FINRA Hearing Panel Hammers Brookstone Securities for Securities Fraud In Connection With CMO Sales

June 6, 2012 By Jay Eng

A FINRA Hearing Panel has hammered Brookstone Securities of Lakeland, Florida.  According to a FINRA release, the panel found that from July 2005 through July 2007, the firms owner and a former broker “intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in [collateralized mortgage obligations].” The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers.  The decision may be appealed to FINRA’s National Adjudicatory Council.

A collateralized mortgage obligations or “CMO” is a security that is collateralized by mortgage-backed securities, which in turn are undivided interests in a pool of mortgages. The principal and interest from the mortgages underlying a mortgage-backed securities are used to pay CMO investors principal and/or interest, depending on the type, or “tranche,” of CMO that they own. CMOs are classified, in part, based on the entity that guarantees them.

In Notice to Member 93-78,FINRA provided guidance to brokers alerting them to their obligations when recommending CMOs stating, in part, that

In light of the complexity and the varying risk characteristics of CMOs, under Article III, Sections 1 and 2 of the Rules of Fair Practice, members and their associated persons must be conversant in all of the characteristics of CMOs to assess adequately the suitability of CMOs for their customers. Moreover, they must ensure that their customers understand the characteristics and risks of CMOs. Further, adequate supervisory procedures must be in place to monitor CMO activity within each NASD member firm.

Emphasis added.

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

June 2, 2010 By Jay Eng

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).

What is a FINRA Letter of Acceptance Waiver & Consent (AWC)

February 14, 2010 By Jay Eng

A Letter of Acceptance, Waiver and Consent is a mechanism provided under the FINRA Rule 9216 to permit the Department of Enforcement or Department of Market Regulation to resolve aa controversy between the Department and a member or associated person over a violation of of any rule, regulation or staturory provision, including the federal securities laws and the regulations promulgated thereunder, which FINRA has jurisidiction to enforce. See also FINRA Rule 9211.

Subsection (a) of FINRA Rule 9216 states in part as follows:

(1) Notwithstanding Rule 9211, if the Department of Enforcement or the Department of Market Regulation has reason to believe a violation has occurred and the member or associated person does not dispute the violation, the Department of Enforcement or the Department of Market Regulation 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 or, if applicable, an Extended 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. Unless the letter states otherwise, the effective date of any sanction(s) imposed will be a date to be determined by FINRA staff.

In addition, a member or associated person who executes an AWC waives certain rights:

(2)(A) If a member or person associated with a member submits an executed letter of acceptance, waiver, and consent, by the submission such member or person associated with a member also waives:
(i) any right of such member or person associated with a member to claim bias or prejudgment of the General Counsel, the National Adjudicatory Council, or any member of the National Adjudicatory Council, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of the letter of acceptance, waiver, and consent, or other consideration of the letter of acceptance, waiver, and consent, including acceptance or rejection of such letter of acceptance, waiver, and consent; and
(ii) any right of such member or person associated with a member to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of the letter of acceptance, waiver, and consent, or other consideration of the letter of acceptance, waiver, and consent, including acceptance or rejection of such letter of acceptance, waiver, and consent.
(B) If a letter of acceptance, waiver, and consent is rejected, the member or associated person shall be bound by the waivers made under paragraphs (a)(1) and (a)(2)(A) for conduct by persons or bodies occurring during the period beginning on the date the letter of acceptance, waiver, and consent was executed and submitted and ending upon the rejection of the letter of acceptance, waiver, and consent.

FINRA Rule 9126 (2).

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

August 29, 2009 By Jay Eng

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).