May 20, 2012

Former Merrill Lynch Broker-Lawyer Suspended by FINRA for Practicing Law

May 17, 2012 By

In April, a former registered representative (a licensed attorney) at Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill” or “ML”) entered into an AWC with FINRA consenting to a 30 day suspension.  The former Merrill broker who was a licensed attorney had  drafted a will for an individual who was not a customer of the firm. The broker was paid $200, and this activity was made outside the scope of his employment with Merrill.  Merrill had denied the broker’s request to practice law outside the scope of his employment. Merrill’s written procedures prohibited representatives from practicing law unless an exception is granted.

FINRA Rule 3270 provides:

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

Emphasis added.

Filed Under: Brokers, Disciplinary Actions, FINRA Tagged With: , , , , , , , , , , ,

What is a Stock Broker’s CRD and FINRA’s BrokerCheck?

May 5, 2012 By

Stock brokers are required to report an array of information to allow investors and customers to make informed decisions as to whether to hire a broker.  This information includes a broker’s current and prior registrations and employment history, business enterprises outside of the securities industry, current licensing and registrations of the broker, and most important a list of customer disputes and regulatory or disciplinary history.  Likewise, reports are also maintained for brokerage firms which show a firms ownership and history, its licenses and registrations, a description of its business, and arbitration awards and regulatory and disciplinary history.  Excessive customer disputes or a disciplinary history are red flags that should cause you to ask more questions.

FINRA and state regulators share and maintain this information in a national database called the Central Registration Depository or “CRD” as it is commonly referred to.  The public can request CRD reports from these agencies.  Also, FINRA maintains an online version which provides some of this information at FINRA BrokerCheck®.

Reviewing a brokers CRD is a great way to start investigate your investment professional before hiring him or her.  Also, it is a good place to check out if there have been any new developments or issues that your broker has concealed from you.

Filed Under: Brokers, Disciplinary Actions, FINRA Tagged With: , , , , ,

FINRA Expels Pinnacle Partners Financial, Corp

April 28, 2012 By

On April 25, FINRA announced that it had expelled Pinnacle Partners Financial, Corp., a broker-dealer based in San Antonio, Texas, for ” for fraudulent sales of oil and gas private placements and unregistered securities.”  See FINRA’s Press Release here.

Filed Under: Disciplinary Actions, FINRA, Securites Fraud Tagged With: , , , , ,

FINRA’S NATIONAL ADJUDICATORY COUNCIL REVERSES HEARING PANEL’S FINDING OF FAILURE TO SUPERVISE

June 2, 2010 By

On Maarch 3, 2010, FINRA’s National Adjudicatory Counsel entered a decision reversing a Hearing Panel’s finding that the CEO and institutional sales desk manager for a broker-dealer failed to reasonably supervise an institutional sales trader. The NAC noted among other things that:

“It is clear to us that Market Regulation’s claims and the Extended Hearing Panel majority’s findings that [respondents] failed as supervisors are informed and colored in this case by their faulty views of [the sales trader's] conduct and a tenuous ‘industry standard’ that they claim limited the ‘profits’ he could garner for [the broker-dealer] from his trading.”

In the Matter of Department of Market Regulation v. Leighton and Pasternak, Complaint No. CLG050021 (NAC Mar. 3, 2010).

Filed Under: Disciplinary Actions, Failure to Supervise, FINRA Arbitration Tagged With: , , , , , , , , , ,

FINRA’s NATIONAL ADJUDICATORY COUNCIL (NAC) INCREASES SUSPENSION OVER APPROVAL OF FALSIFIED DOCUMENTS

August 29, 2009 By

On August 25, 2009, the National Adjudicatory Council (“NAC”), the national committee that reviews initial decisions rendered in FINRA disciplinary matters, reviewed a matter in which a Hearing Panel found that the respondent approved the falsification of IRA adoption agreements , in violation of NASD Rule 2110. Rule 2110 requires that member firms observe high standards of commercial honor and just and equitable principles of trade.

In determining his sanction, the Hearing Panel had concluded that misconduct was serious, not egregious. In reaching this conclusion, the Hearing Panel emphasized that the concealment of the falsification was attributable to several firm officers, that the respondents misconduct was negligent, not reckless or intentional, and that the nature of the documents supported lower sanctions.

On appeal, the NAC reversed this finding.

First, the NAC found that the FINRA Sanction Guidelines (“Guidelines”) for the forgery and falsification of documents were applicable to the alleged misconduct and that the Guidelines for the forgery and falsification of records recommend a fine of $5,000 to $l00,000. The Guidelines also recommend that the adjudicator consider a suspension in any and all capacities for up to two years, when mitigating factors exist. In egregious cases, the Guidelines recommend considering a bar. The specific principal considerations to determine sanctions for this violation are “the nature of the documents forged or falsified, and whether the respondent had a good-faith, but mistaken, belief of express or implied authority.”

Second, with these principals in mind, the NAC stated:

Based on [his] entire course of conduct, we conclude that his violation was egregious. Although [his] stand alone approval of the falsification may not have risen to the level of egregious misconduct, his attempted concealment of the misconduct, coupled with his outright disregard of the compliance officer’s advice, push his actions into what is egregious under the circumstances presented. Accordingly, we increase the duration of [his] suspension as a principal from six months to one year.

In the Matter of Dep’t. of Enforcement v. Vines, Complaint No. 2006005565401 (NAC Aug. 25, 2009).

Filed Under: Brokers, Disciplinary Actions Tagged With: , , , , , , , , , , , , , , , , , , , , , ,

SEC SETTLES NAKED SHORT SELLING CHARGES WITH FIRMS

August 14, 2009 By

On August 5, 2009, the SEC entered into two (here and here) consent decrees for alleged violations of Regulation SHO by traders who engaged in “naked” short sales. In one of the settlements, the SEC charged the firm’s COO for failure to supervise its trader. The SEC states “[i]n a ‘naked’ short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period, and the seller fails to deliver the securities to the buyer when delivery is due.”

Generally, Regulation SHO requires market participants “seeking to effect a short sale to borrow, arrange to borrow, or have reasonable grounds to believe that a security can be borrowed prior to effecting the short sale,” i.e. the “locate requirement.” Market makers may be exempt from the locate locate requirement if they are engaged in bona fide market making activities. Regulation SHO also required “fail-to-deliver” positions in certain securities that have lasted for 13 consecutive settlement days to be closed out immediately. Fail-to-deliver occurs when a seller fails to deliver a security to the buyer when delivery is due. Unlike the locate requirement, market makers are not excepted from such close-out requirement.

Filed Under: Disciplinary Actions, Exchange Act, Failure to Supervise, SEC Tagged With: , , , , , , , , , , ,

FINRA FINES BROKER-DEALERS FOR FAILURE TO SUPERVISE SHORT-TERM SALES OF CLOSED-END FUNDS IN IPO’s

July 28, 2009 By

On July 28, 2009, FINRA fined two broker-dealers for failures to supervise which resulted in the unsuitable short-term sales of closed-end funds (“CEF”) purchased at the funds’ IPO. CEFs are investment companies that sell a fixed number of shares in an IPO with built-in sales charges. Thus, after the IPO, the shares trade in the secondary market, generally at a discount from the IPO price. The CEFs at issue had sales charges of 4.5 percent, as well as a “penalty bid period” of generally 30 to 90 days immediately following the IPO.

FINRA noted that “Closed-end funds possess complex features that can give rise to unsuitability for short-term investors, particularly when purchased at the initial public offering.” During the relevant period, brokers would lose their sales commission if their clients sold the CEFs purchased at the IPO. FINRA found that despite knowledge that CEFs purchased at the IPO are more suitable for long-term investments, the broker-dealers did not have adequate supervisory systems and procedures designed to detect and prevent unsuitable short-term trading of CEFs.

Filed Under: Disciplinary Actions, Failure to Supervise, FINRA Arbitration, Suitability Tagged With: , , , , , , , , , ,

FINRA SANCTIONS BROKER FOR ENGAGING IN PONZI SCHEME INVOLVING BROKER DEALER’S CUSTOMERS

July 27, 2009 By

On July 27, 2009, FINRA announced that it sanctioned a broker for conducting a Ponzi scheme involving his broker-dealer’s customers as well as his family, friends and fellow church members.

According to FINRA, the registered representative “conducted an elaborate Ponzi scheme, fraudulently inducing at least 25 brokerage customers, family and fellow church members to participate in a fictitious ‘St. Louis Investment Club’ and to invest in the non-existent real estate investment trust, the ‘St. Charles REIT.’” To conceal the scheme, the broker typically had investors make payments to his wife in small increments to avoid bank scrutiny. The broker also prepared false invoices for the REIT purchases that were designed to appear like official ownership certificates.

Filed Under: Disciplinary Actions, FINRA Arbitration Tagged With: , , , , , , ,

FINRA FINES BROKER-DEALER $1 MILLION FOR FAILURE TO SUPERVISE

July 25, 2009 By

On July 22, 2009, FINRA announced that it has fined a broker-dealer $1 million for supervisory violations that primarily involved the failure to supervise its approximately 130 OSJ branch managers. Between January 2005 and November 2006, the firm permitted its OSJ branch managers to self-supervise their own handling of customer accounts without adequate review. In November 2006, the firm adopted a system to provide principal review of the OSJ managers’ transactions. However, this system was also “unreasonable” because it required three regional managers to “review thousands of transactions each month with limited access to client suitability information”.

FINRA found that the “the lack of reasonable policies and written procedures resulted in the firm’s failure to detect churning of customer accounts by an OSJ manager … as well as excessive markups and markdowns on corporate bond trades by another two brokers.”

FINRA also stated that “the firm failed to reasonably satisfy its obligations because, among other failures, it did not adequately test the firm’s supervisory systems or provide adequate review of OSJ branch managers.” According to FINRA, “firms must appoint one or more principals to ‘establish, maintain, and enforce a system of supervisory control policies and procedures.’”

FINRA further found that the firm’s systems and procedures governing variable annuity exchanges were not reasonable because the firm’s written supervisory procedures did not provide adequate guidance concerning the criteria that should be considered in recommending variable annuity exchanges to its customers including, for example, a comparison between the features, costs and benefits of the old and new products.

FINRA also found that the firm failed to apply its written heightened supervision procedures and failed to fingerprint firm employees resulting in it hiring a statutorily disqualified person.

In settling this matter, the broker-dealer neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Filed Under: Churning, Disciplinary Actions, Failure to Supervise, Markups, Suitability Tagged With: , , , , , , , , , ,

FLORIDA EXPANDS ENFORCEMENT AUTHORITY FOR VIOLATIONS OF FLORIDA SECURITIES AND INVESTOR PROTECTION ACT

June 30, 2009 By

On June 29, 2009, the Governor of Florida signed into law legislation to expand the jurisdiction of Florida’s Office of Statewide Prosecution by adding violations of the Florida Money Laundering Act and the Florida Securities and Investor Protection Act (“FSIPA”) to the list of offenses that may be considered by a statewide grand jury. Further, the legislation provides additional investigation and enforcement authority of the Florida Attorney General for securities violations, and authorizes the Attorney General to recover costs and attorney fees.

The law also expands the class of persons related to or associated with an applicant for registration as a dealer, associated person, or issuer of securities or registrant for which specified violations may result in adverse actions taken against registrations. Additionally, the law authorizes the Office of Financial Regulation (“OFR”) to bar specified persons from submitting applications or notifications for license or registration under specified circumstances.

The law allows the OFR to impose an emergency suspension in cases where a dealer, associated person, or issuer of securities fails to provide books and records requested by the OFR pursuant to its authority. The OFR is authorized to consider the following as a ground for a denial, suspension, or revocation action:

• A finding of a violation of Chapter 517, F.S., in an arbitration proceeding;
• A conviction of, or entrance of a plea of guilty or nolo contendere to, a crime contemplated under this subsection will be considered regardless of whether adjudication has been withheld;
• Whether the registrant is arrested for a crime which would be the basis for a denial, revocation, or suspension under s. 517.161(1), F.S.

Filed Under: Disciplinary Actions, FINRA Arbitration Tagged With: , , , , , ,
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