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.
Internet Securities and Michael Wayne Beardsley (Principal) AWC/2009020930302/December 2011
Beardsley was a registered
representativeís direct supervisor who was responsible for reviewing
and approving the
representativeís securities transactions, but failed to exercise
reasonable supervision over
the representativeís recommendations of exchange-traded funds
(ETFs) in customersí
accounts, thereby allowing the representative to conduct numerous
As the firmís chief
compliance officer (CCO), Beardsley
was responsible for ensuring that the firm filed all necessary
Uniform Applications for
Securities Industry Registration or Transfer (Forms U4), Uniform
Termination Notices for
Securities Industry Registration (Forms U5) and Rule 3070 reports.
The Firm and Beardsley failed to timely amend Beardsleyís
Form U4 to disclose the
settlement of an arbitration against him, the firm and the
registered representative; the
firm failed to timely amend a registered representativeís Form U5
to disclose settlement of
the arbitration; and the firm and Beardsley failed to timely
report the settlement to FINRAís
The Firm and
Beardsley failed to establish and
maintain a supervisory system reasonably designed to achieve
compliance with applicable
securities laws, regulations and FINRA rules as they pertain to
private placements. The
firm and Beardsley failed to conduct investigations of offerings
for suitability but relied
on information the registered representative who proposed selling
the offering provided;
never reviewed issuersí financials, nor attempted to obtain
information about the issuers
from any third parties; failed to maintain documentation of their
a registered representative to draft selling agreements with
offerings which allowed the
issuer to make direct payment to an entity the representative, not
the firm, owned,; failed
to implement supervisory procedures to ensure compliance with SEC
Exchange Act Rule
15c2-4(b); and failed to implement supervisory procedures to
prevent general solicitation of
investments in connection with offerings made pursuant to
The Firmís written procedures required Beardsley
to obtain and review, on
at least an annual basis, a written statement from each registered
representative about his
or her outside business activities; despite the fact that several
were actively engaged in outside business activities, Beardsley
failed to obtain any such
For almost a three-year
period, Beardsley did not
request any duplicate statements of outside securities accounts
firm employees held; he
neither requested nor obtained any written notifications from firm
their actual or anticipated outside securities activities. In
addition, the Firm and Beardsley failed to implement an adequate system of
policies and procedures regarding testing supervisory procedures
for compliance, erroneous
criteria for identifying and supervising producing managers, including
and monitoring transmittal of funds or securities, customer
changes of address, customer
changes of investment objectives, and concomitant documentation
for its limited size and
resources exception in FINRA Rule 3012. Moreover,he firm and Beardsley completed an annual certification in which Beardsley certified
that he had reviewed a
report evidencing the firmís processes for establishing,
maintaining and reviewing policies
and procedures reasonably designed to achieve compliance with
applicable FINRA rules,
Municipal Securities and Rulemaking Board (MSRB) rules and federal
and regulations; modifying such policies and procedures as
business, regulatory and
legislative changes and events dictate; and testing the
effectiveness of such policies and
procedures on a periodic basis, the timing and extent of which is
reasonably designed to
ensure continuing compliance with FINRA rules, MSRB rules and
federal securities laws and
regulations. In fact, the report did not evidence any processes
for testing the effectiveness
of such policies, and no such testing was done.
Furthermore, on the firmís behalf, Beardsley executed an engagement
letter committing the firm to serve as a placement agent for an
issuer of limited
partnership units. The letter, which a registered representative
of the firm drafted, falsely
represented that the firm was not a registered broker-dealer.
The Firm and Beardsley failed to enforce the firmís Customer
Identification Program (CIP) in
that they completely failed to verify four customersí identities.
The Firm and Beardsley failed to conduct a test of the firmís
(AML) compliance program for a calendar year. FINRA found that the
firm conducted a
securities business while failing to maintain its required minimum
Internet Securities: Censured; Fined $12,500; Required to retain an outside consultant to review and prepare a report concerning the adequacy of the firmís supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firmís size, including, among other things, the firmís revenues and financial resources.
Michael Beardsley: No fine in light of financial status: Suspended 1 year in Principal capacity only
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
Brookstone Securities, Inc.,David William Locy (Principal),Mark Mather Mercier (Principal), and Antony Lee Turbeville (Principal) OS/2009017275301/November 2011
While associated with the firm, registered representatives made misrepresentations or omissions of material fact to purchasers of unsecured bridge notes and warrants to purchase common stock of a successor company.
The registered representatives:
guaranteed customers that they would receive back their principal investment plus returns, failed to inform investors of any risks associated with the investments and did not discuss the risks outlined in the private placement memorandum (PPM) that could result in them losing their entire investment. The registered representatives had no reasonable basis for the guarantees given the description of the placement agentís limited role in the PPM; and
provided unwarranted price predictions to customers regarding the future price of common stock for which the warrants would be exchangeable and guaranteed the payment at maturity of promissory notes, which led customers to believe that funds raised by the sale of the anticipated private placement would be held in escrow for redemption of the promissory notes.
The Firm, acting through a registered representative, made misrepresentations and/or omissions of material fact to customers in connection with the sale of the private placement of firm units consisting of Class B common stock and warrants to purchase Class A common stock; the PPM stated that the investment was speculative, involving a high degree of risk and was only suitable for persons who could risk losing their entire investment. The representative represented to customers that he would invest their funds in another private placement and in direct contradiction, invested the funds in the firm private placement.
The Representative recommended and effected the sale of these securities without having a reasonable basis to believe that the transactions were suitable given the customersí financial circumstances and conditions, and their investment objectives. The representative recommended customers use margin in their accounts, which was unsuitable given their risk tolerance and investment objectives, and he exercised discretion without prior written authorization in customersí accounts.
Acting through Locy, its chief operating officer (COO) and president, the Firm failed to reasonably supervise the registered representative and failed to follow up on ďred flagsĒ that should have alerted him to the need to investigate the representativeís sales practices and determine whether trading restrictions, heightened supervision or discipline were warranted. Moreover, despite numerous red flags, the firm took no steps to contact customers or place the representative on heightened supervision, although it later placed limits only on the representativeís use of margin. The firm eventually suspended his trading authority after additional large margin calls, and Locy failed to ensure that the representative was making accurate representations and suitable recommendations.
Turbeville, the firmís chief executive officer (CEO), and Locy delegated responsibility to Mercier, the firmís chief compliance officer (CCO), to conduct due diligence on a company and were aware of red flags regarding its offering but did not take steps to investigate.
Acting through Turbeville, Locy and Mercier, the Firm failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability; under the firmís written supervisory procedures (WSPs), Mercier was responsible for ensuring the offering complied with due diligence requirements but performed only a superficial review and failed to complete the steps required by the WSPs; Locy never evaluated the companyís financial situation and was unsure if a certified public accountant (CPA) audited the financials, and no one visited the companyís facility. Neither Turbeville nor Locy took any steps to ensure Mercier had completed the due diligence process. Turbeville and Locy created the firmís deficient supervisory system; the firmís procedures were inadequate to prevent and detect unsuitable recommendations resulting from excessive trading, excessive use of margin and over-concentration; principals did not review trades or correspondence; and the firmís new account application process was flawed because a reviewing principal was unable to obtain an accurate picture of customersí financial status, investment objectives and investment history when reviewing a transaction for suitability. The firmís procedures failed to identify specific reports that its compliance department was to review and did not provide guidance on the actions or analysis that should occur in response to the reports; Turbeville and Locy knew, or should have known, of the compliance departmentís limited reviews, but neither of them took steps to address the inadequate system.
Brookstone Securities, Inc.: Censured; Fine $200,000
David William Locy (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only
Mark Mather Mercier (Principal): Fined $5,000; Suspended from 3 months in Principal capacity only
Antony Lee Turbeville(Principal): Fined $10,000; Suspended from 3 months in Principal capacity only
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
J.P. Turner & Company, LLC and James Edward McGrath (Principal) OS/2009016612701/November 2011
McGrath failed to reasonably supervise a registered representative who recommended and effected unsuitable and excessive trading in a customerís account. McGrath had supervisory responsibility over the registered representative and was responsible for reviewing his securities recommendations to ensure compliance with member firm procedures and applicable securities rules. McGrath failed to reasonably supervise the registered representative by, among other things, failing to enforce firm account procedures and failing to respond to red flags regarding the registered representativeís trading activity in the customerís account.
The firmís supervisory procedures required McGrath to review account transactions, such as the registered representativeís recommended transactions in the customerís account, on a daily and monthly basis for, among other things, general suitability, excessive trading and churning, in-and-out trading and excessive commissions and fees; the firmís procedures also required that McGrath review all exception reports related to the individuals who he supervised and take appropriate measures as necessary. Through these required reviews, McGrath was aware of red flags of possible misconduct in the customerís account, including frequent short-term trading, excessive commission and margin charges, high turnover and cost-to-equity ratios, and substantial trading losses, and the account frequently appeared on the firmís exception reports; McGrath failed to reasonably respond to and address the red flags in the customerís account.
McGrath never spoke with the customer despite the fact that the firmís compliance department sent several emails to McGrath advising him that the customerís account needed customer contact as required by the firmís WSPs; McGrath never spoke with the customer directly to confirm that he was aware of the activity level in his account or that such activity was appropriate in light of his financial circumstances and investment objectives.
McGrath failed to ensure that an Active Account Suitability Supplement and Questionnaire was sent to the customer within the time frame the firmís WSPs required. Moreover, months after the registered representative began trading in the customerís account, McGrath instructed the registered representative to curtail the short-term trading in the account and hold positions for a longer period; that was the only time McGrath spoke to the registered representative about the customerís account. Furthermore, McGrath reduced the registered representativeís commissions for purchases in the customerís account, but this measure did not have the desired impact; the registered representative actually increased the number of purchases and frequency of short-term trading to offset the effects of the commission reduction until the customer closed the account after suffering losses of approximately $120,000.
McGrath failed to take any action against the registered representative based on his failure to comply with his instructions; among other things, McGrath never restricted the trading in the customerís account, spoke to the customer, placed the registered representative on heightened supervision, recommended disciplinary measures against him to address these concerns, or spoke with the firmís compliance department regarding the supervision of the registered representative. The firm allowed the registered representative to effect transactions in the customerís account for months without obtaining a signed and completed new account form from the customer, and failed to enforce its review of active accounts as the WSPs required. The firm failed to send a required suitability questionnaire to the customer until almost a year after the account had been opened and suffered significant losses, failed to qualify his account as suitable for active trading and failed to perform a timely quarterly review of the account.
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
Steven Krasner aka Steven Zarkhin AWC/2009019995901/November 2011
Krasner made unsuitable recommendations to a
customer who was a retiree and inexperienced investor.
Although the customer agreed to each of Krasnerís recommendations, Krasner
employed a trading strategy that was not suitable for the customerís particular
financial situation. The customer had indicated in account opening documents that
he had an investment objective of capital preservation and a low risk
Krasner recommended the use of margin
to execute trades in the customerís account and at times exposed the customer
to inappropriate financial risk. Krasner never
read the customerís account opening documents, though they were available to
him, and was unaware of the customerís financial situation and risk tolerance,
as stated in the account opening documents.
Krasnerís member firmís database and computer platform that he used
to place trades, as well as the account statements that were mailed to the
customer each month, inaccurately indicated that the investment objective was
speculation. In his conversations with the customer, Krasner never confirmed
the accuracy of the investment objective. Krasner
employed a short-term and speculative trading strategy of short selling stock
and using margin. Since Krasner was not
fully aware of the customerís stated financial condition, he based his
recommendations on the erroneous view that the customer could absorb the high
risks of these transactions.
The customer frequently
spoke with Krasner on the phone, gave Krasner express permission to execute the
recommended trades and informed Krasner that he was willing to engage in some
speculation. Furthermore, Krasner based his recommendations on
his conversations with the customer and the firmís inaccurate database, not the
accurate financial information that was contained in the account opening
Krasner executed solicited trades in
the customerís account, while charging the account $51,790 in commissions and
fees. Although several of the individual trades were profitable, including
commissions, the customerís account lost $54,160 in net value, dropping from a
net equity value of $162,571 to $108,410.
Steven Krasner aka Steven Zarkhin : Fiend $10,000; Ordered to disgorge to a customer $18,126.81 (payable as partial restitution); Suspended 2 months
Capital Financial Services, Inc. AWC/2009019125903/October 2011
The Firm failed to have reasonable grounds to believe that private placements offered by two entities pursuant to Regulation D were suitable for any customer.
The Firm began selling the offerings for one entity after its representatives visited the issuerís offices to review records and meet with the issuersí executives; the firm also received numerous third-party due diligence reports for these offerings but never obtained financial information about the entity and its offerings from independent sources, such as audited financial statements.
Despite the issuerís assurances, the problems with its Regulation D offerings continued; the issuer repeatedly stated to the firmís representatives that the interest and principal payments would occur within a few weeks, and the issuer made some interest payments but failed to pay substantial amounts of interest and principal owed to its investors, and these unfulfilled promises continued until the SEC filed its civil action and the issuerís operations ceased.
In addition to ongoing delays in making payments to its investors, the firm received other red flags relating to the entityís problems but continued to allow its brokers to sell the offering to their customers; in total, the firmís brokers sold $11,759,798.01 of the offering to customers.
Despite the fact that the firm received numerous third-party due diligence reports for the other entitiesí offering, it never obtained financial information about the issuer and its offerings from independent sources, such as audited financial statements, and although it received a specific fee related to due diligence purportedly performed in connection with each offering, the firm performed little due diligence beyond reviewing the private placement memoranda (PPM) for the issuerís offerings. The firmís representatives did not travel to the entityís headquarters to conduct any due diligence for these offerings in person and did not see or request any financial information for the entity other than that contained in the PPM.
The Firm obtained a third-party due diligence report for one of the offerings after having sold these offerings for several months already; this report identified a number of red flags with respect to the offerings. Moreover, the firm should have been particularly careful to scrutinize each of the issuerís offerings given the purported high rates of return but did not take the necessary steps, through obtaining financial information or otherwise, to ensure that these rates of return were legitimate, and not payable from the proceeds of later offerings, in the manner of a Ponzi scheme. Furthermore, the firm also did not follow up on the red flags documented in the third-party due diligence report; even with notice of these red flags, the firm continued to sell the offerings without conducting any meaningful due diligence.
The Firm failed to have reasonable grounds for approving the sale and allowing the continued sale of the offerings; even though the firm was aware of numerous red flags and negative information that should have alerted it to potential risks, the firm allowed its brokers to continue selling these private placements.The firm did not conduct meaningful due diligence for the offerings prior to approving them for sale to its customers; without adequate due diligence, the firm could not identify and understand the inherent risks of these offerings.The Firm failed to enforce reasonable supervisory procedures to detect or address potential red flags and negative information as it related to these private placements; the firm therefore failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.
Capital Financial Services, Inc.: Censured; Ordered to pay $200,000 restitution to investors
James Michael Lenzi AWC/2009020835202/October 2011
Lenzi engaged in outside business activities without providing prompt written notice to his member firm. The findings stated that the firm permitted its representatives to sell fixed annuities only if the transactions were placed through its GA platform; Lenzi sold fixed annuities to customers, several of whom were clients of the firm, and received compensation for these sales. Lenziís sales were placed through the issuer, not through the firmís GA. On several occasions, Lenzi falsely certified to the firm that he had not engaged in any outside business activities for which he received compensation.
James Michael Lenzi : Fined $5,000; Suspended 5 months
Markus Beat Pletscher AWC/2009019969801/October 2011
Pletscher exercised discretion in customer accounts despite the fact that his member firmís WSPs strictly prohibited discretionary trading in customer accounts, and he was aware of this prohibition.
The firm required that its registered representatives place trade orders immediately after receiving the customerís authorization for trades, but at times Pletscher received oral authorization from customers to place trades in their accounts, yet he waited several weeks or months before placing the trades.
Pletscher requested to have variable annuity holdings for customers transferred into money market accounts without the customersí authorization. The customers requested the unauthorized transactions be reversed, causing his firm to incur reversal fees of $8,863.37.
Pletscherís firm required its customers review and sign transaction related forms, but Pletscher instructed customers to provide transaction forms that contained only the customersí signatures, which Pletscher later completed and submitted to the firm for processing, despite his firm prohibiting him from accepting incomplete forms from customers. Pletscher knew that by allowing his customers to pre-sign blank forms, he failed to ensure that customers had properly reviewed and understood the agreements they had signed. In addition, Pletscher caused the firmís books and records to be false and misleading and to appear that the customers had agreed to the terms of each form on the date the forms were signed in blank.
Markus Beat Pletscher: Fined $15,000; Suspended 1 year
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.
Goel placed a customerís signature on statements he prepared in connection with providing a rationale for his recommendations that the customer sell mutual funds and invest the proceeds in an equity-indexed annuity and a variable annuity, without the customerís knowledge, authorization or consent.
Unbeknownst to Goel, the firm did not require a customerís signature on the registered representativeís statement of rationale.
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
Richard Thomas Morrison (Principal) and Kimberly Ann Morrison 2008013683902/September 2011
Kimberly and Richard Morrison engaged in outside business activities without providing their member firm with written notice of their outside business activities. For nearly three years, Richard Morrison was the agent for transactions in annuities, which his firm had not approved for sale, that he sold through an insurance agency. In connection with these transactions, Richard Morrison met with customers, recommended that the customers purchase the annuities, completed and signed transaction paperwork and earned approximately $425,000 in commissions.
Richard Morrison failed to disclose the outside activities to his firm on annual questionnaires and actively concealed his outside business activities from his firm.
Richard Morrison had employees of the insurance agency sign paperwork effecting the exchanges; in each of these instances, he signed and was identified as the agent of record on the application that was sent to the insurance company that issued the new policy that was purchased. The insurance agency employees signed the exchange request forms that were sent to Richard Morrisonís firm instructing it to surrender a policy and forward the proceeds for the purchase of a new policy; as a result, his firm did not see that he had recommended and was the agent for the transactions.
In addition, for nearly two years, Kimberly Morrison was listed as the agent for transactions in annuities that took place away from her firm. Moreover, in connection with these transactions, Kimberly Morrison telephoned customers to solicit them to meet with Richard Morrison and/or herself, accompanied Richard Morrison to some meetings with customers, and completed and signed transaction paperwork as the agent of record. Furthermore, the insurance agency paid Kimberly Morrison $7,483.53 in commissions on the transactions; she did not notify her firm of her involvement in any of the transactions, and did not disclose them in her firmís annual broker questionnaire.
Richard Thomas Morrison (Principal): Barred
Kimberly Ann Morrison: Fined $10,000; Suspended 1 year
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.
Murillo recommended and effected excessive transactions in a customerís account that were unsuitable in light of the customerís financial situation, needs and investment objectives.
Murillo controlled and directed the trading in the customerís account by recommending and executing all the transactions in the account. The customer was unable to evaluate Murilloís recommendations, did not understand the meaning of ďmargin,Ē and was unable to exercise independent judgment concerning the transactions in the account due to his lack of investment knowledge and limited English skills; the customer trusted Murillo completely to make and execute recommendations in his account.
Murillo did not have a reasonable basis for believing that the volume of trading he recommended was suitable for the customer in light of information he knew about the customerís financial circumstances and needs, and given the amount of commissions and fees the customer was charged; and as a result, the transactions Murillo recommended and executed were unsuitable, even if the investment objectives were speculative as reflected on the customerís new account form. The customer told Murillo that he wanted a conservative retirement account set up because he was nearing retirement age and could not risk any losses with his funds; nevertheless, the new account forms listed the customerís investment objective as speculation and his risk tolerance as aggressive.
The trades were excessive in number and resulted in excessive costs to the customerís account, and the vast majority of the transactions in the customerís account were effected through the use of margin and resulted in the customer incurring additional costs in the form of margin interest. In addition, Although the customer signed a pre-completed margin agreement, along with other pre-completed new account forms Murillo sent to him, the customer did not understand margin and did not realize that Murillo was effecting trades on his account on margin. Moreover, owing to the customerís lack of investment knowledge and inability to decipher his monthly account statements, the customer was unaware that he had a margin balance and did not understand the risk of the margin exposure in his account; at one point, the customerís account had a margin balance of approximately $106,818.52 while the accountís equity was approximately $67,479.98. The transactions on margin Murillo effected in the customerís account were unsuitable for the customer in view of the size and nature of the account and the customerís financial situation and needs.
Miguel Angel Murillo: No fine in light of financial status; Suspended 20 business days; Ordered to pay partial restitution of $35,000 to a customer
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
National Securities Corporation and Matthew G. Portes (Principal) AWC/2009019068201/July 2011
National Securities failed to have reasonable grounds to believe that certain private placements offered pursuant to Regulation D were suitable for customers. Acting through Portes, as the firmís Director of Alternative Investments/Director of Syndications, National failed to adequately enforce its supervisory procedures to conduct adequate due diligence as it relates to an offering. Portes and the firm became aware of multiple red flags regarding an offering, including liquidity concerns, missed interest payments and defaults, that should have put them on notice of possible problems, but the firm continued to sell the offering to customers. Acting through Portes, the Firm failed to enforce its supervisory procedures to conduct adequate due diligence relating to other offerings.
Portes reviewed the PPMs for these offerings and diligence reports others prepared, but the review was cursory.The due diligence reports noted significant risks and specifically provided that its conclusions were conditioned upon recommendations regarding guidelines, changes in the PPMs and heightened financial disclosure of affiliated party advances, but the firm did not investigate, follow up on or discuss any of these potential conflicts or risks with either the issuer or any third party. In addition, acting through Portes, the Firm failed to enforce reasonable supervisory procedures to detect or address potential ďred flagsĒ as related to these offerings; and the firm, acting through Portes, failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.
National Securities Corporation: Censured; Odered to pay a total of $175,000 in restitution to investors.
Matthew G. Portes (Principal): Fned $10,000; Suspended from association with any FINRA member in any principal capacity only for 6 months.
Foster recommended to customers that they purchase UITs without having reasonable grounds to believe the recommendations were suitable based on the customersí risk tolerance, investment experience, need for income, net worth, investable assets and annual income. Fosterís member firm paid the customers a total of $23,199.25 in restitution and compensated customers $124 for a missed breakpoint.
Timothy Martin Foster : Fined $10,000; Suspended 20 business days
Jeremy Kenneth Kelter (Principal) AWC/2009019380701/June 2011
Kelter sold fixed annuities to investors outside the scope of his employment with his member firm, for which he received compensation totaling approximately $69,000. Kelter never provided his firm with written notice of these sales.
Jeremy Kenneth Kelter (Principal): Fined $5,000; Suspended 3 months
Philip Kenneth Mahler (Principal) AWC/2009017244601/June 2011
Mahler improperly created answer keys to state insurance continuing education (CE) exams a company administered.
The companyís president approached Mahler on different occasions and offered to provide him with answers to the companyís CE exams. The president provided Mahler with the answers to the CE exams over the phone or by handing copies of the answers to Mahler, and Mahler used these answers to create answer keys for the exams.
Mahler improperly distributed the answer keys to an employee at his member firm and to multiple registered representatives outside of his firm. On multiple occasions, while he was an external wholesaler, Mahler provided assistance to non-firm registered representatives while they were taking a state annuity examination for CE credit. Mahler was in the offices of some registered representatives while they were taking the annuity examination; some of these registered representatives asked Mahler to give them the answers to certain of the questions on the examination, which Mahler provided.
Mahler failed to supervise in that he gave one direct report answer keys to state insurance CE exams.
Philip Kenneth Mahler (Principal): Fiend $10,000; Suspended 4 months in all capacities; Suspended 6 months in Principal/Supervisory capacities only (to run concurrently)
Chima engaged in a pattern of unsuitable short-term trading and switching of unit investment trusts (UITs), closed-end funds (CEFs) and mutual funds in retired and/or disabled customer accounts without having reasonable grounds for believing that such transactions were suitable for the customers in view of the nature, frequency and size of the recommended transactions and in light of their financial situations, investment objectives, circumstances and needs. Some of the transactions were effected through excessive use of margin and without ensuring that customers received the maximum sales charge discount. In furtherance of his short-term trading strategy, Chima engaged in discretionary trading without prior written authorization, falsified customer account update documents and mismarked trade tickets for each of the customersí accounts, stating that the orders were unsolicited when, in fact, they were solicited.
The transactions generated approximately $450,000 in commissions for Chima and his firm, and approximately $370,000 in losses to the customers; some customers also paid over $75,000 in margin interest. In numerous UIT purchases, none of which exceeded $250,000, Chima failed to apply the rollover discount to which each customer was entitled.
Chima caused his member firmís books and records to be false in material respects, in that he provided false information on customer update forms for customersí accounts, signed the forms certifying that they were accurate and submitted them to his firm.
Uzo Omar Chima (Principal): Fined $75,000; Suspended 2 years; Ordered to pay $12,443.73, plus interest, in restitution to customers.
Gould converted more than $1,315,000 from customers who had purchased annuities from him by, among other deceptive means and devices, convincing his customers to sign blank annuity withdrawal request forms, which he subsequently completed with instructions to the insurance companies to transfer his customersí funds to a bank account held in the name of a company he owned and controlled. In some instances, the withdrawal request forms contained a medallion signature guarantee that he improperly obtained.
Gould converted funds from other annuity customers by using withdrawal request forms that contained customersí signatures to direct insurance companies to transfer funds from the customersí annuities to his bank account. Gould unlawfully converted customer funds from customersí brokerage accounts by, among other deceptive means and devices, improperly transferring funds from their brokerage accounts to the bank account he owned and controlled. The customers either did not authorize or were not aware of the conversion resulting from the transfer of funds from their annuities and brokerage accounts to Gouldís bank account.
Gould used the unlawfully converted funds to pay for his own personal and business expenses; none of the customers were aware he was withdrawing funds for his personal use. On numerous occasions, Gould falsified documents to make it appear that customers had authorized the transfer of funds from their annuities and brokerage accounts to his bank account, and in some instances, effectuated these transfers by convincing customers to sign withdrawal request forms, some of which were blank.
In connection with the sale of investments in a film production company, Flowers made fraudulent misrepresentations and omitted to disclose material information. Flowers collected at least $92,000 from investors, falsely representing that he would use their funds to finance a film production business and promising exorbitant, guaranteed returns. Instead of investing the funds, Flowers misused $30,498 to repay other investors and pay for personal expenses without the investorsí knowledge, consent or authorization.
Flowers made recommendations to a customer to invest in private placement offerings that were unsuitable in light of the customerís financial situation, investment objective and financial needs.
Flowers attempted to settle away customersí complaints without his member firmís knowledge or consent.
Flowers signed an attestation form for a firm acknowledging that email communications with the public must be sent through the firmís email address and copied to the compliance department, but Flowers communicated with customers via unapproved, outside email accounts without his member firmsí knowledge or consent, and as a result of his outside communications, his member firms were unable to review his emails to firm customers. In addition, Flowers engaged in private securities transactions without providing prior written notice to, and receiving prior written approval from, his member firms.
have reasonable grounds to believe that a private placement an entity offered pursuant to Regulation D was suitable for any customer, after it received red flags that the entity had financial issues and was not timely making interest payments, but continued to sell the offering to customers;
enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of private placements;
conduct adequate due diligence of the private placements or confirm that its representatives were doing their own due diligence;
conduct adequate due diligence of private placements other entities offered; and
enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of the private placements the entities offered pursuant to Regulation D.
The Firm reviewed cursory private placement memoranda (PPMs) for the offerings but failed to investigate red flags or analyze third-party sources of information or take affirmative steps to ensure the information in the offering documents was accurate.
The Firm failed to preserve electronic communications in a non-rewritable, non-erasable or ďWORMĒ format that complied with books and records requirements, and the firm used third-party software for storing and retaining electronic communications that did not comply with the requirements of SEC Rule 17a-4(f). Although the Firm was informed that its electronic storage medium was non-compliant but did not take adequate remedial action to retain email properly.
Workman Securities Corporation : Censured; Ordered to pay $700,000 as partial restitution to investors; Ordered to certify in writing to FINRA that it has established and implemented a system and procedures reasonably designed to achieve compliance with recordkeeping requirements related to electronic communications, and provide a written report to FINRA describing the policies, procedures and controls it has established and implemented related to the integrity of the retention and retrieval process for electronic communications, and the supervisory system it has implemented to oversee the preservation of electronic communications.
Puritan Securities Inc. aka First Union Securities, Inc. AWC/2008012927503/March 2011
The Firm entered into an agreement with an entity to sell a private placement for which the firmís brokers sold $1,415,940 of the private placement interests to customers, and the firm failed to create and maintain a reasonable supervisory system to detect and prevent sales practice violations in these transactions. The firm did not collect financial and other relevant information for the customers who purchased the private placement, and did not review these transactions to determine if the recommendations for the purchases were suitable for these customers.
Also, the firm failed to implement a supervisory system reasonably designed to review and retain electronic correspondence. The firm did not establish an email retention system that captured all of its brokersí emails. The firmís brokers were allowed to use email addresses using external domains, and the firm did not have the capability to review, capture and retain these emails.
Puritan Securities Inc. aka First Union Securities, Inc.: Censured; Fined $10,000 (in light of the firm's revenues and financial resources, a "lower fine" was imposed)
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.
Gregory James Buchholz AWC/2010023931401/February 2011
Buchholz misappropriated approximately $1,350,000 from customers, a number of whom were retirees, by liquidating their variable annuities and/or mutual funds and then transferring the proceeds to his personal bank account, converting the proceeds for his own use and benefit. As part of this scheme, Buchholz falsely and fraudulently represented, at times by forging customer signatures on redemption documents, that certain customers had authorized the redemption of the securities in order to obtain the proceeds of the sale; fraudulently induced certain customers to authorize the redemption of securities, based on misrepresentations that the proceeds would be reinvested to the customersí investment accounts; and caused checks to be drawn in the customersí names and caused the checks to be sent directly either to his office or to the customers.
If the checks were sent directly
to the customers, Buchholz convinced those clients to turn the checks over to him, making false and fraudulent representations that he would deposit the funds in their securities accounts to be reinvested; however, he did not reinvest the proceeds but instead deposited the checks into his personal bank accounts and used the proceeds for his own purpose;
to his office, Buchholz simply deposited the checks in his own bank accounts for his personal use and sometimes forged the customersí signatures in order to cash the checks.
Jason Leekarl Beckett AWC/2009016600001/February 2011
Beckett submitted an advertisement to a local newspaper, which listed an entity he owned as offering certain investments, including certificates of deposit (CDs) and fixed annuities, and that he did not submit the advertisement to his member firm for review and approval; moreover, the advertisement content included misleading statements regarding the offered investments.
Beckett maintained a website for an entity he owned, which was accessible to the investing public, and he failed to submit the website material to his firm for review until a later date. Beckett failed to obtain his firmís written approval of the website content prior to its use.
Beckett completed an annual certification, which he provided to his firm and he answered ďnoĒ to the question asking whether he anticipated using any type of electronic communication systems such as the Internet for soliciting business.
Jason Leekarl Beckett : Fiend $10,000; Suspended 2 months
Ellis signed customersí applications for fixed annuities, as a favor to another registered representative not authorized to sell products a company offered, without having met with or discussed the fixed annuity product or the points on each application with the customers, or ascertained the productís suitability for each customer as required; thereby his attestations on the annuity applications submitted to his member firm and the insurer were false. The falsified applications were submitted to the firm under Ellisí production number, and the insurer approved the applications and issued annuity contracts based on Ellisí misrepresentations on the applications. After the falsified annuity applications were discovered, Ellisí firm offered to rescind the transactions for the customers or choose another investment at no cost. Neither Ellis nor the other representative received any compensation for the transactions.
Joshua A. Ellis: Censured; Fined $7,500; Suspended 6 months
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
Todd Randall Ware (Principal) AWC/2007008935007/February 2011
Ware introduced several customers to a Stock to Cash program under which customers would pledge stock to obtain loans to purchase other products. Ware recommended a customer participate in the program under which the customer obtained loans of approximately $388,000 and pledged securities in support of these loans, using the proceeds to purchase fixed annuities through Ware.
Ware failed to conduct adequate due diligence concerning the operations or financial stability of the Stock to Cash program lender and failed to take sufficient action to determine whether his clientsí ownership interest in the pledged securities was adequately protected. Ware did not understand the potential risks inherent in the program and therefore did not have a reasonable basis for his recommendations.
Todd Randall Ware (Principal): Fined $15,000; Suspended 15 business days
Cambridge Legacy Securities, L.L.C. and Tommy Edward Fincher (Principal) AWC/2009020319001/January 2011
Cambridge failed to have reasonable grounds to believe that a private placement offered pursuant to Regulation D was suitable for any customer.
Acting through Fincher, its Chief Compliance Officer and registered principal, the Firm failed to
conduct adequate due diligence of the private placement offering before allowing its brokers to sell the security,
maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and
enforce reasonable supervisory procedures to detect or address potential red flags as it related to the offering.
Fincher was the principal responsible for conducting due diligence on the offering and approved the security as a new product available for firm brokers to sell to their customers; he allowed the firmís brokers to continue selling the security despite its ongoing failure to make overdue interest and principal payments. The Firm failed to have reasonable grounds for allowing the continued sale of the security even though the firm, through Fincher, was aware of numerous red flags concerning liquidity problems, delinquencies and defaults, but allowed its brokers to continue selling the security.
Cambridge Legacy Securities, L.L.C.:Censured; Ordered to pay $218,400 in restitution to customers. If the firm fails to provide FINRA with proof of restitution, it shall immediately be suspended from FINRA membership until such proof has been provided.
Tommy Edward Fincher: Fined $5,000; Suspended 6 months in Principal capacity only.
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.
Paul sold fixed annuities on an insurance companyís behalf totaling approximately $1 million to members of the public and received approximately $44,000 in commissions. Paul failed to give prompt written notice to her member firm that she was engaging in outside business activities.
Lynda Corean Paul : Fined $5,000; Suspended 2 months
NEXT Financial Group, Inc. AWC/2009016272902/January 2011
NEXT Financial Group did not have a reasonable system for reviewing its registered representativesí transactions for excessive trading. The firm relied upon its OSJ branch managers to review its registered representativesí transactions and home office compliance personnel to review its OSJ branch managersí transactions, but the firm failed to utilize exception reports or another system, and the supervisors and compliance personnel only reviewed transactions on weekly paper blotters or electronic blotters.
The monthly account statements and contingent deferred sales charge reports for mutual fund activity were also available for review and could be indicators of excessive trading, however, given the volume of trading certain principals reviewed, and in certain cases, the large number of representatives for which the principal was responsible, it was not reasonable to expect principals to be able to track excessive trading on a weekly sales blotter, let alone through monthly account statements or mutual fund sales charge reports.
Due to the lack of a reasonable supervisory system, the firm failed to detect a registered representativeís excessive trading, which resulted in about $102,376 in unnecessary sales charges; the firm failed to identify or follow up on other transactions that suggested other registered representativesí excessive trading in additional customer accounts.
The Firm did not have a reasonable system for ensuring that it obtained and documented principal review of its registered representativesí transactions, including sales of complicated products such as variable annuities, and the firm should have been particularly attentive to maintaining books and records that established that the transactions had been properly reviewed. The firm failed to provide reasonable supervision of municipal bond markups and markdowns to ensure that its registered representatives charged its customers reasonable markups and markdowns. In addition, the firmís branch office examination program was unreasonable because it was not designed to carry out its intended purpose of detecting and preventing violations of, and achieving compliance with, federal, state and FINRA securities regulations, as well as its own policies.
The firm failed to have a reasonable supervisory system to oversee implementation of its heightened supervision policies and procedures for its registered representatives as it failed to comply with the terms of its heightened supervision for its registered representatives regarding client complaints, regulatory actions or internal reviews, therefore it had a deficient implementation of heightened supervision policies and procedures.
The firm failed to have a reasonable supervisory control system or to have in place Supervisory Control Procedures as required by FINRA Rule 3012, and it failed to perform adequate 3012 testing or prepare adequate 3012 reports. Moreover,the firm failed to have a reasonable system and procedures in place to review and approve investment advisorsí private securities transactions.
Furthermore, the firm filed inaccurate and late Rule 3070 reports relevant to customer complaints, and did not file or amend Form U4 and Uniform Termination Notice for Securities Industry Registration (Form U5) reports in a timely manner.
The Firm's AML systems and procedures were unreasonable, as the firm failed to establish and implement an AML Compliance Program reasonably designed to achieve compliance with NASD Rule 3011. Although the firm utilized a money movement report, its supervisors did not detect red flags involving numerous instances of potentially suspicious activities relating to the trading of a companyís stock and the transfers of proceeds relating to the trading of a stock, and thus failed to investigate and report these activities in accordance with its own procedures and the requirements of the Bank Secrecy Act and the implementing regulations.
In addition, over 1.3 million shares of a companyís stock were traded in customer accounts a registered representative serviced; during a one-week period, the firmís only AML exception report that monitored large money movement flagged the customerís account, but the firm took no action and failed to file any SARs as appropriate.
NEXT Financial Group, Inc.: Censured; Fined $400,000; Ordered to pay $103,179.84, plus interest, in restitution to customers.
The SEC charged 15 broker-dealers with violating certain recordkeeping provisions of the Securities Exchange Act and with failing reasonably to supervise with a view to preventing and detecting those violations. Additionally, the SEC charged affiliated advisor DWS Investment Management Americas, Inc. with violating certain recordkeeping provisions... Read On