Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
December 2010
Benjamin Burl Abbott III
AWC/2008015676801/December 2010

Abbott maintained personal margin accounts at his member firm and met initial margin calls in his personal margin accounts by liquidating the position that created the margin call because he did not have sufficient equity in the account to pay for the securities purchased on margin, nor did he deposit sufficient funds to meet the margin calls.

Abbott placed an unauthorized short-sell order of a company’s stock, at a total cost of $90,331.71, in a customer’s account, and the trade was marked “unsolicited” although the customer had not authorized a short sale of the stock or any other specific transaction. Abbott maintained that he made an error and meant to enter an order for a short sale for a smaller number of shares, but the customer did not authorize this trade transaction either. The Firm cancelled the transaction, resulting in a market loss of approximately $20,000, which the firm absorbed.

In connection with joint accounts he held with his relative at the firm, Abbott knowingly entered information that overstated his net worth and annual income on new account forms. Abbott entered the false information on the new account forms so he could engage in trading activity the firm would not have allowed if he disclosed his true net worth and annual income. In addition, Abbott’s actions resulted in the creation of false books and records.

Benjamin Burl Abbott III : Fined $5,000; Suspended 1 year
Tags:  Margin     |    In: Cases of Note : FINRA
November 2010
Thomas Joseph Brough (Principal), Eric Robinson Elliott (Principal), Brian James Falabella, and Jonathan Jay Sheinkop
OS/2007011348301/November 2010

Brough, Elliott, Falabella and Sheinkop induced customers to invest in complex, illiquid and risky collateralized mortgage obligations (CMOs). Through misrepresentations and omissions, the respondents led customers to believe that through CMO investments they could safely achieve consistently high annual returns, regardless of market conditions, with the government backing the investments. The CMOs the respondents bought for customers were generally not government-guaranteed, and they were subject to price volatility, uncertain cash flows and maturities, based on changes in interest rates. The respondents failed to disclose material characteristics of, and risks associated with, different CMOs with substantially different payment structures and interest rate sensitivity, and failed to ensure that customers understood the characteristics and risks of CMOs.

The respondents failed to adequately investigate and understand the CMO products, and did not have reasonable grounds to believe that the individual CMO purchases were suitable for each customer. The risk was further magnified through the recommendations to the customers to buy CMOs on margin, and Elliott, Falabella and Sheinkop did not have reasonable grounds to believe the use of margin was suitable for customer CMO purchases based upon the customers’ disclosed investment experience, investment objectives, financial situation and needs.

In addition, Brough, Elliott, Falabella and Sheinkop exercised discretionary authority in customer accounts without obtaining the customers’ prior written authorization and their member firm’s prior acceptance of the account as discretionary. Moreover, the customers were exposed to significant risks that they did not understand, and Brough, Elliott Falabella and Sheinkop did not take the time to understand or ignored them so that some customers suffered considerable losses to their retirement savings.

Thomas Joseph Brough: No fine in light of financial status; Suspended 8 months

Eric Robinson Elliott: Fined $10,000; Ordered to pay $30,217, in restitution to customers; Suspended 6 months in all capacities;

Brian James Falabella: No fine in light of financial status; Suspended 6 months in all capacities

Jonathan Jay Sheinkop: No fine in light of financial status; Ordered to pay partial restitution in the total amount of $30,000 to customers; Suspended 12 months in all capacities.

Tags:  CMO    Margin     |    In: Cases of Note : FINRA
Bill Singer's Comment
I must be getting soft in my old age but this is a well-explained case.
July 2010
E*Trade Clearing LLC
AWC/2007009471101/July 2010

E*Trade introduced several new money market sweep funds and, when entering certain back-office processing instructions relating to some of the funds, the firm made an error that resulted in the system failing to recognize these fund positions and customers being erroneously charged margin interest for that day. When the firm became aware of this coding error and corrected the problem, it did not identify or reimburse affected customers until later in the year; the firm reimbursed affected customers a total of $43,938.57 in erroneous margin interest charges several months later.

The Firm acquired customer accounts through conversions from other firms, and it erroneously charged margin interest to conversion customers who traded options.

The Firm failed to designate an employee to review, reconcile and resolve fractional share differences between its Depository Trust Company (DTC) position and the actual quantity of securities on deposit at the DTC.

The Firm’s systems failed to accept delivery instructions if customers had pending dividends or unsettled positions in their accounts.

FINRA also found that the firm failed to establish a system reasonably designed to supervise and written procedures reasonably designed to prevent and/or correct erroneous margin interest accruals in customer accounts holding certain money market sweep funds, prevent and/or correct erroneous margin interest charges to converting customers who traded options at the time of the conversion and had available cash in their accounts, ensure the review and reconciliation of fractional share differences with the DTC, and ensure the prompt transfer of physical certificates to customers. In addition, the Firm failed to accurately mail account statements to customers, liquidated fractional shares in customer accounts without their authorization and failed to report customer complaints in an accurate and timely manner.

Moreover, in connection with its conversion to a new back office system, a functionality that impacted the segregation of long positions in suspense accounts was not activated as required and, as a result, the firm’s possession and control system failed to issue segregation instructions on long positions in suspense accounts.

E*Trade Clearing LLC: Censured; Fined $350,000
Tags:  Margin    Delivery Instructions         |    In: Cases of Note : FINRA
Bill Singer's Comment
See this May 2010 article: E*Trade Baby Craps. Transfer Requests Lost. http://www.brokeandbroker.com/index.php?a=blog&id=394
February 2010
Sandra Loretta Guay
AWC/2008013937601/February 2010
In an attempt to conceal a margin call and avoid the sale of stock, Guay transferred $2,100 of her own funds into a customers’ joint account to satisfy the margin call (the customers were unaware of the call). Prior to the margin call, one of the customers had expressed concerns to Guay about the account’s declining value.

A week later, Guay withdrew the $2,100 by completing an Authorization to Transfer Securities or Money form on the customers’ behalf by executing the joint account holders’ signatures without their consent or authority.When one of the customers questioned Guay about these transactions, she falsely claimed that there had been an “error” and failed to disclose her actions. Guay exercised discretion in the joint account without the customers’ prior written authorization and her member firm’s written acceptance of the account as discretionary. Guay executed numerous discretionary trades resulting in approximately $60,000 in losses.
Sandra Loretta Guay: Barred
Tags:  Margin         |    In: Cases of Note : FINRA
Enforcement Actions