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.
Colleen Anne Averill AWC/2009018941502/September 2011
Averill misappropriated funds from an elderly customerís securities accounts over a period of three years, and was convicted of multiple felonies stemming from her conduct. Averill continued her thefts even after her member firm terminated her employment for lack of production.
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.
Richard Harold Byerly OS/2009017492201/September 2011
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.
Richard Harold Byerly: No fine in light of financial statuts; Suspended 2 years; Ordered to pay $30,000 partial restitution to customers.
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.
Jared Austin Poe : Fined $10,000; Suspended 18 months; Ordered to pay $125,000 plus interest in restitution
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.
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.
Larry Richard Gregory AWC/2011026406001/August 2011
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.
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.
Patrick Shawn Kennedy (Supervisor) AWC/2009018671501/July 2011
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.
Patrick Shawn Kennedy (Supervisor): Fined $5,000; Suspended 9 months
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.
David Alan Kepes : Fined $20,000; Suspended 7 months
Gunnette took more than $925,000 from investment accounts owned by an elderly customer at her member firm and converted the funds to her personal use. Gunnette caused her personal residence to be reflected as the address of record for certain investment accounts of the elderly customer, and established an account for the customer at another member firm, using her personal residence address as the accountís address of record. Gunnette received checks drawn on the customerís accounts totaling approximately $925,513.28 and deposited the checks into bank accounts she owned or controlled. Gunnette failed to observe high standard of commercial honor and just and equitable principles of trade. Gunnette caused her firmís and another firmís records to be falsified by changing the customerís address of record with her firm to her personal residence address, and by designating her address as the customerís address of record on the other firmís account she opened for the customer.
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.
Charles Hyman Brown (Principal) AWC/2008011707003/May 2011
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.
Charles Hyman Brown (Principal): $5,000 Fine; Suspended 30 days in Principal capacity only
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;
$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.
Lloyd Kramer (Principal): Fined $5,000; Suspended 30 days in Principal capacity only
William Thomas Hernandez, AWC/2010025260501/May 2011
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.
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.
Michael William Keleher OS/2008013229701/April 2011
Keleher falsified elderly customersí account information forms and used those forms to open commission-based brokerage accounts the customers did not authorize. Keleher made unauthorized transactions in customer accounts and received $16,694.28 in commissions. Also, he paid $78,266 in commissions to an unregistered individual.
Chad R. Duncan (Principal) AWC/2009017755101/January 2011
Without permission or authority, Duncan used $100,000 drawn from an elderly personís bank account to pay his personal credit card expenses, which were related to costs associated with the construction of his home. When the executor of the deceased personís estate became concerned about the withdrawals totaling $100,000, Duncan created fictitious cashierís checks totaling $100,000 and payable to charities, falsely representing that the checks represented evidence of the payments made by the deceased and the beneficiaries of the payments. The withdrawals were earlier used to purchase cashierís checks payable to an international commercial bank to pay down Duncanís credit card expenses.
A bank compensated the customer for the wrongfully taken funds, and Duncan has reimbursed the bank approximately $91,484.75 and continues to make monthly payments to cover the amounts the bank paid to the customer.
In a recent FINRA regulatory settlement, a Barclays research analyst got a job offer from an issuer he was covering. FINRA makes the case that the job offer posed a conflict and should have been disclosed to the employer. Fair enough -- I agree; however, when considering FINRA's charges against the analyst, I was reminded of a similar scenario involving... Read On