Securities Industry Commentator by Bill Singer Esq

Activities to educate investors, promote compliance by member firms through education, compliance resources or similar projects, or ensure our employees are highly trained in the markets, products and businesses we regulate.

From January 2013 through April 2017, BBR failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures ("WSPs"), that were reasonably designed to achieve compliance with FINRA's suitability rule. In addition, BBR and Buckman -- who was the Firm's designated supervisory principal responsible for conducting suitability reviews failed to reasonably supervise two former registered representatives, GK and RI, who, while registered through BBR, recommended excessive and unsuitable trades in multiple customer accounts. . . .

[F]irst, although the Firm's WSPs identified Buckman a Senior Vice President and one of the owners of the Firm as the principal responsible for reviewing the suitability of representatives' recommendations, Buckman did not perform suitability reviews, claiming instead that he relied on the Compliance Department to perform such reviews. However, BBR did not memorialize any purported delegation of supervisory responsibility in its WSPs or elsewhere.

Second, the WSPs did not identify who at the Firm had responsibility for reviewing exception reports and alerts. Through its monitoring service, BBR received a number of automated exception reports and alerts that were relevant to identifying excessive trading and unduly concentrated positions. Prior to May 2017, however, no one at the Firm reviewed those exception reports or alerts. For example, the Firm had access to monthly exception reports that flagged high turnover rates and commission amounts relative to the amount of equity in an account, both of which are relevant to detecting excessive trading. However, the WSPs did not mention those reports or provide any guidance about how to use them. Similarly, the Firm also received alerts that identified potentially unsuitable concentration levels in customer accounts but, again, the WSPs did not mention the alerts or provide any guidance about how to use them.

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For example, GK recommended that customers LA and RA a retired couple with an investment objective of "balance,conservative growth" buy and then promptly sell UITs and other long-term investments on 15 separate occasions in 2014. The customers held these long-term securities for an average of only 69 days. GK's frequent and short-term trading of UITs and other long-term products in the customers' account resulted in an annualized cost-to-equity ratio of more than 16 percent. GK recommended that another customer with an investment objective of "growth" buy and sell UITs and other long-term investments on 17 occasions in 2014, with an average holding period for these securities of only 53 days. GK's frequent trading in that customer's account resulted in an annualized cost-to-equity ratio of more than 21 percent.

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Respondents were aware that RI had recommended that some of his customers hold concentrated positions in the stock. But neither Buckman nor anyone at the Firm took any measures to determine the specific concentration levels, much less to determine whether the concentration levels were suitable for the customers in question. No one at the Firm contacted the customers to determine whether they were aware of the concentrated positions in their accounts. Collectively, RI's recommendations that these customers concentrate their account holdings in a single, speculative security resulted in losses of approximately $32,078 for the four customers. . . .

[Q]uality's financial performance began to struggle in 2016 due in part to a slowdown in the trucking market.  In addition, Quality owned a significant number of a truck models with mechanical issues, which many drivers did not want to lease.  By 2016, many of Quality's trucks were idle, unleased and overvalued on Quality's books by tens of millions of dollars. 

Instead of properly reporting Quality's financial difficulties to investors, members of Celadon's and Quality's senior management team, all acting within the scope of their employment, participated in a scheme that resulted in Celadon falsely reporting inflated profits and inflated assets to the investing public through Celadon's financial statements.  Between approximately June 2016 and October 2016, Quality engaged in a series of trades as a means to dispose of its aging and unused trucks.  In order to avoid disclosing the losses connected to these trucks, executives executed the trades using invoices purposely inflated well above market value.  Celadon ultimately used these invoices and inflated truck values to hide millions of dollars of losses from investors.    

In December 2016, after allegations of misconduct had arisen publicly, Celadon's management approved a memorandum that falsely stated the trucks involved in the above-described transactions were purchased and sold at fair market value, and were accounted for properly on Celadon's books.  Further, beginning in approximately January 2017, Celadon's independent auditors conducted an investigation into the allegations of misconduct.  In response, multiple members of Celadon's and Quality's management falsely represented to independent auditors that the transactions were done at fair market value and that they were not trades.  Celadon's auditor ultimately withdrew its audit opinion for certain Celadon financial statements.  The resulting disclosure by Celadon of the auditor's withdrawal caused a significant drop in the price of Celadon's stock, which resulted in investors losing tens of millions of dollars. . . .

[B]erkey conducted in-and-out trading that was almost certain to lose money for customers while yielding commissions for himself. According to the complaint, Berkey's customers incurred significant costs with every transaction and the securities were held briefly; thus, the price of the securities had to rise significantly for customers to realize even a minimal profit. The complaint also alleged that Berkey churned customer accounts and concealed material information from his customers, namely that the costs associated with their recommendations, including commissions and fees, would almost certainly exceed any potential gains on the trades.

• Securities Industry Commentator
• Bill Singer