OS/2007011348301/ 2010
Brough, Elliott, Falabella and Sheinkop induced customers to invest in complex, illiquid and risky collateralized mortgage obligations (CMOs). Through misrepresentations and omissions, the respondents led customers to believe that through CMO investments they could safely achieve consistently high annual returns, regardless of market conditions, with the government backing the investments. The CMOs the respondents bought for customers were generally not government-guaranteed, and they were subject to price volatility, uncertain cash flows and maturities, based on changes in interest rates. The respondents failed to disclose material characteristics of, and risks associated with, different CMOs with substantially different payment structures and interest rate sensitivity, and failed to ensure that customers understood the characteristics and risks of CMOs.
The respondents failed to adequately investigate and understand the CMO products, and did not have reasonable grounds to believe that the individual CMO purchases were suitable for each customer. The risk was further magnified through the recommendations to the customers to buy CMOs on margin, and Elliott, Falabella and Sheinkop did not have reasonable grounds to believe the use of margin was suitable for customer CMO purchases based upon the customers’ disclosed investment experience, investment objectives, financial situation and needs.
In addition, Brough, Elliott, Falabella and Sheinkop exercised discretionary authority in customer accounts without obtaining the customers’ prior written authorization and their member firm’s prior acceptance of the account as discretionary. Moreover, the customers were exposed to significant risks that they did not understand, and Brough, Elliott Falabella and Sheinkop did not take the time to understand or ignored them so that some customers suffered considerable losses to their retirement savings.
Thomas Joseph Brough: No fine in light of financial status; Suspended 8 months
Eric Robinson Elliott: Fined $10,000; Ordered to pay $30,217, in restitution to customers; Suspended 6 months in all capacities;
Brian James Falabella: No fine in light of financial status; Suspended 6 months in all capacities
Jonathan Jay Sheinkop: No fine in light of financial status; Ordered to pay partial restitution in the total amount of $30,000 to customers; Suspended 12 months in all capacities.
AWC/2008012444202/ 2010
Mello served as her member firm’s FINOP and was responsible for monitoring the firm’s financial condition to determine whether its net capital was sufficient to conduct a securities business. The firm’s registered representatives effected trades in collateralized mortgage obligations (CMOs) through the firm’s proprietary trading account. The transactions appeared to remove beneficial ownership of the CMOs from the firm, but they were sham transactions because the securities remained in the firm’s inventory.
The registered representative was able to accomplish and maintain his scheme because Mello and others at the firm reviewed his activity on a daily basis rather than in a manner that would evidence trading patterns over time and expose the firm’s losses and risk. As a result of the registered representative’s activity and the firm’s method of monitoring it, the firm conducted a securities business on multiple days while failing to maintain its required minimum net capital and, because Mello failed to discern the true effect of the registered representative’s trading on the firm’s net capital, she allowed the firm to conduct a securities business on multiple occasions while in violation of SEC Exchange Act Rule 15c3-1.
2007007329501/ 2010
OS/2007011348301/ 2010
Gest
- recommended risky and illiquid CMO positions to his customers, and intentionally and/or recklessly made misrepresentations of material facts and omitted to disclose material facts to customers in connection with their CMO investments;
- failed to provide his customers with material information concerning the bonds as contained in prospectuses, prospectus supplements or any offering circulars relating to the particular CMO tranches purchased that document various applicable risk factors that an investor should consider before investing;
- recommended CMO positions to customers without investigating and understanding the products and without reasonable grounds to believe that CMO investments were suitable, as he lacked an understanding of the material characteristics of, and risks associated with, the CMOs offered;
- lacked reasonable grounds to believe the CMO program and CMO investments were suitable for his customers based upon their disclosed investment experience, investment objectives, financial situation and needs, and he did not have reasonable grounds to believe that the use of margin was suitable for customer CMO purchases;
- exercised discretionary authority in customer accounts without his customers’ prior written authorization and his member firm’s prior written acceptance of the accounts as discretionary; and
- willfully failed to timely update his Form U4 with material facts.
- 529 College Savings Plan
- Abandoned Accounts
- Algorithmic Trading
- Altered Customer Phone Records
- AML
- Annual Compliance Certification
- Annual Compliance Meeting
- Annuity
- Asset Purchase Agreement
- ATM
- Away Accounts
- Background
- Bank
- Banks
- Beneficiary
- Best Efforts Offering
- Blackjack
- Borrowed
- Borrowing
- Breakpoint
- Casino
- CE
- CFTC
- Changes Of Address
- Check
- Check Kiting
- Checks
- CIP
- CMO
- Commodity Futures
- Commodity Pool
- Communications
- Computers
- Confidential Customer Information
- Contingency Offering
- Continuing Education
- Conversion
- Conviction
- Cooperation Agreement
- Correspondence
- Credit Cards
- Currency
- Day Trading
- Deceased
- Delivery Instructions
- Discretion
- Do Not Call
- EIA
- Elderly
- Electronic Communications
- Electronic Storage
- Embezzled
- Escheat
- Escrow
- Estate
- Expenses
- False Proof Of Insurance
- False Statements
- Fax
- Federal Appeal
- Felony
- Finder Fees
- Finder\\\'s Fees
- Fingerprints
- FINOP
- Firm Committment Offering
- FOCUS
- FOREX
- Forgery
- Freely-Tradable
- Futures
- Gifts
- Guaranteeing Against Losses
- Hedge Fund
- Impersonation
- Inspections
- Instant Messaging
- Insurance
- Internet
- Investment Advisor
- Letter Of Credit
- Life Insurance
- Living Trust
- LOA
- Loan
- Log On IDs
- Margin
- Mark-Up Mark-Down
- Material Change Of Business
- Membership Agreement
- Minimum Contingency
- Modification Of Sanctions
- Money Laundering
- MSRB
- Mutual Fund
- Mutual Funds
- NAC
- Net Capital
- Notary
- Notice Of Levy
- NSF
- Operations Manager
- Options
- Orders
- OSJ
- Outside Accounts
- Passwords
- Payphones
- POA
- Policy Lapse
- Ponzi
- Power Of Attorney
- Pre-arranged Trading.
- Private Placement
- Private Securities Transaction
- Producing Manager
- Production Quota
- Promissory Notes
- Proprietary Traders
- Public Appearances
- Qualified Domestic Relations Order
- Radio
- Regulation S-P
- REIT
- Research
- Restitution
- SAR
- Scripts
- Signature
- Solicited
- Statutory Disqualification
- Suitability
- Supervision
- Supervisory System
- Surrender Charge
- Surrender Charges
- Suspense Account
- Taping Rule
- Telemarketing
- Television
- Term Life
- Testing
- Third Party Vendor
- Time & Price Discretion
- Trading Limits
- Trading Volume
- Trust Account
- Turnover
- Two Party Consent
- U.S. Treasuries
- UIT
- Unclaimed Funds
- Universal Lease Programs
- Unregistered Office
- Unregistered Person
- Unregistered Principal
- Unregistered RRs
- Unregistered Securities
- Unregistered Supervisor
- Variable Annuity
- Variable Insurance
- Website
- Willfully
- WSP
- Zero Coupon