FINRA

Santander Securities to Pay $6.4M Over Puerto Rico Muni Bond and Closed-End Fund Sales

Published on: October 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) says that it is ordering Santander Securities LLC (Santander) to pay $6.4M for supervisory failures involving the sale of Puerto Rico Municipal Bonds and Puerto Rico closed-end funds. Of the payment to FINRA, $2 million is a fine and censure and over $4.3 million is customer restitution.

The restitution will go toward certain customers who were solicited to buy the municipal bonds. Santander will pay $121,000 and make rescission offers to repurchase the securities from certain customers that were affected by the firm’s purported failure to supervise employees while they were trading.

FINRA said that between December 2012 and October 2013, Santander failed to make sure that its proprietary product risk-classification tool accurately reflected the risks of investing in Puerto Rico bonds. The regulator contends that the systems and procedures that were in place at Santander did not mandate an evaluation or review of this tool, which is what its representatives used when recommending financial products to customers.

For example, said FINRA, when “significant market events” occurred, such as when credit rating agency Moody’s downgraded a number of Puerto Rico bonds-including Puerto Rico General Obligation bonds-to a level just above junk, Santander did not re-examine the tool’s risk classifications for the bonds. Instead, one day after the credit rating agency issued its ratings downgrade, the firm stopped buying the municipal bonds that its customers in Puerto Rico wanted to sell and ramped up its efforts to lower the firm’s own Puerto Rico municipal bond inventory.
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SEC Approves Rule Requiring Firms, Brokers Link to BrokerCheck

Published on: October 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Over two years after it was initially proposed, a FINRA rule requiring that broker-dealers include a link to the self-regulatory organization’s BrokerCheck database has been approved by the Securities and Exchange Commission. The rule slated to go into effect, at the latest, at 180 days after the FINRA regulatory notice is published in the Federal Register. The deadline for publishing the notice is December 7, 2015.

Per the rule, a brokerage firm will have to include an obvious reference and hyperlink to the front page of FINRA’s BrokerCheck.com. Links to BrokerCheck would also have to be included on the profile pages of each broker.

FINRA has been trying to make retail investors more aware that BrokerCheck exists. The online database includes the work history of every registered broker, where they are registered, and other information, such as if they’ve been subject to disciplinary measures or named on previous securities cases.

A previous version of the proposed rule had called for LinkedIn and Twitter profiles of brokers to also include links back to BrokerCheck. However, rather than link directly to that home page, the hyperlink would have taken an investor to the BrokerCheck profile of a particular representative. Many in the industry, however, were strongly opposed to that mandate.
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FINRA Fines Voya Financial, J.P. Turner, Cetera, and Other Firms For Not Discounting Big REIT Sales

Published on: October 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has fined six independent brokerage firms for not giving clients the proper discounts on big sales of business development companies and real estate investment trusts. According to InvestmentNews, the self-regulatory organization has been scrutinizing whether financial firms are giving the appropriate discounts, also known as breakpoint discounts to clients.

When the sale of certain nontraded real estate investment trusts is anywhere from over $500K up to $1 million, a discount is usually available. This means that the REIT’s price, which is typically at $10/share with the broker getting a 70 cent commission, can go down to $9.90/share and a commission of 60 cents.

FINRA said that J.P. Turner, Voya Financial Inc. (VOYA), Transamerica Financial Advisors Inc., Investacorp., National Planning Corp., and Cetera Investment Services did not identify and put into effect volume discounts for certain eligible purchase of BDCs and non-traded REITs. Because of this, said the SRO, customers paid sales charges that were too high. Now, all six firms will have to pay restitution to the clients that were affected.

Securities Headlines: Halcyon Cabot Partners is Expelled from Industry by FINRA, Blackstone Settles Disclosure Failure Charges for Nearly $39M, SEC Approves Proposal to Improve Transparency for OTC Equity Securities

Published on: October 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

Broker Fraud News: Ex-Dallas Broker Faces Prison, Fintegra Files for Bankruptcy, and Broker Who Promised Investors They’d Double Their Money Can No Longer Sell Securities

Published on: September 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Dallas Broker Accused of Texas Securities Fraud Face Five Years
Wade Lawrence, a former Dallas broker, has pleaded guilty to Texas securities fraud. As part of his plea bargain the 43-year-old will have to forfeit $1.5 million and pay over $250,000 in fines. He also faces up to five years behind bars for his $2.1 million securities scam.

According to prosecutors, over the course of working for several securities firm over the last seven years, Lawrence falsely offered risky investments with the promise of 20% to 100% returns. He lost a significant amount of money and invested just a portion of investors’ funds. Lawrence used a lot of investors’ cash to cover his own living expenses, personal travel, as well as pay for fancy jewelry. The Associated Press reports that to date Lawrence has given back $581,000 to investors.

Minnesota-Based Brokerage Firm Files for Bankruptcy
Broker-dealer Fintegra has filed for bankruptcy in U.S. Bankruptcy Court in Minnesota. The firm had to stop its securities business in June after it was hit with a $1.5M arbitration award that placed it under the $250,000 regulatory net capital requirements of minimum.

According to the FINRA arbitration panel, Finestra and a broker violated state anti-fraud provisions related to the sale of Miasole Investments II, an unregistered security. The securities fraud complaint, submitted by Fintegra customers, states that the broker-dealer could only pay $300,000 of the award. However, InvestmentNews reported that the attorneys for one of the clients said that to date none of the award has been paid.

Fintegra, in its FOCUS report with the SEC, admitted that it had been named in five separate lawsuits, all involving the alleged sale of securities that were either unsuitable or violated state securities laws.
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FINRA Headlines: Regulator Seeks to Curb Broker Record Expungement, Continues to Fight Elder Abuse and Issues Liquidity Risk Management Guidance

Published on: September 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Takes Action to Make It Harder for Brokers to Expunge Their Disciplinary Records
The Financial Industry Regulatory Authority’s Board has given the regulator permission to ask for public comment on a plan that would establish tougher requirements for when a broker would be allowed to expunge disciplinary actions from his/her BrokerCheck record. The proposed rule would update existing arbitration rules regarding the expungement of information related to customer disputes.

One proposed requirement is that an arbitration panel would have to get a copy of the BrokerCheck report when determining whether to grant an expungement request. The panel then would have to give more details about its reason to recommend a request.

According to a 2013 study by the Public Investors Arbitration Bar Association, expungement requests have been granted in up to 90% of cases that ended in an award or settlement. However, in 2014 the SEC signed off on a rule preventing broker-dealers from conditioning a settlement so that a claimant cannot counter expungement after the case is resolved.

FINRA Board Continues to Fight Elder Financial Abuse
FINRA’s board has given the self-regulatory authority permission to put out a rule proposal that would protect older investors and other vulnerable investors.

Under the rule, firms would be obligated to get the name and contact data of a trusted individual when opening an account for a customer. The rule also would let a firm, if it suspects financial fraud, freeze the money in accounts of senior investors age 65 and over, as well as the accounts of adults with physical or mental impairments. The concern is that such impairments may make it difficult for them to protect their best interests especially when they are being bilked.
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FINRA Bars Global Arena Capital Brokers for Cockroaching, Churning, and Other Securities Violations

Published on: September 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has barred seven brokers accused of committing violations and repeatedly transferring from one brokerage firm to another from the securities industry. The brokers worked at the brokerage firm Global Arena Capital Corp. Also barred is the broker-dealer’s president, Barbara L. Desiderio. She is accused of letting the brokers engage in stockbroker fraud and deceiving the regulator.

The other brokers are David Awad, Alex Wildermuth, Peter Snetzko, James Torres, and Michael Tannen. Global Arena branch managers Kevin Hagan and Richard Bohak have been barred from serving in a principal role. Brokers Andrew Marzec and Niaz Elmazi were barred for not cooperating with the regulator’s probe.

According to FINRA, while at the firm, the brokers used sales pitches that were misleading, churned accounts, and committed other abusive acts. Seven of the brokers who were barred had been placed on heightened supervision by the self-regulatory organization when they exited HFP Capital Markets to go work at Global Arena. HFP Capital Markets has since been expelled from the industry by FINRA.
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FINRA Fines Charles Schwab $2M for Supervisory Failures, Capital Deficiencies

Published on: September 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Charles Schwab & Co. (SCHW) $2 million. The self-regulatory organization said that between 5/15/14 and 7/1/14, Schwab was capital deficient by up to $775M because of cash inflows that went beyond what it could invest with existing facilities on three occasions. Because of this, said FINRA, the firm moved $1 billion to its parent company for overnight investment. Under a revolving loan agreement, Schwab’s Treasury group approved the funds as an unsecured loan.

The SRO claims that Schwab lacked the procedures that would have mandated that its Treasury group consult with the company’s regulatory reporting group. It also contends that the firm’s supervisory systems were not designed in a manner reasonable enough to stop the Treasury group from going into unsecured transfers with affiliates that could lead to a net capital deficiency.

Schwab is not denying or admitting to the FINRA alelagtions. A firm representative did issue a statement expressing regret over the failure to note the overnight cash transfers.

FSC Securities to Be Held Accountable for $1.2M FINRA Arbitration Award Issued to Victims of Ponzi Scammer Who Faked His Death

Published on: August 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Inc. panel said that FSC Securities Corp. is responsible for a $1.2 million arbitration award for compensatory damages to investors that were bilked by Aubrey Lee Price, the infamous Ponzi scammer from Georgia who tried to fake his death to in 2012. FSC Securities is a broker-dealer with AIG Advisor Group (AIG).

The eight claimants contend that the brokerage firm did not supervise a number of brokers who sold them fraudulent securities that were part of Price’s $40 million Ponzi scam. According to their securities lawyer, Price and two other ex-FSC brokers persuaded clients to invest in the PFG fund, an unregistered investment fund, which was the main product of the scheme.

When the trading account sustained huge losses Price prepared account statements for investors that noted fake asset amounts and investment returns. The claimants believe that FSC failed to properly supervise its brokers and had numerous chances to detect that Price and the other brokers were selling away into the PFG fund while claiming “preposterous” return rates.

Price was an FSC broker from 2006 to 2008. Prior to that he worked at Citigroup Global Markets (C) and Banc of America Investment Services (BAC). Last year, a federal judge sentenced him to 30 years behind bars for bank fraud.
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Ex-Caldwell Broker is Barred by FINRA for Churning Accounts

Published on: August 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has permanently barred ex-Caldwell International Securities Corp. broker Richard Adams from the industry. Adams is accused of churning customer accounts.

 According to FINRA, from July 2013 to June 2014, Adams engaged in excessive trading and churned the accounts of two customers, making close to $57,000 in commissions. The customers lost over $37,000 as a result.

Adams is also accused of not reporting numerous unsatisfied judgments and liens on his U4 Registration Form, which he is required to do under FINRA rules. By settling the civil case against him, Adams is not denying or admitting to the charges.

Churning
This type of illegal activity typically involves a broker engaging in the excessive selling or buying of securities in a customer account for the purpose of earning commissions. Signs of possible churning may include frequent in-and-out purchase and securities sales that appear unrelated to the customer’s investment goals.
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