Inadequate Supervision

Berthel Fisher & Affiliate Fined $775K by FINRA Over Supervisory Failures Involving Non-Traded REITs and Leveraged and Inverse ETFs

Published on: February 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc. are going to pay the Financial Industry Regulatory Authority a combined $775,000 for purported supervisory deficiencies related to leveraged and inverse exchange-traded funds and non-traded real estate investment trusts. The firm settled without deny or admitting to the allegations.

FINRA claims that from January 2008 to December 2012 Berthel Fisher had inadequate written procedures and supervisory systems to deal with the sale of alternative investment products, such as managed futures, non-traded REITs, oil and gas programs, managed futures, business development companies, and equipment leasing programs. The SRO says that the brokerage firm’s staff were improperly trained with regard to state suitability standards, and criteria wasn’t properly enforced in a number of alternative investment sales because the firm did not figure out the correct concentration levels of certain financial instruments.

FINRA also said that from 4/09 to 4/12, Berthel Fisher lacked a reasonable basis for certain ETF sales, resulting from numerous reasons, including a failure to properly review or research non-traditional ETFs before letting registered representatives make recommendations to customers. Inadequate sales training was not provided and some customers suffered losses because the brokerage firm did not monitor investment holding periods.

Foremost Trading LLC Must Pay $400K to CFTC for Supervisory Violations

Published on: September 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Foremost Trading LLC has settled the securities charges filed against it by the US Commodity Futures Trading Commission. The regulator accused the introducing broker of failing to properly supervise the handling of specific trading accounts by employees, agents, and officers. To settle, Foremost Trading must pay a $400K civil penalty and cease and desist from future CFTC regulation violations.

According to the agency’s order, the accounts involved were held by clients who were referred to the introducing broker via three unregistered entities that sold futures trading systems. Foremost Trading and its staff are accused of disregarding warning signs that the Systems-Systems Providers were using fraudulent means and business practices to get these clients.

Clients complained to Foremost. However, contends the CFTC, the latter did not properly investigate claims or let other clients know about the allegations. Meantime, the introducing broker kept setting up accounts for clients referred to it by Systems Provider, even vouching for the latter’s track record when communicating with clients.

Stockbroker Fraud Headlines: Wells Fargo Banker Charged Over $11M Insider Trading, Morgan Stanley to Resolve Facebook IPO Action for $5M, & SEC Accuses Canadian Broker of Inadequate Day Trader Supervision

Published on: December 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo Banker and 8 Others Accused of Alleged $8M Insider Trading Scam

The U.S. Attorney for the Western District of North Carolina is charging Wells Fargo (WFC) investment banker John Femenia and eight alleged co-conspirators with involvement in an alleged $11 million insider trading scam. Femenia is accused of stealing confidential data from his employer and its clients about acquisitions and mergers that were pending. He then either directly or via others tipped his co-conspirators, receiving kickbacks in return.

According to the N.C. government, the insider trading scam resulted in $11M in profits. While six of the co-conspirators opted to plead guilty to conspiracy to commit insider trading, Femenia and the other two have been indicted on multiple charges of conspiracy and insider trading. The same defendants, and another person, are also named in the SEC lawsuit over the scheme.

CFTC Securities Headlines: Goldman Sachs Fined For Inadequate Broker Supervision in $118M Fraud, Firms Named in Precious Metal Scam, & Defendants to Pay $1.8M Over Off-Exchange Foreign Currency Scheme

Published on: December 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Fined$1.5 Inadequate Supervision in $118M Fraud
The Commodity Futures Trading Commission says that Goldman Sachs (GS) must pay $1.5M because it did not properly supervise trader Matthew Marshall Taylor, who allegedly got around internal systems to manually make fabricated trades that went straight to the financial firms’ records and books and not the exchange. Taylor is accused of defrauding the bank, which lost about $118.4M.

The agency says that Goldman failed to make sure that its risk management, supervision, and compliance programs were in alignment with its duties to diligently oversee its business as a registrant of the Commission. However, CFTC commissioner Bart Chilton has criticized the $1.5M fine, describing it as a wrist slap.

CFTC Names Firms and Individuals in Precious Metal Scam The Commission has filed a civil injunctive enforcement action against a number of firms, including Hunter Wise Credit, LLC, Lloyds Commodities Credit Company, Hard Asset Lending Group, Blackstone Metals Group, LLC, CD Hopkins Financial, Newbridge Alliance Inc., Harold Edward Martin Jr., United States Capital Trust, LLC, as well as related entities, and Fred Jager, Frank Gaudino, James Burbage, Chadewick Hopkins, Baris Keser, David A. Moore, and John King. They are accused of fraudulently marketing off-exchange commodity contracts that were illegal. Also, Hunter Wise Commodities, which allegedly orchestrated the fraud, is accused of having gotten least $46M in client funds since July of last year.

The defendants allegedly claimed that they were selling physical metals to retail clients in retail commodity transactions and that they would arrange loans for the balance of the purchase price. Customers were supposed to make down payments at 25% of the complete buying price for certain quantities of metal, which were to be placed in a safe depository. The CFTC contends, however, says that not only were certain statements found in the investment contract untrue, but also the transactions were merely paper transactions with no actual metals involved.

Defendants to Pay $1.8M in Off-Exchange Foreign Currency Scheme
Following a CFTC anti-fraud enforcement action, a permanent injunction order and default judgment has been issued against Forex Capital Trading Partners, Inc., Forex Capital Trading Group Inc., and Highland Stone Capital Management, LLC requiring that they pay a penalty of over $1.3M and disgorge $450,764 to benefit clients who were defrauded. The Commission says that the three firms made fraudulent solicitations to 106 clients that invested over $2.8M in forex trading.

These solicitations were allegedly made with false claims that they were engaging in this type of trading had been profitable for several years, including a falsely reported 51.94% customer gain in 2010, which was a year when the investors actually lost over 1.2M. In fact, says the Commission, customers actually lost over 93% of total invested principal via the defendants’ customer trading.

CFTC Press Room

More Blog Posts:
CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012 Continue Reading ›

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs

Published on: May 3, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo & Co. (WFC), UBS AG (UBSN), Morgan Stanley (MS), and Citigroup Inc. (C) have consented to pay a combined $9.1 million to settle Financial Industry Regulatory Authority claims that they did not adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009. $7.3 million of this is fines. The remaining $1.8 million will go to affected customers. The SRO says that the four financial firms had no reasonable grounds for recommending these securities to the investors, yet they each sold billions of dollars of ETFs to clients. Some of these investors ended up holding them for extended periods while the markets were exhibiting volatility.

It was in June 2009 that FINRA cautioned brokers that long-term investors and leveraged and inverse ETFs were not a good match. While UBS suspended its sale of these ETFs after the SRO issued its warning, it eventually resumed selling them but doesn’t recommend them to clients anymore. Morgan Stanley also had announced that it would place restrictions on ETF sales. Meantime, Wells Fargo continues to sell leveraged and inverse ETF. However, a spokesperson for the financial firm says that it has implemented enhanced procedures and policies to ensure that it meets its regulatory responsibilities. Citigroup also has enhanced its policies, procedures, and training related to the sale of these ETFs. (FINRA began looking into how leveraged and inverse ETFs are being marketed to clients in March after one ETN, VelocityShares Daily 2x VIX Short-Term (TVIX), which is managed by Credit Suisse (CS), lost half its worth in two days.)

The Securities and Exchange Commission describes ETFs as (usually) registered investment companies with shares that represent an interest in a portfolio with securities that track an underlying index or benchmark. While leveraged ETFs look to deliver multiples of the performance of the benchmark or index they are tracking, inverse ETFs seek to do the opposite. Both types of ETFs seek to do this with the help of different investment strategies involving future contracts, swaps, and other derivative instruments. The majority of leveraged and inverse ETFs “reset” daily. How they perform over extend time periods can differ from how well their benchmark or underlying index does during the same duration. Per Bloomberg, leveraged and inverse ETFs hold $29.3 billion in the US.

“These highly leveraged investments were – and still are – being bought into the accounts of unsophisticated investors at these and other firms,” said Leveraged and Inverse ETF Attorney William Shepherd. “Although most firms do not allow margin investing in retirement accounts, many did not screen accounts to flag these leveraged investments which can operate on the same principle as margin accounts.”

For investors, it is important that they understand the risks involved in leveraged and inverse ETFs. Depending on what investment strategies the ETF employs, the risks may vary. Long-term investors should be especially careful about their decision to invest in leveraged and inverse ETFs.

Finra Sanctions Citi, Morgan Stanley, UBS, Wells Fargo $9.1M For Leveraged ETFs, The Wall Street Journal, May 1, 2012
Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, SEC
FINRA investigating exchange-traded notes: spokesperson, Reuters, March 29, 2012

More Blog Posts:
SEC to Investigate Seesawing Credit Suisse TVIX Note, Stockbroker Fraud Blog, March 30, 2012

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations, Stockbroker Fraud Blog, April 6, 2012

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investor Securities Blog, April 12, 2012 Continue Reading ›

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations

Published on: April 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Harry Friedman, a principal of Global Arena Capital Corp. has agreed to a bar that prevents him from associating with any Financial Industry Regulatory Authority member. Although he has not admitted to or denied the allegations against him, Friedman has consented to the sanction and the entry of findings accusing him of not properly supervising a number of employees who used improper markups in a fraudulent trading scheme that, as a result, denied clients of best execution and the most favorable market price.

It was Friedman’s job to make sure that the head trader provided accurate disclosure on order tickets, such as when they were received and executed, the role that the broker-dealer played, and how much compensation the financial firm would get from each securities transaction. According to FINRA, Friedman either knew or should have known that order tickets were not being marked properly.

FINRA also found that Friedman, whose job it was to supervise and review trading activity involving his firm, failed to reconcile daily positions and trades in principal accounts. Also, per the SRO, Global Arena Capital Corp., through Friedman, did not set up, maintain, and enforce supervisory control policies and procedures that were supposed to ensure that registered representatives and others were in compliance with securities regulations and laws. Also, for three years, Friedman allegedly falsely certified that the financial firm had the necessary processes in place and that they had been evidenced in a report that the CCO, CEO, and other officers had reviewed.

In other FINRA-related news, Berthel, Fisher & Company Financial Services, Inc. registered principal Marsha Ann Hill has been suspended from associating with any Financial Industry Regulatory Authority member for a year. She also will pay a $20,000 fine.

Hill is accused of allegedly making unsuitable recommendations to a customer regarding the purchase of a variable annuity for $110,418.97 and two private placement offerings for $10,000 each. Per the findings, the transactions were not suitable because over 90% of the client’s liquid net worth had been placed in the variable annuity, which was illiquid and had a seven-year surrender period. (The SRO says that the private placement offerings were not only high risk, but also they failed to meet the client’s investment objectives.) Hill is accused of misusing the customer’s funds when she delayed the investments, resulting in her firm violating SEC Rule 15c3-3.

She also allegedly sold a private placement to an unaccredited investor. When her supervisor noted that this was an accredited-only investment, Hill erased certain information on the Account Information Form and put different yearly income, liquid net worth, and net worth amounts without letting her client know. Hill is settling the securities fraud allegations against her without deny or admitting to them.

Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC, Stockbroker Fraud Blog, July 28, 2011
Despite Reports of Customer Satisfaction, Consumer Reports Uncovers Questionable Sales Practices at Certain Financial Firms, Stockbroker Fraud Blog, January 7, 2012
SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012 Continue Reading ›

FINRA Bars Registered Representatives Accused of Securities Misconduct and Negligence

Published on: April 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Registered representative Erick Enrique Isaac has turned in a Letter of Acceptance, Waiver and Consent that affirms his agreement to be barred from associating with any Financial Industry Regulatory Authority member. Although he isn’t denying or admitting to the findings, Isaac has consented to the described sanction and the entry of findings that claims he became affiliated with a member firm at the behest of a relative, a former registered representative who needed access to a broker-dealer to make trades for his clients.

While registered with the financial firm, Enrique allegedly gave trading directions from this relative to another firm representative, who then made the trades. He also allegedly started sending over hundreds of thousands of dollars in commissions on those securities transactions to the relative.

FINRA’s findings contend that Isaac knew that his relative was controlling the trading in at least some of the client accounts that resulted in commission fees. He also kept sending the commission funds to the relative even after finding out that the latter was barred by the SRO from associating with a member firm.

Also submitting a Letter of Acceptance, Waiver and Consent in another FINRA case is First Merger Capital, Inc. registered principal Mark SImonetti who is not allowed to associate with any FINRA member for three months.

FINRA accused Simonetti of knowing that registered representatives at First Merger Capital were paying the operators and co-owners of a branch of the financial firm (a foreign-based publicly traded company) $350,000 for unspecified services. Even though this should have indicated to Simonetti that the financial firm’s COO was not appropriately discharging his compliance and supervisory duties, he still allegedly failed to properly supervise the brokers to make sure that everyone disclosed all material information about this consulting agreement when soliciting clients to buy stock in the company.

Also, per FINRA, when the counsel for another foreign-owned publicly traded company referred clients, who were current and former company employees, to First Merger Capital, no one at the financial firm spoke to these new clients to make sure that the information they provided when opening the accounts was accurate.

The customers deposited more than 3.8 million shares of company stock. The company’s CEO, who was given control of the sales of the stock, then gave the order for company shares to be sold. More than $23 million of company stocks were sold. These were the only transactions in the clients’ accounts. Also, a number of branch owners and operators who took part in securities transactions netted commission as a result. FINRA says that SImonetti should have monitored, analyzed, and investigated these transactions to figure out whether they warranted a Suspicious Activity Report. As part of the settlement, Simonetti has agreed to participate in the FINRA Department of Enforcement’s investigation into this matter and to testifying truthfully.

FINRA Fines AXA Advisors $100,000 For Allegedly Not Firing Broker who Ran Ponzi Scam Sooner, Stockbroker Fraud Blog, March 16, 2012

FINRA May Surrender Proprietary BrokerCheck Lock, Stockbroker Fraud Blog, March 8, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012 Continue Reading ›

LPL Financial Ordered to Pay $100K for Lack of Adequate Oversight that Resulted in Unsuitable Investments for Clients

Published on: November 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

LPL Financial must pay $100K for its improper supervision of a broker. The Oregon Division of Financial and Corporate Securities, which fined the financial firm, reports that LPL Financial has put in place better oversight procedures since the violation was discovered. LPL Financial is a LPL Investment Holdings Inc. division.

According to the state’s securities division, Jack Kleck, an LPL Financial branch manager, sold risky gas and oil partnership-related investments to almost 36 residents. A lot of these clients were elderly seniors for whom these investments were unsuitable (considering their investment goals and age). Some even lacked the mental capacity to make such investment choices.

LPL Financial is accused of committing securities law violations, including not making sure that company procedures and policy were enforced and inadequately supervising Kleck, whose securities license was taken away in 2007. He was ordered to pay a $30,000 fine.

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative

Published on: October 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Two years after San Antonio broker was sentenced to prison for Texas securities fraud, FINRA has fined Merrill Lynch $1M for not properly supervising its former employer. These failures allegedly allowed Bruce Hammonds to run a Ponzi scam that defrauded investors of $1.4M.

Hammonds persuaded 11 people to invest in the Texas Ponzi scam, which he operated under the name B&J Partnership. It was supervisors at Merrill Lynch that gave the green light for him to open an account for B & J. The supervisors also are accused of not monitoring the funds that moved between customers and Hammonds.

Rather than putting investors’ money in a Merrill Lynch fund, he put $1.4 million of their funds in his working capital account. He even gave clients charts showing how the B & J fund was performing even though the fund wasn’t real. Hammonds used the money to pay for his personal spending, including a supposed house-flipping business.

He later pleaded guilty to federal securities charges. In addition to five years behind bars and three year supervised release. Hammond has been barred from the securities industry. All investors have been paid back in full for their losses.

In deciding to fine Merrill Lynch, FINRA found that the financial firm did not have a supervisory system that did a satisfactory enough job of monitoring accounts of employees for signs of possible misconduct. The system was only able to immediately capture accounts opened by an employee if he/she used his/her social security number as the main tax identification number. The SRO also said that between 1/06 and 6/10 Merrill Lynch did not monitor another 40,000 employee/employee-interested accounts.

By agreeing to settle, Merrill is not denying or admitting to the charges.

Failure to Supervise
It is a brokerage firm’s responsibility to establish written procedures for how to properly supervise its employees’ activities. These procedures must then be implemented to prevent broker fraud. When misconduct does arise and failure to supervise played a role in allowing the incident to happen, the financial firm can be held liable for securities fraud.

Brokerage companies have to supervise every broker that they license to work for them. Even if an accused broker is later found not liable, there is still a possibility that the brokerage firm or supervisor can be held liable for failure to supervise and be ordered to pay damages. For example, a broker may not have received the proper training or was given the wrong information by the financial firm, and this resulted in Texas securities fraud that caused an investor to suffer losses.

FINRA Fines Merrill Lynch $1 Million for Supervisory Failures That Allowed a Registered Representative to Operate a Ponzi Scheme, FINRA, October 4, 2011
Shepherd Smith Edwards & Kantas LTD LLP is Investigating Merrill Lynch in Light of Recent FINRA Fines Against the Firm for Failure to Supervise, MarketWatch, October 5, 2011
More Blog Posts:
Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term, Stock Broker Fraud Blog, October 5, 2009
Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stock Broker Fraud Blog, August 31, 2011
Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC, Institutional Investors Securities Blog, December 9, 2010 Continue Reading ›

FINRA Fines Bank of America Corp.’s Merrill Lynch $500,000 Over Alleged Oversight Failures of 529 Plans

Published on: February 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering Merrill Lynch, a Bank of America Corp. unit, to pay a $500,000 fine over alleged oversight failures involving 529 plans, a college-savings product. Merrill Lynch has also been censured by FINRA in a disciplinary action.

According to the SRO, Merrill Lynch lacked the adequate supervisory procedures necessary to make sure representatives were taking into account clients’ state income-tax benefits when determining whether they should invest in a 529 plan within their state of residence or in one outside the state. Merrill Lynch sold more than $3 billion in 529 plans between June 2002 and February 2007.

With 529 plans, which are considered municipal securities, money can be withdrawn to pay for college expenses without the imposition of federal taxes. Many states offer credits or state tax deductions for residents that invest in a 529 plans in the state. That said, depending on where the investor resides, investing in a plan outside the state can be more beneficial than the benefits received from a 529 plan in the investor’s home state.

However, FINRA contends that the only 529 plan that the financial firm offered and sold nationally was Maine’s NextGen College Investing Plan. Merrill Lynch must now send letters to clients who lived in states that offered 529-related tax benefits but ended up opening accounts with Maine’s NextGen College Investing Plan through Merrill Lynch. These customers will be given instructions on how to contact the financial firm. If they want to move their funds to a home-state 529 plan, Merrill Lynch has to help, as well as waive a number of fees.

By agreeing to settle with FINRA, Merrill Lynch is not denying or admitting to the SRO’s findings.

Related Web Resources:
Merrill fined $500,000 over college-savings plans, Bloomberg, January 19, 2011
FINRA Censures, Fines Merrill Over Colleges Saving Plans, OnWallStreet, January 19, 2011

More Blog Posts:
Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010
SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses, Stockbroker Fraud Blog, December 3, 2009 Continue Reading ›