Acting through Rooney, Fox Financial

• sold zero-coupon bonds to customers and negligently omitted material facts concerning the fund’s manager, who the State of Texas had charged with forgery of a financial instrument, and was sentenced to five years deferred adjudication and had been the subject of a Temporary Order of Prohibition for selling unregistered securities by the State of Illinois;
• sold zero-coupon bonds to customers that were secured by interests in life insurance policies, and limited liability companies, which Rooney controlled and were affiliated with the firm, issued the bonds, and negligently omitted material facts to customers relevant to the criminal records of the bonds’ manager and owning companies.
• participated in private placement offerings of zero-coupon bonds limited liability companies issued, and each of the offerings claimed an exemption from registration under the Securities Act of 1933; however, the offerings were not separate and distinct, and were, therefore, subject to integration, and to the securities registration requirements of public offerings.
• sold zero-coupon bonds, failed to establish a proper escrow account by using a limited liability company not chartered as a bank as the escrow agent, and falsely represented that customer funds would not be commingled.

Rooney failed to detect that customer funds had been commingled because he had neglected to obtain copies of the escrow account statements and to maintain such statements among the firm’s records.

The firm’s test of its system of supervisory controls was flawed because it failed to include a review of its private placement business, and Rooney stated in his annual certification of compliance that the firm had established and maintained policies and procedures reasonably designed to ensure compliance with FINRA rules. In addition,the firm failed to evidence its supervision over Rooney, in that Rooney was the only principal who had signed Subscription Agreements indicating approval of the customer’s investment in an offering.

Fox Financial Management Corporation: Censured; Fined $40,000

James Edward Rooney Jr. (Principal): Fined $20,000; Suspended 15 business days in Principal capacity only

Lau sold preferred stock through a private placement while not appropriately registered to sell that product.

Lau informed a customer about a private offering of preferred stock in a company, stating that he intended to invest in the company, and provided the customer with brochures, disclosure documents and an application, including a subscription agreement, to invest in the company. The customer completed the application for a $300,000 investment in the company and returned it to Lau. Because Lau knew that he was not appropriately registered to sell the product to the customer, he asked his supervisor to sign the subscription agreement as the selling representative.

The supervisor agreed and signed the subscription agreement, and submitted the application, including the subscription agreement, to the member firm for processing. The firm approved the investment and executed the transaction; and, as such, Lau caused the firm’s books and records to be inaccurate by having his supervisor sign the subscription agreement as the selling representative.

As his member firm’s AMLCO, Kobin failed to

• implement policies and procedures reasonably expected to detect and cause the reporting of transactions required under 31 USC 5318(g) and implementing regulations;
• provide AML training for firm personnel, failed to adequately review customer activity for compliance with AML rules and to adequately review suspicious activity and file timely SARs where appropriate;
• fulfill his responsibility to access the Financial Crimes Enforcement Network (FINCEN) of the United States Department of Treasury to review requests for information, under Section 314(A) of the USA Patriot Act, relating to possible money laundering or terrorist activity;
• search firm records to determine whether the firm maintained, or had maintained, any account for, or had engaged in any transactions with, any individual, entity or organization named in FINCEN’s requests.

As a result of the firm’s inadequate AML program, the firm, acting through Kobin, failed to timely detect, investigate and report suspicious activity to achieve compliance with the Bank Secrecy Act.

Kobin failed to

• identify red flags in connection with suspicious account activity, did not timely investigate or review the red flags, and caused his firm’s failure to timely report the suspicious activity;
• implement the firm’s procedures for suspicious activity detection and reporting, monitor and investigate approximately $6 million in suspicious wires to and from one of its branches,
• detect and timely report suspicious activity and maintain documentation evidencing a review for suspicious activity of securities transactions, money movements and securities transfers;
• ensure that a designated principal review and approve all correspondence to and from branch offices, including electronic correspondence.
• failed to properly create, maintain and timely file records and reports of customer complaints, and failed to timely update Forms U4 and Forms U5 relating to persons who were registered with FINRA through his firm in his capacity as his firm’s Chief Compliance Officer (CCO), .
• take adequate steps to comply with the Firm Element of the Continuing Education Requirement and, as a result, his firm did not conduct the required annual needs analysis or develop a written training plan.
• ensure that each registered person was clearly assigned to an appropriately registered representative and/or principal responsible for supervising that person’s activities,
• conduct an annual compliance interview or meeting,
• implement an adequate supervisory control system over the firm’s branch office managers, sales managers or any person performing a similar function; specifically, the firm’s written supervisory procedures failed to identify producing managers for purposes of review and supervision of their customer account activity; assign a person who was either senior to, or otherwise independent of, the producing manager to perform such supervisory reviews; and reasonably ensure that the firm calculate, on a rolling, twelve-month basis, whether heightened supervision requirements were triggered with any respect to any producing managers.

The Firm 

• issued research reports that the firm labeled “Asset Analysis Focus” (AAF) on a paid subscription basis;
• did not consider the AAF a research report;
• did not have in place policies and procedures designed to ensure compliance with the various research related rules applicable to firms that issue research reports, such as those relating to research analyst and research principal registration, disclosures, conflicts, annual attestations and written supervisory procedures;
• allowed registered representatives at the firm to collaborate in the preparation of AAFs without having passed a qualifying examination,
• allowed an individual also to collaborate in the preparation of AAFs without being registered as a general securities representative or in any other capacity through the firm, and without having passed a qualifying examination.

A general securities principal supervised the preparation of AAFs without having passed the qualifying examination.

Certain AAFs the firm issued failed to disclose certain NASD Rule 2711 required information, including the financial interest in the issuer of the research analysts who prepared the reports, price charts for issuers where the firm has assigned a price target for at least one year, and the valuation methods used to determine price targets and the risks that may impede achievement of the price targets.

An individual who collaborated in the preparation of AAFs purchased securities of companies during the 30-day period before the publication of the research reports concerning those companies. In addition, The firm did not have the required research report-related written supervisory procedures in place, and the firm did not have a senior officer make the required annual attestation that the firm had adopted and implemented the required written supervisory procedures.

Moreover, the Firm did not make the required annual attestations for several years and filed inaccurate annual attestations for other years.

Acting through Rodgers,NWT:

• allowed opening options transactions in accounts without signed options agreements;
• allowed accounts to day-trade prior to firm approval;
• failed to evidence that accounts had been approved for daytrading;
• failed to evidence that customers had been furnished a risk disclosure statement prior to engaging in day-trading activities.

Each of the above noted accounts came to the firm as part of a mass transfer of accounts from a former member firm.

Acting through Rodgers and Niederkrome, the firm failed to implement portions of its supervisory control procedures, in that Rodgers and Niederkrome failed to test and verify that the firm’s supervisory control procedures and policies were reasonably designed to achieve compliance with applicable rules; and, prepare and submit a report to senior management detailing the firm’s system of supervisory controls, the summary of the test results, significant identified exceptions and any additional or amended supervisory procedures created in response to the test results.

Rodgers and Niederkrome failed to complete an annual certification pursuant to NASD Rule 3013(b), verifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures to comply with applicable securities rules and regulations.

Censured; Fined $10,000 jt/sev with Niederkrome and Rodgers; Fined additional $5,000 jt/several with Rodgers

David Eric Niederkrome: Censured; Fined $10,000 jt/sev with NWT and Rodgers;

Stephen Rudolph Rodgers: Censured; Fined $10,000 jt/sev with NWT and Niederkrome; Fined additional $5,000 jt/sev with NWT

Acting with others, Jones participated in a fraudulent scheme to solicit investments in an unregistered hedge fund and its general partner. Jones engaged in a variety of fraudulent and deceptive sales practices and disregarded his duties and obligations of fair dealing to his customers. Jones knew, or was reckless in not knowing, that the hedge fund was engaging in a highly speculative trading strategy involving futures contracts and that information the hedge fund manager supplied, which Jones used, contained materially false and misleading statements and omissions, including a pending Commodity Futures Trading Commission (CFTC) fraud action against the hedge fund manager, the fund’s theoretical and unproven performance figures, the highly speculative nature of the hedge fund’s trading strategy, and the significant risks associated with an investment in the hedge fund and its general partner.

Jones ignored many “red flags,” including those in the hedge fund’s Private Placement Memorandum (PPM). Jones solicited his customers without conducting a reasonable investigation to determine whether the hedge fund and its general partner were suitable investments and without regard as to whether his customers were capable of evaluating and bearing the risks associated with such investments.

Brenowitz

• falsified a client’s insurance policy application and related documents without the client’s knowledge, submitted the documents to his member firm’s insurance company affiliate and subsequently denied to his firm that he had falsified signatures or submitted falsely signed documents;
• falsified clients’ insurance policy-related supplement documents without the clients’ knowledge, submitted the documents to his firm’s insurance affiliate and, although the clients later stated that they approved of his actions, the firm’s insurance affiliate policy prohibited its insurance agents from signing another person’s name, even if the clients’ authorized them;
• falsely endorsed and deposited a check for $1,000 made payable to an insurance agent contracted to him into his personal bank account, and falsely claimed to his firm that the insurance agent authorized him to use the check to repay expenses;
• took an online computer examination on his office manager’s behalf that his firm’s insurance company affiliate required, and Brenowitz falsely denied to his firm that he did so;
• denied in writing to FINRA that he took any test posing as his office manager; and
• denied  in sworn testimony to FINRA that he took any test posing as his office manager and claimed that the insurance agent contracted to him had authorized him to endorse and deposit the check and use the proceeds for expense reimbursement.

Faulks misappropriated customer insurance premium payments totaling over $9,600 from an insurance company by comingling her personal cash with cash premium payments and using the funds for her own purposes.Faulks paid earlier cash premiums with premium payments received at later dates, which was something the insurance company had cautioned her about in the past. The insurance company credited Faulks’ customers for the insurance premium payments that Faulks failed to deposit on their behalf.

Faulks failed to respond to FINRA requests for information and to appear for testimony.

Acting through its chief compliance officer (CCO), the firm: 

• failed to establish and implement an adequate AML program and related procedures; adequately identify, investigate and respond to red flags of suspicious activities;
• timely file a Suspicious Activity Report (SAR); and
• provide AML training for firm personnel for one year.

Acting through a registered representative, the firm

• improperly facilitated the distribution of approximately 20 million shares of various unregistered securities;
• operated an unregistered branch office, in violation of the restriction on business expansion contained in its membership agreement, and
• engaged in improper telephone solicitations (from the unregistered office) by making materially false representations and omitting material facts in connection with the offer of securities and by using misleading telemarketing scripts that a registered principal had not approved.

Acting through the registered representative and CCO, the firm failed to perform adequate searching inquiries and take necessary steps to ensure that transactions did not involve distributions of unregistered and/or restricted securities.

Acting through a registered representative and firm principal, the firm sold securities to public investors using a private placement memorandum that omitted to disclose a convicted felon’s association with the issuer, a material fact to any reasonable investor.

Acting through various FINOPs, the firm

• failed to maintain accurate financial books and records,
• filed inaccurate FOCUS reports and
• operated a securities business while under minimum net capital requirements.

Acting through the CCO and other compliance officers, the firm

• failed to forward customer funds it received in connection with contingency offerings to an escrow agent by noon of the next business days after receipt of such fund;
• adequately review and approve customer correspondence;
• timely and accurately report customer complaints;
• timely update Uniform Applications for Securities Industry Registration or Transfer (Forms U4) and Uniform Termination Notices for Securities Industry Registration (Forms U5);
• comply with the Firm Element of the Continuing Education Requirement for a year;
• conduct an annual compliance meeting; and
• establish an adequate business continuity plan, which consequently led to the loss of access to certain customer records upon termination of its relationship with a particular clearing firm.

The firm had additional supervisory deficiencies, including that

• its written supervisory procedures failed to establish adequate procedures for review of producing managers’ customer account activities,
• it failed to have written supervisory procedures for identifying producing managers that should be subject to heightened supervision, and
• failed to place certain producing managers on heightened supervision, in that, acting through various individuals, the firm failed to clearly assign each registered person to an appropriately registered representative and/or principal responsible for supervising that person’s activities, and designate principals with actual authority to carry out the supervisory responsibilities over the firm’s business.

Acting through a supervising principal, the firm failed to reasonably supervise registered representatives working out of the unregistered branch office.

Acting through firm officers, the firm failed to establish and maintain a supervisory system reasonably designed to supervise the sales activities of firm personnel conducted outside of its registered offices, and failed to establish and maintain a supervisory system for determining whether customer securities were properly registered or exempt from registration.

Acting through its CCO, the firm failed to implement adequate procedures to ensure that the firm did not telephone persons who stated they did not wish to receive calls and/or who registered on the national do-not-call registry, and failed to adequately update and maintain a do-not-call list.

Acting through various supervisors, the firm failed to perform heightened supervision over numerous individuals.

Brookstone Securities failed to ensure that each of its registered representatives and registered principals participated in an annual compliance meeting. The Firm failed to timely update a registered representative’s Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose required information and failed to timely disclose customers’ complaints pursuant to NASD Rule 3070.

The Firm failed to report quarterly statistical customer complaints; failed, in some instances, to create and maintain a record of customers’ complaints and related records that included the complainant’s information; and, alternatively, failed to maintain a separate file that contained complainant’s information.

The Firm failed to report transactions to the Trade Reporting and Compliance Engine (TRACE) and failed to evidence the creation and maintenance of order tickets for sell transactions in corporate bond transactions.

Through several of its employees at the branch office level and employees of an affiliate in the Office of General Counsel, the Firm made material misstatements to NYSE Regulation examiners relating to an on-site branch office examination relating to non-registered cold callers by

• providing the NYSE with inaccurate and deceptive information in response to various regulatory examination requests,
• instructing staff that an unapproved facsimile machine be hidden or removed, and
• by providing an inaccurate written statement in response to requests for information during an ongoing investigation.

Unlicensed Attorney

The Firm failed to properly supervise a registered person with the firm who held himself out as an attorney on firm stationery and business cards even though he was not licensed or admitted to practice before any state or federal bar.

Away Accounts

The Firm failed to

• provide letters from outside broker dealers, whose employees maintained accounts at the firm, confirming that they were aware of such accounts;
• receive and review duplicate confirmations and monthly account statements for accounts that employees maintained outside the firm;
• evidence the approval of such accounts; and
• send duplicate statement and confirmations to other firms whose employees had accounts at the firm.

Communications and Computers

The Firm failed to

• evidence review and supervision of incoming or outgoing written communications and facsimiles at certain branches;
• evidence the approval for certain employees to maintain computers and software; and
• review, supervise and/or evidence supervisory review of communications that employees sent and received with non-firm issued computers.

The Firm failed to place certain accounts on 90-day restrictions; evidence the review, approval and/or supervision of order errors and account designation changes; and date or properly date corrections for order errors and account designation changes. Also, the Firm failed to evidence the review, approval and/or supervision of certain personal computer forms that had been backdated at a branch; failed to approve and/or timely approve seminars that firm employees conducted, and maintain certain seminar-related materials; failed to review, approve and/or retain certain facsimiles, including Fax-2-Mail correspondence and/or evidence its review and approval; and failed to maintain its "control" fax machine in a secure location in one branch.

Acting through Buchanan, Valores Finamex failed to produce evidence of Buchanan’s review of a registered representative’s correspondence. The Firm’s written supervisory procedures failed to

• identify the registered representative as a producing manager,
• contain procedures reasonably designed to provide heightened supervision over the activities of each producing manager who is responsible for generating 20 percent or more of the revenue of the business units supervised by the producing manager’s supervisor, and 
• assign a qualified supervisor to supervise the registered representative.

The Firm permitted Buchanan to conduct a securities business while he was “Continuing Education Inactive.”  Also, the Firm failed to

• send an annual privacy notice to its customers;
• provide an explanation to its customers of their right to opt out of disclosure of nonpublic personal information to nonaffiliated third parties; and
• establish policies and procedures that address and review administrative, technical and physical safeguards for the protection of customer records and information involved in the outsourcing of compliance and operations functions to nonaffiliated third parties.

The Firm effected Trade Reporting and Compliance Engine-eligible securities trades and failed to report, or properly report, those transactions.

Valores Finamex International, Inc.: Censured; Fined $27,500 ($10,000 of which was jointly and severally with Buchanan).

Vincent Anthony Buchanan: Fined $10,000 jointly and severally with Valores Finamex; Suspended in Principal capacity only for 20 business days. 

• conduct inspections of its main office,
  
• reduce inspections and reviews to a written report, and
  
• conduct annual compliance meetings.
  

• document that it had administered a continuing education program in accordance with its evaluation of its training needs and written training plan for its covered registered personnel, and
  
• conduct a needs analysis and prepare a written training plan or administer a continuing education program for its covered registered personnel.
  

• email correspondence,
  
• incoming and outgoing hard copy correspondence at the firm’s branch offices that he was in charge of, and
  
• outside investment activity of registered representatives at the firm.
  

• NASD Rule 3012(a)(2)(B) and its requirement that members establish, maintain and enforce procedures reasonably designed to review and monitor transmittals of funds or securities between customers and registered representatives, and
  
• NASD Rule 3012(a)(2)(C) and its requirement of an analysis and determination of whether producing branch office managers should have been subjected to heightened supervision.

The Firm failed to have an adequate supervisory system, including written supervisory procedures and a supervisory control system, to properly and timely identify customer checks deposited at affiliated bank branches and ensure that all customer check deposits were duly credited to the appropriate customer accounts. The Firm escheated approximately $133,616.65 in funds to the Commonwealth of Kentucky when it was unable to identify the proper customer accounts. As a result of the unidentified customer check deposits, the firm failed to make and keep accurate daily records of all receipts and disbursements of cash and other debits and credits in its books and records, including entries to an Escheatment Account. The Firm understated its net capital charges and incorrectly calculated its Customer Reserve Formula. In addition, the Firm produced inaccurate month-end customer account statements, incorrectly liquidated certain customer fully paid securities, and failed to segregate some customers’ fully paid securities, resulting in intra-day possession or control deficits. The Firm did not prepare required inter-company account reconciliations, failed to properly record certain aged unfavorable reconciliation differences and failed to conduct supervisory reviews of certain reconciliations and accounts.

The Firm ’s supervisory procedures did not adequately ensure that its research analysts obtained the required approval for public appearances and provided proper disclosures during such public appearances. In addition, the Firm issued certain research reports that

• contained indefinite “may” language regarding future investment banking services that the firm expected to provide,
• did not include analyst certifications on the front page,
• contained front pages that did not specify the page or pages in the research report on which the analyst certifications were to be found, and
• incorrectly included the analyst certification information as part of the important disclosures.

Registered Principal Brennan failed to reasonably supervise and respond to warning signs that registered representatives were conducting and operating a securities business from an unregistered branch office without supervision. The representatives

• improperly solicited potential customers by telephone in connection with the offer of securities,
• made false representations, including unwarranted price predictions,
• omitted material facts, and
• used misleading telemarketing scripts that a registered principal had not approved.

Brennan failed to timely amend his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose material information.