NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA 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, 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.

Timothy Charles Cross
AWC/2010021640302

Cross failed to supervise the activities of a registered representative of his member firm in a manner that was reasonably designed to achieve compliance with applicable securities laws and regulations. Cross was the registered representative’s designated supervisor. The registered representative, through her fraudulent scheme, converted to her own use and benefit at least $8 million from clients, including the firm’s customers.

The representative persuaded her clients to liquidate existing investments, for the purpose of purchasing other investments, and instructed the customers to make the checks payable to an entity Cross owned and with which she conducted business. Rather than use the clients’ funds to purchase the other investments, she diverted their funds to her own personal use.

In order to conceal her conversion of the clients’ funds, she prepared and sent to the clients’ false account statements, and she concealed from the firm the personal bank account where the clients’ funds were deposited. 

Approximately once a month Cross received from the representative a blotter that listed purchases and sales processed through direct applications to issuers. Also, Cross received reports from the firm’s insurance affiliate, which showed the representative’s insurance sales activity, except for the business she conducted with other insurers. Some of the representative’s outside insurance business was conducted through Cross’ insurance agency; Cross was therefore able to track all of the representative’s business except for a portion of her outside insurance business.

The representative’s income from her securities business and from insurance business conducted through the firm’s affiliate was not sufficient to pay her expenses; and that, although it was obvious that the representative had additional income, Cross did not attempt to determine the source of that income. In addition, the securities blotters Cross reviewed showed numerous sales of securities by the representative’s clients and did not show that they had purchased other products with the proceeds of those sales; but Cross did not take note of the liquidations shown on the blotters and make inquiries to determine what happened to the proceeds of those sales.

Moreover, Cross conducted an inspection of the representative’s office; and that the firm’s inspection checklist required him to complete a checking account review form for each doing business as (DBA) and outside business activity (OBA) accounts owned or controlled by the representative as well as any other accounts where commissions are deposited, including business accounts, DBA accounts and personal accounts. Furthermore, before the inspection of the representative’s office, Cross participated in the firm’s webcast training session regarding office inspections; a significant portion of the training was devoted to the review of checking accounts. As part of the inspection, Cross reviewed account statements for the registered representative’s business account; the representative told Cross that the business account was her only bank account.

There were several reasons why Cross should have known that the representative had another bank account and that some of her commissions were deposited into that account; Cross should have realized that the commissions deposited into the business account represented less than all of the registered representative’s income. Cross knew that the representative frequently sold an entity’s annuities and there was no evidence that the entity’s commissions were deposited into the business account; and that Cross could also see that the representative did not pay her personal expenses from the business account, a further indication that she had another account. Cross failed to note large deposits that were shown on the business account statements; that the statements showed 35 deposits of $2,000 or more from unidentified sources in a 12-month period, and that the total amount of those deposits was approximately $497,585.

In addition, pursuant to his firm’s directives, Cross should have requested documentation showing the sources of those payments; had he done so, Cross would have learned of the personal account where the registered representative had deposited clients’ funds, and thus would have discovered that the representative had received large payments from customers.

Timothy Charles Cross: Fined $1,000; Suspended 6 months in Principal capacity only; Required to requalify as a general securities principal by examination before association with any member firm in a principal or supervisory capacity.