Securities Industry Commentator by Bill Singer Esq

After Midnight It All Hangs Out In Morgan Stanley Arbitration

(BrokeAndBroker.com Blog)

SEC Charges Corporate Controller and His Brother-In-Law with Insider Trading Ahead of Merger Announcement (SEC Release)

FINRA Censures and Fines R.F. Lafferty Over Order Memoranda 

In the Matter of R.F. Lafferty & Co., Inc, Respondent (FINRA AWC)

FINRA Censures and Fines Lincoln Investment Over Supervisory Failures

In the Matter of Lincoln Investment, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Impersonations

In the Matter of Curtis R. Shinn, Respondent (FINRA AWC)

[W]right learned non-public information about the acquisition of CEB while serving as a senior accounting officer of the company. In the months leading up to the merger announcement, the complaint alleges, Wright repeatedly tipped his brother-in-law, Christopher J. Clark, about the impending acquisition. The complaint alleges that based on the information tipped by Wright, Clark purchased highly speculative, out-of-the-money call options and directed his son to purchase the same options in the son's account. As the date of the announcement approached, Clark allegedly took aggressive steps to fund purchases of additional out-of-the-money CEB options, including liquidating his wife's IRA, nearly maxing out a line of credit and taking out a loan on his car. The options Clark allegedly purchased were so speculative that Clark - alone or with his son - were the only people to buy those options on all but one of the days they traded. As alleged, Clark and his son made profits of more than $243,000 and $53,000, respectively.

Inaccurate Books and Records

Rather than maintaining physical order tickets or other internal records as a "memorandum of each brokerage order," R.F. Lafferty relied on records generated by its clearing firms. The records generated by its clearing firms included a field indicating whether each trade was solicited or unsolicited. However, from July 2014 to July 2017, one of the firm's two clearing firms regularly reported that information as "N/A" or blank, rather than indicating whether these trades were solicited or unsolicited. 

As a result, from July 2014 to July 2017,¹ the firm's order memoranda for 56,033 trades in customer accounts -- which was more than 40% of the firm's non-proprietary trades during this time period-- listed "N/A" in the solicitation filed. The firm's order  memoranda and other books and records lacked any other information indicating whether the 56,033 trades were solicited or unsolicited. unsolicited. The firm's books and records were, therefore, inaccurate, as these trades in customers' accounts were either solicited or unsolicited.

Footnote 1: R. F. Lafferty has since worked with the clearing firm to fix this issue and ensure that solicitation indicators are accurately recorded.

. . .

Supervisory Failures

. . .

The firm allowed individual representatives, when entering customer trades in the order management systems maintained by the firm's clearing firms, to select whether or not they had solicited the trades. R.F. Lafferty then retained just the information it received from its clearing firms as the order memoranda in the firm's own books and records. But the firm maintained no supervisory system to ensure the accuracy of its order memoranda, and no firm principal took supervisory steps to ensure the accuracy of the firm's order memoranda. To the contrary, when firm supervisory personnel became aware of inaccurate blank or "N/A" solicitation information in the firm's books and records, they treated the trades as unsolicited for purposes of supervisory review. 

The limited steps that the firm took to correct the problem were not reasonable. During the relevant period, firm operations personnel occasionally asked registered representatives about trades in customer accounts with "N/A" as the solicitation indicator; when that happened, operations personnel on an ad hoc basis would correct the order memoranda or add a comment to the blotter to show the trades as either solicited or unsolicited. The firm did not, however, correct the all or evn most trades showing "N/A" as the solicitation indicator and took no other steps to remedy the problem. As described above, because of the firm's failure to establish and maintain a reasonably designed supervisory system or enforce its existing WSPs, the firms books and records contained tens of thousands of inaccuracies with respect to whether trades were solicited or not.

1. Lincoln Failed Reasonably to Respond to Red Flags Concerning the Transmittal of Customer Funds to Outside Entities

. . .

In September and October 2017, Lincoln received multiple telephone calls from a woman impersonating Customer A; the calls were recorded by the firm. The imposter also faxed to the firm three requests for transmittals of funds from Customer A's brokerage account at Lincoln to a bank account, purportedly in her own name, which Lincoln processed. Ultimately, the imposter obtained approximately $15,800 from Customer A's account. The firm failed to reasonably identify and respond to multiple red flags concerning Customer A. During one of the calls, for example, the imposter gave an incorrect social security number, and she provided Customer A's social security number after obvious hesitation during another call. On each of the three faxed transmittal requests, the imposter requested that funds be transferred to a bank account not previously on file. 

Additional red flags accompanied the third distribution request. Initially, and in error, the requested funds were sent via check to Customer A's address of record; the imposter's faxed transmittal request directed that the funds be sent via ACH payment to a bank account ostensibly in her name. The imposter, realizing that the funds were not sent to the imposter's bank as directed, thereafter again instructed Lincoln to transmit the funds via ACH payment to her bank. The receiving bank rejected the transmittal, informing Lincoln that the account had been "frozen." Firm personnel then spoke with the imposter, who asked that no mail be sent to her address of record for the next few months. Lincoln processed three additional, similar funds transmittal requests in October and November 2017, and each time the receiving bank rejected the transmittals, stating that the account was closed. On the same day that the receiving bank rejected the transmittal for the final time, Customer A called Lincoln because she had received the check that was originally sent to her home address. Because Customer A never, in fact, requested transmittals from her Lincoln account, the scam was discovered. 

Lincoln reimbursed Customer A the full amount that was wrongly transferred from her account, plus missed market gains; Customer A also was offered credit monitoring. 

. . .

2. Lincoln Failed Reasonably to Implement its WSPs Concerning the Transmittal of Customer Funds to Third-Parties

. . . 

In September 2017, an affiliated person of the firm received an email from Customer B's email address. Customer B did not send the email; an impostor did. In the email, the imposter asked how to transfer $30,000 that day to a third party via check. When the affiliated person emailed the imposter at Customer B's email address and informed him that Lincoln may need to contact him by telephone to verify the transmittal request, the imposter replied: "They can verify the withdrawal with my signature as I would be getting into a meeting soon." The affiliated person then emailed the imposter an authorization letter, which the imposter returned. Customer B's registered representative did not attest to the authenticity of the signature on the authorization letter; in fact, the signature was electronically affixed to the letter of authorization and could be manipulated. Moreover, no one associated with the firm called Customer B to verify the transmittal request, as required by the firm's procedures. 

The firm issued the $30,000 check payable to the third party, as requested by the imposter. When the imposter attempted to deposit the check, the receiving bank, which had suspicions about the check, contacted Lincoln to verify the authenticity of the transaction. Personnel at the firm then called Customer B, who informed the firm that he had not requested the third-party check. 

The bank returned the funds, which were deposited back into Customer B's brokerage account at Lincoln; Lincoln also offered credit monitoring to Customer B. 

Following its discovery of the events described above involving Customer A's and Customer B's accounts, the Firm undertook remedial measures to address the deficiencies in its WSPs and supervisory system. 

Between November 7, 2012 and January 11, 2019, Shinn made 25 telephone calls to Firm A's customer service department, during which he impersonated 14 of his customers or former customers who had insurance policies or retirement accounts with Firm A or one of its affiliated entities. During these calls, Shinn primarily sought to resolve service related issues or to obtain general information about the customers' insurance policies or retirement accounts with Firm A, including required minimum distribution amounts and account balances. Although the customers and former customers gave Shinn permission to contact Firm A on their behalf, they did not give him permission to impersonate them on these phone calls.

• Securities Industry Commentator
• Bill Singer