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.
Scott David McElhenny (Principal) AWC/2009020124301/December 2011
McElhenny applied one investment model in numerous customersí
accounts by executing
thousands of trades on a group basis in a variable annuity
platform offered by one
company and a mutual fund platform offered by another company.
McElhenny could place
one trade, which was not individualized for each of his customers,
and that trade would be
processed for all of his customers that were part of the trading
group. The group trading
executed by McElhenny in his customersí accounts involved inverse
and leveraged funds.
McElhenny engaged in such trading without
grounds for believing that the recommendation was suitable for
each of his customers in
light of their individual investment objectives, financial
situation and needs. As a result
of McElhennyís recommendations, the customers sustained a
collective loss exceeding $1
million. McElhenny exercised
discretion in the customersí
accounts without each customerís written authorization and his
member firmís acceptance
of the accounts as discretionary. McElhenny executed more
than one hundred unauthorized securities transactions in one
Byron Edward Meyer AWC/2011026619801/November 2011
Meyer verbally informed his supervisors of his outside business activities and his business plans, but failed to provide his firm with prompt written notice of his outside business activities, for which he accepted compensation. Without his relativeís knowledge, Meyer conducted subaccount transfers, or transactions, in an Individual Retirement Account (IRA) the relative held to his personal account, which held only a variable annuity contract. The annuity sub-account transactions reduced the value of the variable annuity contract by $1,395.15 by the time the account was formally transferred to his relative.
Meyer transferred $1,800 from the relativeís IRA to his personal bank account. The firm immediately reversed the transaction as well as reimbursed Meyerís relative $1,395.15 for the accountís reduction in value caused by Meyerís transactions. Meyer has made full restitution to the firm.
Byron Edward Meyer: Fined $12,500; Suspended 25 business days
Michael Ray Howard (Principal) OS/2008012282901/November 2011
that a customer have her trust purchase a $500,000 variable annuity that would
make payments to her heirs.
Purportedly, the purchase of the $500,000 annuity, issued by an
insurance company, would provide the customerís heirs with a monthly income
until a certain age. The customer advised Howard that
she owned rural real estate, which was held in the trust, and she believed that
the property could be sold following her death realizing sale proceeds of
Howard arranged for the
trust to borrow $500,000 from a bank using the real estate as collateral for
the loan and using the proceeds to purchase the variable annuity. The trust had
to encumber virtually all of its major assets to secure the loan, including the
underlying variable annuity, because the market value of the property was only
$375,000. Howard received $38,526.86 in
commission for his sale of the variable annuity to the customer.
found that Howard knew, or should have known, that the cost of the annuity far
exceeded the appraised market value of the real estate and the customerís
liquid assets, and that the customer could not pay for the variable annuity he
recommended without borrowed funds secured in part by the annuity itself. Howard did not have a reasonable basis for believing that his
recommendation was suitable for the customer in light of her financial
circumstances and needs; Howardís recommendation exceeded the customerís
financial capability and exposed her to material risk. In addition, Howard completed the account documents and paperwork for the
customerís purchase of the variable annuity, including the variable annuity
questionnaire, with false information about the trustís net worth and source of
funds. Further, he provided the completed questionnaire containing the false
information about the trustís financial situation to his member firm, and the
firm retained the document in its records. Moreover, in
reviewing and approving the annuity sale, Howardís supervisor reviewed the
variable annuity questionnaire; Howard thus caused the firmís books and records
to be inaccurate and impeded supervision of the annuity sale.
Michael Ray Howard (Principal): Fined $40,000; suspended 6 months
Rosas wrongfully converted a customerís funds totaling $14,000 for his personal use by submitting withdrawal requests he forged to his member firm and an annuity company without the customerís knowledge or consent. Rosas completed and forged other customersí signatures on variable annuity withdrawal forms and submitted them to annuity companies, without the customersí knowledge or consent, in an effort to convert funds totaling $45,000 from the customersí variable annuity accounts for his personal use.
As indicated on these forms, the funds were to be made payable to a limited liability company for which Rosas was the president and CEO. One of the annuity companies cancelled the withdrawal requests and the other annuity company placed stop payments on the checks that were issued.
Brian Scott Brewer (Principal) OS/2005002244102/September 2011
Brewer failed to adequately supervise a registered representativeís variable annuity sales activities.
Brewer personally reviewed and approved variable annuity switches of the registered representativeís customers despite the misstatements and omissions on the switch forms and numerous red flags revealing that the transactions were unsuitable. After becoming aware of the inaccurate information and omissions contained in the forms the registered representative submitted, Brewer did not require that all of the deficiencies be corrected on his member firmís books and records and that customers be presented with forms that were completely accurate. At no time did Brewer take any action to reverse the transactions the registered representative had already effected, nor did he take any actions to prevent the registered representative from completing additional unsuitable switches.
Brewer was responsible for replying to the audit reports and implementing adequate systems and procedures relating to the supervision of variable annuities at his firm; although he was made aware of issues in the variable annuities sales review process cited by the firmís Audit Division, he failed to take adequate steps to correct the identified failings. Brewer failed to maintain an adequate system of supervision and follow-up review, and failed to maintain and enforce written procedures reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules in connection with the sale of variable annuities.
Brian Scott Brewer (Principal): Fined $20,000; Suspended 12 months in Principal capacity only
Richard Barry Holody AWC/2010022152201/September 2011
Holody sold equity-indexed annuities (EIAs) to individuals, through insurance companies, with investments totaling approximately $1,002,555, without providing prompt written notice to his member firm; none of these individuals were customers of his firm. Holody received commissions of approximately $79,594.34 from these sales.
The firm prohibited its representatives from selling EIAs not on the firmís approved product list; the annuities Holody sold were not on the approved product list and his acceptance of compensation for the sales constituted engaging in an outside business activity.
Holody recommended that a retired individual liquidate some variable annuity contracts and transfer the proceeds to purchase an EIA an insurance corporation issued. Holody processed all of the paperwork on the individualís behalf to effect the variable annuity contract liquidations to purchase the EIA contract, and the insurance corporation issued a nine-year term EIA contract in the approximate amount of $253,997.37. As a result of these transactions, the individual lost approximately $49,604 in enhanced guaranteed death benefits available under the variable annuity contracts that the individual could never recover. In addition,the insurance corporation EIA contract was also not beneficial to the individual since the variable annuity contracts offered the individual other more favorable features. Moreover, based on the individualís disclosed investment objectives of guaranteed returns on his retirement assets and to provide for his beneficiaries, and the individualís financial situation and needs, Holody lacked reasonable grounds to believe that liquidating the variable annuities to generate funds for the purchase of the EIA contract was suitable for the individual.
Richard Barry Holody: Fined $10,000; Suspended 4 months
Searle & Co. and Robert Southworth Searle (Principal) AWC/2009016262101/September 2011
Although the Firm sought and received permission to conduct its private placement activity, it failed to timely amend its Application for Broker-Dealer Registration (Form BD), as it did not identify this business on its Form BD until years later.
Acting through Searle, the Firmís president and CCO failed to establish, maintain and enforce an adequate system and written procedures reasonably designed to supervise its placement business; and failed to adequately supervise the placement business conducted by a former registered representative who conducted firm business at an unregistered office. The Firm failed to adequately ensure that its ledgers or other records accurately reflected all of the firmís assets, liabilities, income and expenses. The Firm impermissibly ďnettedĒ the commission revenue it received, failing to reflect the gross amount of commission the firm received and the amount paid to the registered representative who placed the business, thus understating gross revenues and expenses. As a result, the Firm filed inaccurate Financial and Operational Combined Uniform Single (FOCUS) Reports and inaccurate annual audits.
The Firm failed to establish, maintain and enforce adequate WSPs regarding the use of outside emails for firm business and the review and retention of emails; the firm permitted associated persons to use personal email accounts to send and receive emails related to the firmís securities business without capturing, reviewing or retaining them.
In addition, the Firm paid fees and commissions totaling $21 million to non-registered limited liability company (LLC) entities of which the firmís registered representatives were the sole members. Moreover, the Firm improperly paid the non-registered entities rather than paying the commissions and fees directly to the registered representatives who owned the non-registered entities. The suspension was in effect from August 15, 2011, through August 26, 2011. (FINRA Case #)
Searle & Co.: Censured; Fined $47,500 ($10,000 was jointly and severally with Searle)
Robert Southworth Searle: Fined $10,000 joint/several with Searle & Co.; Suspended 10 business days in Principal capacity
Terry Tin Sing Tang (Principal) AWC/2010021897401/September 2011
Tang opened an account at his member firm on customersí behalf based upon the representations of a registered representative at another FINRA member firm, although Tang never met or spoke directly with the customers. Instead, all of Tangís communications with the customers were through the registered representative.
Tang caused a variable annuity, in the amount of $532,874.02, to be purchased in the customersí account based upon an order from the registered representative, for which Tang received $28,775.20 in net commission for the transaction but his firm never granted him authority to place third-party orders in the customersí account.
Tang failed to notify his firm that a third-party placed a variable annuity order and failed to obtain the firmís approval to cause this third-party order to be executed in the customersí account.
Terry Tin Sing Tang (Principal): Fined $33,775.20 (includes $28,775.20 disgorgement of commissions); Suspended 10 business days.
Tieger convinced his junior partner to call an annuity company and impersonate his relative for the purpose of confirming a $275,000 withdrawal from one of the relativeís variable annuity contracts.
The relative attempted to make a distribution from his variable annuity and after growing frustrated with the withdrawal process, instructed Tieger to take care of it. After multiple requests, Tiegerís junior partner agreed to make the telephone call using the relativeís cellular phone, spoke to the annuity company representative and, pretending to be Tiegerís relative, asked the representative to process the contract withdrawal. The junior partner answered the representativeís questions by reading from a script that Tieger had prepared. Tieger watched the junior partnerís call from outside a glass conference room.
After Tieger left the office building, the junior partner called the representative back to inform him that he was not the relative and that he had called because someone standing next to him asked him to impersonate the relative.
David Lewis Tieger : Fined $5,000; Suspended 30 business days
Scott Davis Johnson (Princiipal) AWC/2009018077101/June 2011
Johnson was employed with a state-registered investment adviser company and after learning that performance values being reported in monthly statements to investors were inconsistent with actual performance figures to investors, he continued to forward monthly statements to investors when requested to do so. After discovering that the gain/loss values reported in the monthly statements were inconsistent with actual performance of the funds, Johnson questioned the investment adviser companyís president, who falsely stated that the statements reflected personal monetary contributions he made to the funds in the form of waived management fees. Johnson continued to forward the statements to investors without informing the recipients that the performance values represented ďadjustedĒ values, and without attempting to confirm whether the investment adviser companyís president was actually making monetary contributions.
Scott Davis Johnson (Princiipal): Fined $5,000; Suspended 4 months
TradeStation Securities, Inc. AWC/2010023770401/May 2011
The Firm proceeded with new business operations prior to obtaining FINRA approval. The firm filed an Application for Approval of Change of Business Operations to move its futures business operations from fully-disclosed clearing to omnibus clearing operations, and while it requested expedited processing of its application, it did not wait for approval before commencing omnibus clearing.
FINRA notified the firm by letter that it had conducted an initial review of the application and requested additional information regarding the firm and the proposed change in business operations. The firm provided the requested information to FINRA by letter, in which it notified FINRA that it made the required net capital increases and went live with its omnibus arrangement although FINRA had neither concluded its review of the application nor granted the firmís request for provisional approval to effect the change from fully disclosed to omnibus clearing operations.
At the time the firm was undergoing the approval process for its application, the firm was also contemplating a change in its business operations to prime brokerage. The firm informed FINRA that prior to conducting any full scale prime brokerage business, it intended to submit a separate Rule 1017 application. In addition, the firm submitted another Application for Approval of Change of Business Operations requesting approval to conduct prime brokerage business, which FINRA approved, although the firm had been engaging in unapproved prime brokerage activity prior to approval.
TradeStation Securities, Inc. : Censured; Fined $15,000
UVEST Financial Services Group, Inc. AWC/2008012048601/May 2011
The Firm allowed registered representatives to operate registered investment advisory (RIA) programs not affiliated with the firm. These RIA programs were operated by firm registered representatives who were dually registered as representatives and RIAs. The RIA programs maintained accounts away from the firm and had assets under management of over $350 million. The dually registered representatives who operated these RIA programs participated in the execution of securities transactions, through broker-dealers other than the firm, involving mostly equity investments. Because the firm viewed these RIA programs as outside business activities, the firm did not comply with its obligations under NASD Rule 3040 with regard to the RIA programs, including complying with supervisory obligations and the obligation to record the transactions on the firmís books and records. The firm failed to record the transactions executed away from the firm in its books and records as required by NASD Rule 3040; failed to supervise registered representative/investment adviser (RR/IA)sí participation in the securities transactions executed through brokerdealers other than the firm; and failed to establish, maintain and enforce a supervisory system to supervise the RR/IA activities reasonably designed to provide an understanding of the nature of the services provided by its RR/IAs, the scope of each RR/IAís authority, and the suitability of the transactions in which the RR/IA participated. In addition, the firm did not have WSPs to specifically address supervision of the securities activities of outside RIAs until a later date.
UVEST Financial Services Group, Inc. : Censured; Fined $75,000
Roger Craig Fulton (Principal) AWC/2009018041101/March 2011
Fulton submitted a variable annuity application and other documents to his member firm knowing that they contained falsified customer signatures. Fulton recommended that a customer switch a variable annuity he owned for another variable annuity, which had advantageous riders. The customer agreed to the switch, but Fulton agreed to delay the switch until market conditions improved.
Fulton determined that market conditions were appropriate for the switch on a certain date, but the customer was out of town on an extended trip at that time. Fulton and the customer then agreed that the customerís relative would sign the customerís name to the variable annuity application and the other documents necessary to complete the switch transaction, which she did with Fultonís knowledge. Fulton then submitted the annuity application and other documents the relative falsely signed to his firm as authentic, knowing that the customerís signature on the documents was not authentic. In addition, Fultonís submission of the falsified application and other documents to his firm caused the firmís books and records to be inaccurate.
Roger Craig Fulton (Principal): No fine in light of financial status; Suspended 3 months
Benjamin Harry Cohen AWC/2009017087301/February 2011
Cohen violated FINRAís suitability rule by failing to understand or convey to customers the cost of a rider to a variable annuity, pursuant to transactions he recommended to customers. Cohen incorrectly communicated the imposed fee. Cohen did not understand the risks and rewards inherent in the variable annuity, with the rider feature, which he recommended to the customers.
Cohen conducted a trade in a deceased customerís account with a purchase of $4,662 of an entity Class A mutual fund share. Cohen had discussed with this customer purchasing the entityís Class A shares prior to the customerís passing, and he had prepared certain paperwork for the transaction prior to the customerís death, but the purchase had not been made at the time of the customerís death. At the time of the transaction, Cohen did not consult with any representative of the deceased customerís estate and also did not notify the firm that the customer had passed away.
In addition, Cohen failed to appear for a FINRA on-the-record interview.
Christopher Gregory Gibas (Principal) AWC/2005002244703/February 2011
Gibas failed to reasonably supervise a registered representative at his member firm by approving variable annuity transactions the representative recommended and affected; in approving these transactions, Gibas did not adequately respond to red flags that should have alerted him that the transactions were unsuitable.
Gibasí firm placed the representative under heightened supervision, which was formalized by a written agreement the representative and Gibas signed, and under the agreement, Gibas was required, among of things, to pre-approve all the representativeís annuity business and new accounts, to speak with each of the representativeís customers who were 65 or older, and to help the representative diversify her business.
With respect to the variable annuity transactions, they were unsuitable, in that the transactionsí costs outweighed the benefits, and in some of those transactions, the customers purchased a rider for which they were not eligible. At the time Gibas approved these transactions, there were numerous red flags regarding the representativeís variable annuity transactions, including transactions appearing on exception reports, that should have alerted him to the potential unsuitability of her transactions and required follow-up more comprehensive than Gibas otherwise took. Gibas did not adequately carry out his other responsibilities under the firmís heightened supervision of the representative; although Gibas reviewed the representativeís transactions and contacted certain elderly customers before those transactions were affected, some of the conversations with the representativeís customers lasted only a few minutes, were conducted when the representative was present, or before Gibas received any paperwork regarding the proposed transaction. While Gibas met with the representative, as well as with other supervisory and compliance personnel at the firm, none of the steps taken proved effective in preventing the representativeís unsuitable sales.
Christopher Gregory Gibas (Principal): Fined $10,000; Suspended 5 months in Supervisory/Principal capacities only
Cynthia Ann Bulinski AWC/2005002244704/February 2011
Bulinski made unsuitable recommendations to her elderly clients to purchase variable annuities. She repeatedly failed to tailor her recommendations to meet her customersí individual investment needs, and instead recommended the same variable annuity to her customers, irrespective of age, investment experience, liquidity needs, financial situation and risk tolerance.
Bulinski recommended that elderly customers purchase the same variable annuity with an enhanced death benefit rider, but demonstrated that she did not have reasonable basis for her recommendation because some of the customers were too old to purchase the rider and the rest gained little, if any, benefit from the rider while paying a substantial cost for it. Bulinski recommended unsuitable variable annuities with a rider that was inconsistent with her customersí investment objectives. In numerous instances, Bulinski demonstrated that she did not understand the variable annuity and inaccurately described the investment to a customer as a fixed annuity rather than a variable annuity, and with other customers, incorrectly stated the surrender period and surrender charges her customers would incur.
Bulinski was the subject of several written customer complaints about her lack of disclosure about surrender charges and other product details.
Resource Horizons Group LLC AWC/2009017637201/February 2011
The Firm approved advertising materials registered representatives used during several public seminars; the firm sent invitations to members of the public, and the seminar attendees received supplemental materials designed to introduce the firm and the financial services it offered. The invitations failed to provide a sound basis for evaluating the facts regarding the products or services offered. The supplemental materials contained exaggerated and unwarranted language, and the seminar handout had unwarranted language.
The seminar presentations failed to explain a product or strategy. The discussion of equity-indexed annuities (EIAs) failed to provide a balanced presentation and omitted information. The discussion of variable annuities omitted material information.
The presentations failed to disclose
that projections are hypothetical and are not guarantees,
risks attendant with options transactions, and
risks and rewards of real estate investment trusts (REITs) in a balanced way.
The discussion of expenses pertaining to mutual funds and variable annuities was misleading; discussion of annuities in Individual Retirement Accounts (IRAs) was misleading.
The list of benefits and features of variable annuities failed to disclose potential restrictions and costs, discussion of 1031 exchanges failed to elaborate on Internal Revenue Code restrictions. The discussion of variable annuities provided an incomplete, and oversimplified presentation and representation that safety and protection are provided by diversification market index certificates of deposit, puts, and living benefits profits provided by variable annuities was promissory and exaggerated.
The firm failed to reasonably supervise its communications with the public and its supervision was not reasonably designed to meet the requirements of FINRA Rule 2210(b)(2). The firmís procedures required the supervisory principal to evidence approval by signing public communications submitted for approval and use, but the supervisory principal only initialed a coversheet that did not identify which communication was approved. In addition, the firm failed to maintain records naming the registered principal who approved the public communication or the date approval was given, nor documentation establishing that a certified registered options principal approved options material or that the material had been properly submitted to FINRAís Advertising Regulation Department for pre-approval.
Resource Horizons Group LLC : Censured; Fined $15,000
Thomas Jones Charles Jr. 2008016036901/February 2011
Charles sold variable universal life insurance products to his member firmís customers and after leaving the firm, Charles remained the assigned representative on the accounts and received modest annual ďtrailing commissions.Ē Charlesí former firm asked him to pay a ďsingle appointmentĒ fee of $100 to the firm or submit customer-signed ďTelephone or Electronic Transaction AuthorizationĒ forms for him to continue to service the customersí accounts. Charles chose to do neither, but when he realized the deadline was approaching, he signed the customersí names on the authorization forms without the customersí permission and sent them to the firm via facsimile.
One of the customers complained that Charles had not being authorized to sign her name on the authorization form; therefore, Charlesí former firm notified Charles and his present firm of the customerís allegation and asked Charles for a written explanation. During Charlesí present firmís investigation into the complaint, he made misstatements, verbally and in writing, to the firm, denying forging the signatures and fabricating a story to prevent the firm from discovering his misconduct. Also, Charles subsequently admitted to the firm that his alibi was false and that he signed the customersí names without authorization.
Thomas Jones Charles Jr. : Fined $35,000; Suspended 1 year
Trende falsified Federal
Reserve forms with
respect to customers and caused his firm to maintain false books
and records by providing
false information on Purpose Statements and submitting them to the
A Stock-to-Cash program was designed to help customers
of insurance agents
fund purchases of fixed annuity and fixed life insurance products; however, loan documents and
federal regulations prohibited investment of the loan proceeds in
margin securities and from investing in variable
annuities. As part of the
Stock-to-Cash loan process, Trende was required to provide a
Purpose Statement setting
forth the intended use of proceeds, in order to ensure compliance
with Federal Reserve
Board regulations restricting the extension of margin credit.
Trende had general discussions
with the customers who agreed to borrow approximately $180,000
concerning the possible
uses of the loan proceeds, but no decisions were made about how to
use the funds until
after the proceeds were received so real estate was written on the
Purpose Statement as
the specific purpose of the loan.
The customers did not use
the proceeds for the stated purpose of purchasing real estate;
they used more than 50
percent of the proceeds of the Stock-to-Cash loan to purchase a
variable annuity from an
entity, with Trende as their broker, and used the remainder of the
proceeds to purchase an
equity-indexed annuity, again through Trende, and to pay some
The firm received
a commission from the annuity sales, and Trende received a payout
from the firm.
Another of Trendeís customers agreed
to borrow approximately
$100,000 through the Stock-to-Cash program. In connection with
this customerís loan,
Trende completed a Purpose Statement for the customerís signature,
which stated that
the credit was going to be used for real estate. When the customer
signed the Purpose
Statement, he had discussed several options for the use of the
proceeds with Trende, but
had not determined how he would ultimately use the loan proceeds
but did not use the
proceeds to purchase real estate. The customer signed an
application to purchase a variable
annuity, with Trende as the broker, with most of the proceeds from
the Stock-to-Cash loan;
the firm received a commission from the annuity sale, and Trende
received a payout from
the firm. FINRA found that both customers profited on their
investments in the securities
that they bought for participation in the Stock-to-Cash program
and posted as collateral
for their loans.
Trende was well aware that
his customers had not
decided how to use the money at the time the Purpose Statements
were signed. Trendeís
conduct was unethical and reflects negatively on his commitment to
compliance with the
securities industryís regulatory requirements.
David William Trende : Fiend $10,000; Suspended 3 months.
Kruse entered into a settlement agreement regarding a customer complaint without authorization from, and without notifying, his member firm.
Kruse sold a customer a variable life insurance policy which required payment of monthly premiums by automatic withdrawal from the customerís bank account. Thereafter, the customer complained to Kruse that he had not been aware of the monthly withdrawals from his bank account and about the performance of the policy. The customer threatened to direct his complaint to the state insurance commissioner if Kruse did not resolve the situation to his satisfaction; Kruse then paid the customer $4,000 to settle the complaint.
Leslie David Kruse: Fined $5,000; Suspended 10 business days
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