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.
September 2011
Harry Friedman (Principal)
2005000835801/September 2011
Friedman participated in private securities transactions for compensation without providing written notice to, or obtaining prior written approval from, his member firm.
Harry Friedman (Principal): Fined $77,500; Suspended 9 months
Tags:  NAC     |    In: Private Securities Transactions
Bill Singer's Comment
The SEC sustained the sanctions following appeal of a NAC decision.
April 2011
Alvin Waino Gebhart Jr. (Principal) and Donna Traina Gebhart (Principal)
C0220020057/April 2011

The sanctions were based on findings that Alvin and Donna Gebhart engaged in private securities transactions without prior written notification to, or prior approval from, their member firm. The findings stated that Alvin and Donna Gebhart sold unregistered securities that were not exempt from registration, and recklessly made material misrepresentations and omissions in connection with the sale of securities. Donna Gebhart’s suspension is in effect from June 7, 2010, through June 6, 2011.

Alvin Waino Gebhart Jr.: Barred

Donna Traina Gebhart: Fined $15,000; Suspended 1 year; Must requalify by exam in all capacities.

Tags:  Due Diligence    NAC    Appeal     |    In: Cases of Note : FINRA
Bill Singer's Comment

The Weigh In

The 2004 NASD Hearing Decision

  • Alvin W. Gebhart, Jr. was suspended for 12 months in all capacities and fined $100,000.
  • Donna T. Gebhart was suspended for 7 months in her capacity as general securities representative and fined $7,500.
  • Both Respondents found jointly and severally liable for $5,141.21 in hearing costs.

The 2005 National Adjudicatory Council Decision

Round One: 2006 SEC Opinion

In 2006, the SEC reviewed the Gebharts' appeal of NASD findings and sanctions. In the 2006 SEC Opinion, the SEC held that the Gebharts, registered representatives of member firm of the NASD, had engaged in private securities transactions without giving prior written notification to, or obtaining prior approval from, member; sold unregistered securities; and made material misrepresentations and omissions in the sale of securities. The SEC sustained the NASD's findings of violation. The SEC also sustained NASD's sanctions:

  • Alvin Gebhart: Barred
  • Donna Gebhart: Fined $15,000 and suspended  for one year. NASD imposed two separate one-year suspensions on D. Gebhart (one year for private securities transactions and sales of unregistered securities and one year for violations of federal and NASD antifraud provisions) that were to be served concurrently.
  • NASD also assessed costs against the Gebharts, jointly and severally, in the amount of $5,141.21.

Round Two: 9th Circuit Remand on "scienter" issue

Following appeal to the Ninth Circuit Court of Appeals, that court affirmed the SEC's finding that registered representatives of member firm of registered securities association engaged in private securities transactions without giving prior written notification to, or obtaining prior approval from, member. However, the Circuit Court remanded for further findings on whether representatives violated antifraud provisions with the requisite scienter when they made material misrepresentations and omissions in the sale of securities.

Round Three: SEC's 2008 clarification

Upon remand, the SEC held in a 2008 Opinion that the representatives recklessly made material misrepresentations and omissions, and association's findings of liability. Accordingly the SEC sustained the sanctions imposed.  

Round Four: Case Closed

Thereafter, the Supreme Court of the United States denied a petition following the United States Court of Appeals for the Ninth Circuit’s denial of petition for review.

The Nitty Gritty: Scienter Is Not Mere Negligence

An interesting aspect of this case is the issue of whether "scienter" is satisfied by mere negligence or whether the state of mind requires something more. In responding to this issue, the SEC's 2008 Opinion provides an interesting commentary (pages 15 - 17 of the Opinion):

The Gebharts nevertheless argue that they should not be found liable for fraud because they acted in good faith, and therefore without the requisite state of mind. They contend that, as found by the NASD Hearing Panel, the Gebharts "truly believed that they had fulfilled their responsibilities to assure that MHP and CSG were appropriate investments . . . ." The Hearing Panel decision on this point was overturned by NASD's National Adjudicatory Council ("NAC"), which found that the Gebharts were reckless and concluded that the four factors identified by the Hearing Panel provided "scant reasons for the Gebharts to believe they had fulfilled their duty to investigate." The NAC decision is NASD's final action. 33/

The Court of Appeals in its remand opinion identified subjective and objective components in an analysis of recklessness, and we acknowledge the Gebharts' assertions that they believed they had done enough to confirm the truthfulness of their statements to clients. We consider evidence of good faith to be relevant to a determination of whether a respondent acted with the requisite state of mind. That evidence must be considered with all other evidence of knowledge or recklessness because the reasonableness and, therefore, the credibility of that claim of good faith must be evaluated in light of the circumstances of each case and in light of the conduct expected from a reasonable person.

The Court questioned whether the 2006 Opinion should be interpreted as holding that good faith cannot be a defense to a finding of scienter whenever the evidence indicates that the respondents lacked a "reasonable basis for recommending the [securities], because they failed to discharge [their] duty to investigate before making the recommendations." 34/ The Court seems concerned that our view is that a good faith belief founded on negligent actions satisfies the recklessness prong of scienter. We take this opportunity to reiterate our adherence to the recklessness standard as an extreme departure from the standards of ordinary care and our view that negligence does not qualify as scienter.

Thus, the evidence the Gebharts forward to demonstrate their good faith beliefs is and should be part of the complete mix of facts bearing on an evaluation of their state of mind, but, in the end, a respondent's belief that he acted in good faith must be tested by reference to objective criteria; i.e., the applicable standard of conduct is determined in accordance with the degree to which the respondent had acted extremely unreasonably. A respondent's asserted good faith belief is not plausible if he ignores facts that place him on notice of a risk of misleading clients. The Court in remanding this proceeding recognized this when it said: "When warranted, the SEC is entitled to infer from circumstantial evidence that a defendant must have been cognizant of an extreme and obvious risk and reject as implausible testimony to the contrary." 35/ The Sundstrand court also emphasized the need to refer to external standards when it originally defined recklessness, 36/ and other courts have similarly identified the ultimate importance of objective measures in securities fraud cases. 37/

Unlike the examples given by the Sundstrand court in which the subjective component would preclude liability for objectively reckless misconduct, the Gebharts do not claim that they "genuinely forgot" to disclose material information, i.e., that their statements had no basis in fact. Rather, their claim is that they were not reckless because, even though they knew their representations were based primarily on Archer's assertions and the silence of others, they nonetheless thought that they had done enough. The Gebharts similarly argue that they were truly and completely unaware of the fraud that the principals of MHP were perpetrating, that they were victims themselves of that fraud, and that they therefore lacked scienter. As the Gebharts assert, "It is simply implausible to suggest that the Gebharts knew or suspected that MHP would be unable to repay these loans while, at the same time, loaning it money."

These arguments are insufficient. As discussed above, the Gebharts made no meaningful attempts to confirm the validity of their assertions to clients that the Notes would be fully secured. They made these unsupported representations to clients despite not knowing whether they were true or false and despite having several and varied reasons to doubt the truth of their own statements. Our de novo review of the evidence in this case therefore leads us to conclude that, contrary to the Gebharts' assertions, they must have known when they made their misrepresentations that their actions presented an unacceptable danger of misleading their clients.

Moreover, accepting arguendo that the Gebharts were unaware of MHP's fraud, this does not alter our conclusion: the Gebharts face liability not because they knew of or failed to discover MHP's fraud, but because they made specific representations to clients about the security of the Notes without taking any basic steps to verify the truthfulness of those representations. Even if the Gebharts were unaware of MHP's actual fraud, we conclude that they still must have known of the risk of misleading their clients given their extreme departure from the standards of ordinary care. The Gebharts are legally bound as knowing that the representations were false. 38/


Mission Securities Corporation and Craig Michael Biddick (Principal)
2006003738501/April 2011

The Securities and Exchange Commission (SEC) sustained the sanctions following appeal of a National Adjudicatory Council (NAC) decision. The sanctions were based on findings that the firm and Biddick converted and misused customer securities. The SEC affirmed the NAC’s findings that the firm and Biddick intentionally caused the transfer of securities from customers’ accounts to the firm’s account without any prior authorization from, or notification to, these customers. The findings also stated that the firm and Biddick then sold a portion of the converted shares and used some of the proceeds for the firm’s operating expenses.

Mission Securities Corporation: Expelled

Craig Michael Biddick: Barred

The Firm and Biddick were ordered to pay $38,946.06, plus interest, in disgorgement to firm customers.

Tags:  Expulsion    NAC     |    In: Cases of Note : FINRA
Bill Singer's Comment

FINRA NAC Decision (Feb. 24,2010) affirming Hearing Panel’s finding that respondents violated NASD Rules 2330 and 2110 by converting and misusing customer securities. Accordingly, the NAC agreed to (a) expel Mission; (b) bar Biddick in all capacities;33 (c) order that Mission and Biddick pay, jointly and severally, $38,946.06 in the amounts and to the customers identified on Exhibit A attached to this decision, plus interest at the rate established for the underpayment of income taxes in Section 6621(a) of the Internal Revenue Code, 26 U.S.C. § 6621(a), from September 30, 2005, until paid; and (d) order that respondents pay, jointly and severally, hearing costs of $2,078.60.

See, SEC Decision (December 7, 2010)

March 2011
M. Paul De Vietien
2006007544401/March 2011
Following De Vietien’s appeal of an Office of Hearing Officers (OHO) decision that barred him for participating in private securities transactions and outside business activities in violation of FINRA rules.
M. Paul De Vietien : Fined $16,000; Suspended 1 year
Tags:  NAC     |    In: Cases of Note : FINRA
Bill Singer's Comment
M. Paul De Vietien appeals the December 3, 2009, Hearing Panel decision, which found that he participated in private securities transactions and engaged in undisclosed outside business activities, in violation of FINRA’s rules. The Hearing Panel barred De Vietien for the violations. On review, the NAC affirmed the Hearing Panel’s fmdings, but eliminated the Bar, and imposed a 1 year suspension plus a fine of $16,000 for the private securities transactions and outside business activities.

Read the NAC 12/28/10 Decision at http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/nacdecisions/p122867.pdf

January 2011
CMG Institutional Trading LLC and Shawn Derrick Baldwin (Principal)
2008012026601/January 2011

CMG Institutional Trading LLC was expelled from FINRA membership and Baldwin was barred from association with any FINRA member in any capacity. The National Adjudicatory Council (NAC) imposed the sanctions following appeal of an Office of Hearing Officers (OHO) decision. The sanctions were based on findings that the firm, acting through Baldwin, failed to respond to FINRA requests for information and documents.

CMG Institutional Trading LLC: Expelled

Shawn Derrick Baldwin: Barred

Tags:  Expulsion    NAC     |    In: Cases of Note : FINRA
Vincent Patrick McCrudden (Principal)
2007008358101/January 2011
McCrudden induced his firm to file a false Form U5. The NAC found that McCrudden used a variety of tactics, including harassment and a monetary payment, to coerce his firm to file a Form U5, which mischaracterized his firing as a voluntary termination.
Vincent Patrick McCrudden (Principal): Fined $50,000; Suspended 1 year
Tags:  NAC     |    In: U4, U5, RE-3, Rule 3070
Bill Singer's Comment

McCrudden became subject to statutory disqualification when the CFTC issued its order affirming the NFA’s decision on December 28, 2006. He had no prior FINRA disciplinary history.

In reviewing his "voluntary" termination from a so-called hedge fund hotel, a FINRA examiner was troubled by the circumstances represented on the U5. The termination involved a dispute over purportedly unpaid commissions and disputed expenses.

In a particularly colorful portion of FINRA's OHO decision, we are told that:

Respondent responded to his termination with a string of profanity-laced, threatening communications. Sometime over the holiday weekend, he left a voice mail for Napolitani, saying substantially, "You mess with the wrong fucking guy, you fat bastard. You are a slimy scumbag. I have dealt with people like you before. You are not going to get away with this."

The threats and language from McCrudden may have been somewhat provoked by his former firm's conduct according to FINRA, but provoked or not, FINRA clearly deemed unjustified and unprofessional. Moreover, rather than an isolated incident, FINRA noted that such outbursts and threats ha a troubling history.  During an NFA investigation, the OHO Decision states that:

After a telephone call with the NFA official who denied the request, Respondent sent an e-mail to the official, saying:

I am coming out to Chicago and fucking getting you and your fucking prick friends…You think you can fuck with whoever you want mother fucker? look over your shoulder one day fucker…you mother fucking corrupt pieces of shit…you splash that corrupt, biased, fixed decision all over the internet so all of my friends and childrens friends can see? And you think I am going to let you, nastro and driscoll get away with it? think again..tell your buddies I’m coming…your not getting away with this shit.

In responding to FINRA staff investigating the U5 issue, we are told in the NAC decision that:

FINRA staff concluded its investigation of this matter in May 2007. At that time, the staff informed McCrudden that FINRA intended to initiate disciplinary proceedings against him. Upon learning the staffs recommendation, MeCrudden left voicemails for both the FINRA investigator and Enforcement attorney handling the matter:

Yeah . . . this is Vincent McCrudden . . . . Um, I just got off the phone with my attorney. You know you guys are flicking pieces of shit. You really are pieces of shit. Um, I want to know who you report to and obviously this is a set up. You know, I cooperated with the NASD and you guys are gonna fucking do this to me? You are fhclcing low life flicking scum bags. I want to know who you report to, I’m going to have you and [the investigator] flicking fired. There’s no way you guys are getting away with this. Somebody has set this up. There’s no way that you ban somebody and there’s no threat . . . . Give me your flicking superior’s number. And I want to know the guys who made this flicking decision. I want every flicking name, you got that? You scum bag.

Essentially, the OHO Decisions found that

[R]espondent’s communications violated the high standards of commercial honor required by participants in the securities industry. Respondent used his abusive and threatening communications to bargain for the money he felt he was owed and to improve the terms of his termination. He achieved one of his most important objectives by getting HedgeCap to agree to file a Form U5 that falsely reported that he had voluntarily resigned.

The OHO imposed  the following sanction:

For making abusive, intimidating, and threatening communications to his former employer, in violation of Rule 2110, Respondent is suspended for 30 business days and fined $10,000. For inducing the filing of a misleading and inaccurate Form U5 by his former firm, in violation of Rule 2110, Respondent is suspended for an additional five business days and fined an additional $2,500.

The NAC increased the sanctions to a $50,000 fine and a one-year suspension.

Copy of the NAC's October 2010 Decision: http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/nacdecisions/p122283.pdf

Copy of the OHO October 2009 Decision:


Enforcement Actions