NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
Alan Stuart Pattee AWC/2010023232101/December 2011
Patel forged homeowner signatures on uniform mitigation verification
(UMVI forms) in connection with inspections performed by a
qualified inspector regarding
construction information; the form is submitted to the homeownerís
in connection with insurance pricing.Pattee forged the signatures
to accommodate his clients, who were either not at home at the
time of the inspection
or were his longtime clients.
acted as an officer for
a company formed to conduct inspections to determine homeowner
for compensation, without providing prompt written notice to his
member firm for this
outside business activity.
annual compliance online certifications for his firm representing
that he had complied with
the requirements of NASD Rule 3030 and for the certifications,
certified that no changes
were needed to his Form U4 or that he had requested appropriate
changes to the Form U4
regarding outside business activities.
Alternative Wealth Strategies, Inc. AWC/2010021058401/December 2011
The Firm negligently omitted material facts in
connection with its sale of
promissory notes, issued by an entity that a real estate
developer controlled. The firm negligently failed to disclose to
investors that the entity had
been experiencing cash flow problems and that the entity and other
with the real estate developer had failed to make required
interest payments to investors.
The firm negligently failed to
disclose 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.
The firm distributed a document called ďInvestor LetterĒ for a
company; the Investor Letter
constituted a research report, but it failed to disclose a firm
interest in the company and his receipt of compensation from the
The firm permitted its registered persons to use
the company to solicit potential investors at seminars; the
statements and projections that were without basis; were false,
and/or misleading; and failed to provide a balanced presentation
by omitting material
information regarding the significant risks associated with
investing in the company. The firm failed to establish, maintain and enforce
a system of supervisory
control policies and procedures that tested and verified that its
were reasonably designed with respect to the activities of the
firm, its registered
representatives and associated persons to achieve compliance with
laws and regulations, and created additional or amended supervisory
such testing and verification identified a need. The firmís
supervisory control policies
and procedures failed to identify producing managers and assign
qualified principals to
supervise such managers, and the firm failed to electronically
notify FINRA of its reliance
on the limited size and resources exception.
In addition, F for one
year-end, the firm failed to prepare an annual certification from
its CEO or equivalent
officer, that it had in place processes to establish, maintain,
review, test and modify written
compliance policies and WSPs reasonably designed to achieve
compliance with applicable
FINRA rules, MSRB rules and federal securities laws and
regulations, and that the CEO had conducted one or more meetings with the firmís CCO in the
preceding 12 months to
discuss such processes. For another year-end, the firm filed an
annual certification that
did not fully comply with FINRA Rule 3130(c). Moreover, the firm failed
to establish, maintain and/or enforce WSPs reasonably designed to
with the laws and regulations applicable to its business in
conducting private placement
offerings (including training representatives regarding the risks
for these offerings and
establishing standards for determining the suitability of these
offerings for investors), the
review of electronic correspondence and the review and approval of
Alternative Wealth Strategies, Inc.: Censured; Fined $75,000 (includes $40,000 disgorgement of commissions)
Schams accepted appointment
as an alternative agent attorney-in-fact over a customer account,
without his member
firmís express written consent.
Schams was to receive
approximately $90,000 from the
customersí estate. Schams accepted two $20,000 interest-free loans
on the anticipated
inheritance, without signing a promissory note evidencing the
loan, contrary to the
firmís compliance policies that prohibited registered
representatives from exercising or
maintaining discretionary authority or power of attorney over
customer accounts and
borrowing money, accepting loans, issuing or transacting
promissory notes or other similar
forms of debt for customers without the express written consent of
the firmís compliance
Schams made material
misstatements to his
firm in a compliance questionnaire regarding borrowing money or
accepting a loan from
a client, holding any securities, stock powers, money or property
belonging to a client,
accepting client checks made payable to him, or endorsed to him
personally or in the name
of an entity, and managing or handling, in any way, the affairs of
any client account on a
Lee borrowed $20,000 from his customer and
repaid the loan in full,
plus interest. During the time of the
loan transaction, the firmís
procedures specifically prohibited registered representatives from
borrowing money from
Leeís conduct was aggravated by the fact that he failed
to disclose the loan
when completing the firmís annual compliance inspection forms for
two years, when he
answered ďyesĒ to the question, ďDo you understand and comply with
the rule that you
cannot loan money to, or borrow money from your clients?Ē
Internet Securities and Michael Wayne Beardsley (Principal) AWC/2009020930302/December 2011
Beardsley was a registered
representativeís direct supervisor who was responsible for reviewing
and approving the
representativeís securities transactions, but failed to exercise
reasonable supervision over
the representativeís recommendations of exchange-traded funds
(ETFs) in customersí
accounts, thereby allowing the representative to conduct numerous
As the firmís chief
compliance officer (CCO), Beardsley
was responsible for ensuring that the firm filed all necessary
Uniform Applications for
Securities Industry Registration or Transfer (Forms U4), Uniform
Termination Notices for
Securities Industry Registration (Forms U5) and Rule 3070 reports.
The Firm and Beardsley failed to timely amend Beardsleyís
Form U4 to disclose the
settlement of an arbitration against him, the firm and the
registered representative; the
firm failed to timely amend a registered representativeís Form U5
to disclose settlement of
the arbitration; and the firm and Beardsley failed to timely
report the settlement to FINRAís
The Firm and
Beardsley failed to establish and
maintain a supervisory system reasonably designed to achieve
compliance with applicable
securities laws, regulations and FINRA rules as they pertain to
private placements. The
firm and Beardsley failed to conduct investigations of offerings
for suitability but relied
on information the registered representative who proposed selling
the offering provided;
never reviewed issuersí financials, nor attempted to obtain
information about the issuers
from any third parties; failed to maintain documentation of their
a registered representative to draft selling agreements with
offerings which allowed the
issuer to make direct payment to an entity the representative, not
the firm, owned,; failed
to implement supervisory procedures to ensure compliance with SEC
Exchange Act Rule
15c2-4(b); and failed to implement supervisory procedures to
prevent general solicitation of
investments in connection with offerings made pursuant to
The Firmís written procedures required Beardsley
to obtain and review, on
at least an annual basis, a written statement from each registered
representative about his
or her outside business activities; despite the fact that several
were actively engaged in outside business activities, Beardsley
failed to obtain any such
For almost a three-year
period, Beardsley did not
request any duplicate statements of outside securities accounts
firm employees held; he
neither requested nor obtained any written notifications from firm
their actual or anticipated outside securities activities. In
addition, the Firm and Beardsley failed to implement an adequate system of
policies and procedures regarding testing supervisory procedures
for compliance, erroneous
criteria for identifying and supervising producing managers, including
and monitoring transmittal of funds or securities, customer
changes of address, customer
changes of investment objectives, and concomitant documentation
for its limited size and
resources exception in FINRA Rule 3012. Moreover,he firm and Beardsley completed an annual certification in which Beardsley certified
that he had reviewed a
report evidencing the firmís processes for establishing,
maintaining and reviewing policies
and procedures reasonably designed to achieve compliance with
applicable FINRA rules,
Municipal Securities and Rulemaking Board (MSRB) rules and federal
and regulations; modifying such policies and procedures as
business, regulatory and
legislative changes and events dictate; and testing the
effectiveness of such policies and
procedures on a periodic basis, the timing and extent of which is
reasonably designed to
ensure continuing compliance with FINRA rules, MSRB rules and
federal securities laws and
regulations. In fact, the report did not evidence any processes
for testing the effectiveness
of such policies, and no such testing was done.
Furthermore, on the firmís behalf, Beardsley executed an engagement
letter committing the firm to serve as a placement agent for an
issuer of limited
partnership units. The letter, which a registered representative
of the firm drafted, falsely
represented that the firm was not a registered broker-dealer.
The Firm and Beardsley failed to enforce the firmís Customer
Identification Program (CIP) in
that they completely failed to verify four customersí identities.
The Firm and Beardsley failed to conduct a test of the firmís
(AML) compliance program for a calendar year. FINRA found that the
firm conducted a
securities business while failing to maintain its required minimum
Internet Securities: Censured; Fined $12,500; Required to retain an outside consultant to review and prepare a report concerning the adequacy of the firmís supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firmís size, including, among other things, the firmís revenues and financial resources.
Michael Beardsley: No fine in light of financial status: Suspended 1 year in Principal capacity only
James Carl Gaul (Principal) AWC/2010021058402/December 2011
Acting through Gaul and another
firm principal, his firm negligently
omitted material facts in connection with its sales of promissory
The notes were issued by an entity that a real estate
developer controlled. Acting through Gaul and another firm principal,the firm negligently failed
to disclose to investors
that the entity had been experiencing cash flow problems and that
the entity and other
companies affiliated with the real estate developer failed to make
payments to investors.
Acting through Gaul and
another firm principal, the firm negligently failed to disclose 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.
through Gaul, 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,
its registered representatives
and associated persons to achieve compliance with applicable
securities laws and
regulations, and created additional or amended supervisory
procedures where such testing
and verification identified a need. The firmís supervisory control
policies and procedures
failed to identify producing managers and assign qualified
principals to supervise such
The firm also failed to notify FINRA electronically of
its reliance on the limited
size and resources exception. For a year-end, the firm, acting through Gaul,
failed to prepare an annual
certification from its CEO, or equivalent officer, that it had in
place processes to establish,
maintain, review, test and modify written compliance policies and
designed to achieve compliance with applicable FINRA rules, MSRB
rules and federal
securities laws and regulations, and that the CEO had conducted
one or more meetings
with the firmís CCO in the preceding 12 months to discuss such
processes. For another
year-end, the firm, acting through Gaul, filed an annual
certification that did not fully
comply with FINRA Rule 3130(c).
Acting through Gaul, the Firm failed
to establish, maintain and/or enforce WSPs reasonably designed to
with the laws and regulations applicable to its business in
conducting private placement
offerings (including training representatives regarding the risks
for these offerings and
establishing standards for determining the suitability of these
offerings for investors), the
review of electronic correspondence, and the review and approval
of advertising materials.
James Carl Gaul (Principal): Fined $10,000; Suspended 30 business days in all capacities; Suspended 18 months in Principal capacity only
Johnnie Kelsey Pope (Principal) AWC/2009019408802/December 2011
Pope willfully failed
to timely disclose material facts on his Form U4. Pope failed to
disclose the material facts in an annual compliance questionnaire
for his member firm; and failed to timely respond to FINRA
requests for information.
Johnnie Kelsey Pope (Principal): Fiend $5,000; Suspended 6 months
Patel failed to respond to FINRA requests for
information and to appear
for testimony regarding loans from a firm customer.
Patel failed to
make appropriate disclosure of an outside securities account after
he became associated
with his member firm and failed to notify the firm that held his
securities account that
he had become associated with a firm.Patel made a false
statement on an annual compliance certification to his firm that
he completed after
he signed and filed his initial Form U4 subjecting himself to
FINRAís jurisdiction. Patel
acknowledged receipt of and adherence to the firmís policies,
including obligations to
comply with the firmís policies and to adhere to the applicable
federal, state and selfregulatory
organization laws and rules. Patel falsely stated that he did not
have a securities
account when, in fact, he did.
Ronald John Garabed Sr. AWC/2010024175501/December 2011
Garabed borrowed $15,000 from his customer at his firm contrary to
his firmís procedures,
which did not permit loans between registered representatives and
under any circumstances. Garabed
agreed to repay the
customer the principal loan amount plus an additional $5,000, he
ultimately repaid a total
of approximately $15,200. Garabed
denied on a compliance
questionnaire that he had ever solicited or accepted a loan from a
Garabed willfully failed to update his Form U4
to disclose material
Ronald John Garabed Sr.: Fined $10,000; Suspended 6 months
Ronald William Cheney AWC/2010022535201/December 2011
Cheney borrowed $10,000 from his customers without
his member firmís
Although his firmís WSPs require review and written approval before a registered representative may borrow from a customer , Cheney did not
request or receive the
firmís permission to borrow money from the customers.
Cheney incorporated this loan into another loan from the customers, for a total sum borrowed of $23,000.
Cheney completed his firmís annual certification questionnaire in which he was asked if he had borrowed from, or loaned money to, any customers, and responded that he had not.
While registered with another member firm, Cheney was paid $5,187 for work he performed on behalf of the beneficiaries of a trust account. That firmís procedures required that a representative submit a written request for approval to the designated supervisory principal prior to engaging in any outside employment or business activity. ICheney submitted outside business activity forms and an internal questionnaire to the firm in which he responded that he had not engaged in any outside business activity without prior written approval.
Ronald William Cheney : Fined$10,000; Suspended 60 business days.
Dennis Lee Grossman (Principal) OS/2008011672301/November 2011
As the AMLCO and president of his member firm, Grossmanfailed 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
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
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.
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.
Dennis Lee Grossman (Principal): Fined $75,000; Suspended 4 months in Principal capacity only
Donald Anthony Duarte Jr. 2009018133802/November 2011
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.
Donald Anthony Duarte Jr.: Barred; Ordered to pay $25,000 plus interest in restitution to a customer
Richard Thomas Morrison (Principal) and Kimberly Ann Morrison 2008013683902/September 2011
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
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.
Thomas Michael Aretz : Barred; Ordered to pay $251,907, plus interest, in restitution to 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.
Veritrust Financial, LLC : Censured; Fined $90,000; Ordered pay $34,105.40, plus interest, in restitution to customers
Vision Securities Inc. and Daniel James Gallagher 2008011701203/September 2011
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.
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.
Edward Philip Gelb (Principal) AWC/2009019466601/July 2011
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).
Frederick Xavier Veile III AWC/2009020153401/July 2011
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.
Frederick Xavier Veile III : Fined $5,000; Suspended 1 month
David Elijah McKee (Principal) AWC/2008011640801/June 2011
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.
David Elijah McKee (Principal): Fined $15,000; Suspended 30 business days in Principal/Supervisory capacities only
Gary Scot Cohen (Principal) AWC/2009020792101/May 2011
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.
Gary Scot Cohen (Principal): Fined $5,000; Suspended 4 months
John Godfried Croes Jr. AWC/2009017291201/May 2011
Croes sold EIAs outside the scope of his employment relationship with his member firm and received approximately $84,917.14 in compensation. Croes did not provide prompt written notice to his firm of his outside business activity, and represented on annual certification statements and/or outside business activity forms that he was either not engaged in outside business activity or that he had previously disclosed such activity; these representations were false. Despite a specific verbal warning by his firm to discontinue selling EIAs outside the firmís agency, Croes continued to do so, despite the firmís specific prohibition against doing so in its WSPs.
John Godfried Croes Jr.: Fined $5,000; Suspended 8 months
Michael Steven Jacobson AWC/2009017282401/May 2011
Jacobson sold Equity Indexed Annuties ("EIA") outside the scope of his employment relationship with a member firm, and received approximately $488,266.41 in compensation. Jacobson failed to give prompt written notice to his firm of his outside business activity and represented on annual certification statements and/or outside business activity forms that he was either not engaged in outside business activity or had previously disclosed such activity; these representations were false. Despite a specific verbal warning from his firm to discontinue selling EIAs outside his firmís agency, he continued to do so despite the firmís specific prohibition against doing so in its WSPs.
Michael Steven Jacobson : Fined $5,000; Suspended 18 months
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.
Jordon participated in private securities transactions for which he received approximately $48,585 in commissions and failed to provide prior written notice to his member firm. Jordon concealed his participation because he did not believe his firm would approve the activity and completed the firmís compliance questionnaires without disclosing the private securities transactions.
James Gabor Doering (Principal) AWC/2009018661401/April 2011
Doering willfully failed to disclose material information on his Form U4. Doering completed annual certifications for his member firm in which he falsely answered ďnoĒ to whether he had been the subject of a Form U4 reportable event.
James Gabor Doering (Principal): Fined $5,000; Suspended 4 months
James Robert Riolo (Principal) AWC/2010022499001/March 2011
Riolo referred customers of his member firm to entities controlled by his relative, who was purportedly engaging in trading off-exchange foreign currency (forex) contracts, but in fact was running a fraudulent scheme. The customers invested more than $3.3 million with one entity, and for referring these customers, Riolo received more than $960,000 from his relative. Both entities were fraudulent schemes and Rioloís relative was subsequently convicted and sentenced in court for his fraudulent activities.
Customers that Riolo referred lost a combined amount of over $120,000. In referring these customers to his cousin and receiving compensation, Riolo engaged in an outside business activity, but did not provide written notice or receive approval from his firm. Riolo falsely stated in signed monthly compliance questionnaires that he was not engaging in any outside business activity. In addition, Riolo failed to respond to FINRA requests for information and documents.
White borrowed $20,000 from a customer at his member firm, in order to purchase a house, without providing prior written notice to or obtaining prior written approval from, the firm. White borrowed the money, and the firmís written procedures prohibited borrowing from customers unless the customer was either an immediate family member, or a person or entity regularly engaged in the business of lending money, and Whiteís customer was neither.
White completed an annual firm compliance survey and answered falsely that he had not borrowed money from clients.
John Leslie White : Fined $5,000; Suspended 2 months
Griffin borrowed a total of $10,000 from a friend who was also a customer of his member firm through loans against the customerís life insurance policy, contrary to his firmís written supervisory procedures that required written approval from the firm before an employee could borrow money from any customer, including friends. Griffin supplied the customer with the necessary paperwork and asked the customer not to tell anyone at his firm about the loan. Griffin failed to obtain his firmís pre-approval in writing of the loans before accepting the loans. Also, Griffin provided false responses during firm face-to-face annual compliance interviews and on questionnaires regarding borrowing or lending money to clients.
Robert John Griffin : Fined $7,500; Suspended 7 months
Andrew Gregory McGrath AWC/2009018123301/February 2011
McGrath engaged in an outside business activity and failed to provide prompt written notice to his member firm; McGrath sold EIAs and earned approximately $104,000 in commissions. McGrath completed and signed a firm annual questionnaire, on which he failed to disclose his outside business activity, and failed to update his Form U4 to disclose the outside business activity, and at no time did he provide written notice to his firm.
Andrew Gregory McGrath: Fined $5,000; Suspended 3 months
Clark Alexander Reinhard AWC/2010021577101/February 2011
Reinhard participated in private securities transactions without providing prior written notice to, and/or obtaining prior written approval from, his member firm. The findings stated that Reinhard sold at least $869,000 in stock and warrants to investors, including firm customers, and sold the securities, which a publicly traded company issued, as part of a private securities offering by hedge funds. Reinhard falsely represented on annual compliance questionnaires that he had not engaged in private securities transactions.
Reinhard failed to respond to FINRA requests for documents.
Dallas Ray Seagraves II (Principal) 2007009181101/February 2011
Seagraves willfully failed to amend his Form U4 with material information and to disclose the information on his member firmís annual compliance questionnaire. Seagraves failed to submit an invitation to his investment seminars for principal approval before sending it to the general public, and used unapproved slides at the seminars although he had previously submitted sales literature to his firm for advance approval and was therefore familiar with the requirement to do so. The seminar invitation and slides he used in connection with the seminars contained numerous exaggerated, misleading and promissory statements that contravened FINRA Rule 2210ís requirements for sales literature.
Dallas Ray Seagraves II (Principal): Fined $10,000; Suspended 9 months in all capacities; Barred in Principal capacity only
Jason Leekarl Beckett AWC/2009016600001/February 2011
Beckett submitted an advertisement to a local newspaper, which listed an entity he owned as offering certain investments, including certificates of deposit (CDs) and fixed annuities, and that he did not submit the advertisement to his member firm for review and approval; moreover, the advertisement content included misleading statements regarding the offered investments.
Beckett maintained a website for an entity he owned, which was accessible to the investing public, and he failed to submit the website material to his firm for review until a later date. Beckett failed to obtain his firmís written approval of the website content prior to its use.
Beckett completed an annual certification, which he provided to his firm and he answered ďnoĒ to the question asking whether he anticipated using any type of electronic communication systems such as the Internet for soliciting business.
Jason Leekarl Beckett : Fiend $10,000; Suspended 2 months
Linda Mary Bakalis Schurr AWC/2007009073002/February 2011
Schurr engaged in an outside business activity involving a company, which was a marketing and advertising business through which she sought to generate leads for registered representatives and insurance agents. The companyís primary form of marketing was mass mailings, usually employing postcards that contained false and misleading statements that Schurr sent and caused to be sent to thousands of prospective customers. Schurr developed and directed the use of multiple false and misleading telephone operator scripts that were used in the companyís call center to respond to potential investors.
As a result of the misleading marketing practices involving her company, Schurr became the subject of state regulatory actions and willfully failed to timely update and amend her Form U4 to disclose these actions to FINRA as required.
Schurr associated with a FINRA registered member firm and acted in a registered capacity while subject to statutory disqualification.
Schurr provided false information and failed to disclose material information to the firm on firm annual compliance and outside business activity questionnaires concerning her outside business activity and regulatory actions.
In addition, Schurr failed to provide prompt and complete written notice to the firm of her outside business activities involving another insurance marketing firm when the other company was closed.
Linda Mary Bakalis Schurr : Fined $35,000; Suspended 2 years
Takeuchi participated in private securities transactions by selling a viatical settlement companyís viaticals to outside investors while he was registered with his member firm. Takeuchi did not provide notice to, and receive approval from, the firm before participating in these private securities transactions; the firm also prohibited the sales of viaticals. Takeuchi earned approximately $4,400 as a result of his viatical sales and never gave the firm any notice, written or otherwise, that he had sold viaticals to outside investors.
Takeuchi repeatedly misrepresented and omitted material information to the firm concerning his sales of viaticals when he completed the firmís annual compliance meeting questionnaires and checked ďNo,Ē implying that he had not engaged in any activity involving viatical contracts.Takeuchi made false attestation to the firm when he executed a firm document that he had not participated in the sale or solicitation of viaticals. Takeuchi knew that his written statements to the firm regarding his viatical sales were inaccurate or incomplete.
Peter Joseph Bonnell III (Principal) AWC/2007009073001/February 2011
Bonnell engaged in an outside business activity involving a company he owned and operated, which was a marketing and advertising business through which he sought to generate leads for registered representatives and insurance agents. The companyís primary form of marketing was mass mailings, usually employing postcards that contained false and misleading statements that Bonnell sent and caused to be sent to thousands of prospective customers.
Bonnell developed and directed the use of multiple false and misleading telephone operator scripts that were used in the companyís call center to respond to potential investors. As a result of the misleading marketing practices involving his company, Bonnell became the subject of several state regulatory actions and willfully failed to timely amend his Form U4 to disclose these actions to FINRA as required.
Bonnell associated with a FINRA registered member firm and acted in a registered capacity while he was subject to statutory disqualification. Bonnell provided false information, failed to disclose material information, and misrepresented material information on the firmís annual compliance questionnaires concerning his outside business activity and regulatory actions.
In addition,Bonnell failed to provide prompt and complete written notice to the firm of his outside business activities involving another insurance marketing firm he operated after closing the other company. Moreover, Bonnell failed to adequately supervise certain representatives to ensure they filed accurate and timely updates disclosing state regulatory actions and outside business activity.
Peter Joseph Bonnell III (Principal): Fined $35,000; Suspended 2 years
David William Reimers (Principal) AWC/2010022393501/January 2011
Reimers borrowed approximately $75,768 from one of his customers at his member firm despite the fact that the firmís procedures prohibited representatives from borrowing money from a customer, unless the customer was a family member and written notice was provided to the firm. The customer was not a family member and Reimers did not inform the firm of the loan, which was repaid in full, together with interest totaling $11,259.
Reimers falsely represented on his firmís annual compliance questionnaire that he had not borrowed money from a customer.
David William Reimers (Principal): Fined $5,000; Suspended 3 months
establish certain elements of an adequate AML program reasonably designed to achieve and monitor its compliance with the requirements of the Bank Secrecy Act and implementing regulations promulgated by the Department of Treasury;
establish policies and procedures reasonably expected to detect and cause the reporting of transactions required under 31 USC 5318(g) by failing to provide branch office managers with reports that contained adequate information to monitor for potential money-laundering and red flag activity; and for the firmís compliance department to perform periodic reviews of wire transfer activity, require either branch managers or the AML compliance officers to document reviews of AML alerts in accordance with firm procedures, identify the beneficial owners and/or agents for service of process for some foreign correspondent banks accounts, and establish adequate written policies and procedures that provided guidelines for suspicious activity that would require the filing of a Form SAR-SF;
establish policies and procedures that required ongoing AML training of appropriate personnel related to margin issues, entering new account information, verifying physical securities and handling wire activity;
ensure that its third-party vendor verified new customersí identities by using credit and other database cross-references, and after the firm determined that the vendorís lapse was resolved, it failed to retroactively verify customer information not previously subjected to the verification process;
establish procedures reasonably expected to detect and cause the reporting of suspicious transactions required under 31 USC 5318(g), in that it failed to include in its AML review the activity in retail accounts institutional account registered representatives serviced;
review accounts that a producing branch office manager serviced under joint production numbers;
evidence in certain instances timely review of letters of authorization, correspondence, account designation changes, trade blotters, branch manager weekly review forms and branch manager monthly reviews; failed to follow procedures intended to prevent producing branch office managers from approving their own errors;
follow procedures intended to prevent a branch office operations manager from approving transactions in her own account and an assistant branch office manager from reviewing transactions in accounts he serviced;
establish procedures for the approval and supervision related to employee use of personal computers and, during one year, permitted certain employees to use personal computers the firm did not approve or supervise,
include a question on thefirmís annual acknowledgement form for one year that required its registered representatives to disclose outside securities accounts and the firm could not determine how many remained unreported due to the supervisory lapse;
follow policies and procedures requiring the pre-approval and review of the content of employeesí radio broadcasts, television appearances, seminars and dinners, and materials distributed at the seminars and dinners; representatives conducted seminars that were not pre-approved by the firmís advertising principal as required by its written procedures; the firm failed to maintain in a separate file all advertisements, sales literature and independently prepared reprints for three years from date of last use; and a branch office manager failed to review a registered representativeís radio broadcast. A branch office manager failed to maintain a log of a registered representativeís radio broadcasts and failed to tape and/or maintain a transcript of the broadcasts and there was no evidence a qualified principal reviewed or approved the registered representativeís statements. Branch office managers did not retain documents reflecting the nature of seminars, materials distributed to attendees or supervisory pre-approval of the seminars; retain transcripts of a representativeís local radio program and TV appearances or document supervisory review or approval of materials used; and retain documents reflecting the nature of a dinner or seminar conducted by representatives or materials distributed;
record the identity of the person who accepted each customer order because it failed to update its order ticket form to reflect the identity of the person who accepted the order; and
to review Bloomberg emails and some firm employeesí instant messages
The Firm distributed a document, Characteristics and Risks of Standardized Options, that was not current, and the firm lacked procedures for advising customers with respect to changes to the document and failed to document the date on which it was sent to certain customers who had recently opened options accounts. Also, the firmís compliance registered options principal did not document weekly reviews of trading in discretionary options accounts.
Kirk engaged in outside business activities without providing prompt written notice to his member firm. Kirk had a contract with an insurance company to sell EIAs, which was approved, but the firm subsequently informed Kirk in writing that the approval to sell EIAs through the insurance company had been cancelled. Despite receiving this notice, Kirk sold EIAs through the insurance company without providing prompt written notice to his firm, and received commissions of approximately $14,500.
Kirk incorrectly answered on his firmís required compliance questionnaire that he was not currently engaged in any outside business activities, when at the time, he maintained his contractual relationship with the same insurance company through which he sold the EIAs.
Joe Michael Kirk: Fined $5,000; Suspended 4 months
Torrey Pines Securities, Inc. and NAME REDACTED (Principal) AWC/2007011125103/January 2011
Acting on the firmís behalf, NAME REDACTED
failed to ensure that a firm principal completed his annual certification as the firmís procedure required,
did not follow up on the principalís failure to provide information regarding both his outside business activities and the accounts for which he served as a custodian or trustee, and
conducted an inspection of a firm branch office, and that inspection did not comport with the firmís written procedures and did not reasonably review the activities of that office.
NAME REDACTED did not review the transmittal of funds between the principalís customers and a third party as the firmís written supervisory procedures required, and failed to obtain details regarding the principalís outside business activities.
The firm failed to
reasonably supervise the principal by failing to take steps to inquire into ďred flagsĒ indicating his possible misconduct;
follow up on the principal's outside business activities and excessive absences from the firm;
timely investigate allegations that he was participating in private securities transactions away from the firm; and when the firm confirmed his selling away activities, it did not take any steps to place him on heightened supervision.
The Firm's written supervisory procedures were not reasonably designed to ensure principal review of wires from customers to third parties, so it was unaware the principalís customers were transferring large sums to a third party and that he was executing Letters of Authorization (LOAs) on behalf of multiple customers.
NAME REDACTED: No Fine in light of financial status; Suspended from association with any FINRA member in any principal capacity, other than the capacity of municipal securities principal, for 10 business days.
By way of preamble, this blog is about Goldman, Sachs & Co. and the Financial Industry Regulatory Authority's ("FINRA") Board of Governors. This is about a multinational investment bank and financial services company. This is about Wall Street's largest self-regulatory-organization. This is about a sexual discrimination Class Action f... Read On