible for establishing, maintaining and enforcing his firmís supervisory control policies and procedures, but failed to implement reasonable supervisory controls when he failed to ensure that an individual at the firm who was senior to or otherwise independent of himself supervised and reviewed his customer account activity.
Shah made unauthorized foreign currency trades in a customer bank account, resulting in margin calls being generated for the account and consequently the customerís other bank accounts were frozen, preventing the customer from transferring funds from those accounts. Shah made unauthorized money transfers from another customerís bank account to satisfy, in part, the margin calls for the first client and to be able to transfer funds at its request.
In order to effect the unauthorized fund transfers, Shah forged a signature and created falsified Letters of Authorization (LOAs) by cutting a bank directorís signature from an account opening document and pasting it on a fabricated LOA. Shah fabricated documents regarding another clientís obligation to meet capital calls and falsely created a memorandum representing that the capital calls had been met.
Shah falsely told the customerís beneficial owner that all outstanding calls had been met and to ignore notices he too was receiving. To make the memorandum appear authentic, Shah fabricated an internal email address for a fictitious employee and sent the memorandum to the beneficial owner to make him believe that the calls had been met.
Shah failed to respond to FINRA requests to provide on-the-record testimony and to provide a signed statement.
Karn allowed a customer to sign relativesí names on life insurance applications, and before Karn submitted them for processing, she signed the insurance applications and certified that she had witnessed each of the proposed signatures on the insurance applications. Karn falsely certified on the Representativeís Information Supplement document for each insurance application that she had personally seen each proposed insured at the time the application was completed.
One of Karnís clients completed an application to purchase a municipal bond fund by signing her name on an electronic signature pad, and later that same day, Karn signed the clientís name on the electronic signature pad and thereby affixed the clientís signature on an application without the clientís authorization, consent or knowledge. The application Karnís member firm processed and sent to the client reflected the signature Karn had affixed rather than the clientís authentic signature. When the firm questioned Karn about the authenticity of the clientís signature, Karn initially stated it was the clientís original signature, but when questioned further, admitted she had signed the clientís name and in doing so, Karn misled her firm during its internal investigation into a customer complaint.
Whitehurst improperly borrowed funds from customers at his member firm. He borrowed a total of approximately $15,000 from a customer. The borrowings were unsecured and the loan terms were not memorialized in writing; to date, Whitehurst has only repaid $10,000 to the customer.
When these borrowings occurred, Whitehurstís firm prohibited its representatives from borrowing from customers. Whitehurst did not obtain the firmís approval to borrow money from the customer and did not disclose to his firm that he had borrowed money from her.
Whitehurst borrowed a total of approximately $10,000 from another customer and has repaid the loans.
When these borrowings occurred, the firmís written policies prohibited borrowing from customers unless the firm approved an exception, but Whitehurst did not obtain his firmís approval to borrow money from the customer, and did not disclose to it that he had borrowed money from her. In addition, With both customers, the borrowing arrangements did not otherwise meet the conditions set forth in NASD Rule 2370(a)(2). Moreover, FINRA found that Whitehurst provided FINRA with a false written response in regard to an investigation.