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Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
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.
December 2011
Dawson James Securities, Inc, Albert James Poliak (Principal) and Douglas Fulton Kaiser (Principal)
OS/2009016158501/December 2011
The Firm entered into a de facto commission recapture agreement with a firm customer without meeting the minimum required net capital of $250,000 and without filing an application for amendment of the firm’s FINRA membership agreement. 

The Firm and a customer entered into a consulting agreement whereby the customer was to provide research and advisory services. However, the firm did not request, nor did the customer provide, research reports or advisory services or any of the other services set forth in the consulting agreement. Moreover, the Firm paid the customer a total of $1,215,000, which exceeded by $885,000 the payments due to the customer per the contractual requirements under the consulting agreement. The payments exceeded the contractual requirements of the consulting agreement because the agreement was a de facto commission recapture arrangement through which the customer was paid larger amounts based upon the level of security transactions the customer was executing in its brokerage account at the firm. 

Dawson's CEO Poliak was responsible for the creation of the consulting agreement and approved each wire transfer payment to the customer, including the payments that were in excess of amounts due to the customer under the consulting agreement. 

Kaiser (who acted at times as both the firm’s head of trading and the Financial and Operations Principal (FINOP)) was responsible for calculating the payments owed to the customer and he pulled research concerning the customer’s trades in an effort to document the consulting agreement, but the Firm was unable to document its use of the purported research or other financial benefit arising from the consulting agreement. 

Poliak and Kaiser acted unethically in that they facilitated the improper commission recapture arrangement between the firm and customer, and caused the firm to fail to comply with the requirement of NASD Rule 1017.

Acting through Poliak and Kaiser, the Firm violated the Customer Protection Rule in several ways:
  1. in connection with the commission recapture agreement described above, the firm held, or was in control of, customer funds without establishing a special reserve bank account for the exclusive benefit of the customer in violation of Securities Exchange Act Rule 15c3-3, By holding customer funds and failing to forward the funds to its clearing firm, the firm became a broker or dealer that receives and holds funds for customers, which required it to increase its net capital and establish a reserve bank account for customer protection;
  2. after a commission recapture agreement was ultimately established for the customer by the firm’s clearing firm, the firm deposited into its own checking account a check from the clearing firm which included at least $136,700 in commission rebates due to the customer. Rather than record a liability to the customer, the firm made a journal entry to reduce the commission receivable. The firm’s receipt of customer funds increased its minimum net capital to $250,000, a level that the firm did not meet;
  3. the firm held and segregated security positions in its proprietary account for the benefit of two customers in order to satisfy the obligation of promissory notes and a confidential private placement memorandum (PPM); 
  4. the firm acted in the capacity of a noteholder’s agent to facilitate the repayment to firm customers of $2,715,000 of principal plus interest on defaulted notes and warrants issued by an unaffiliated issuer. By doing so, the firm acted in a carrying, transferring and safekeeping capacity for customers, which required the firm to maintain a minimum net capital of at least $250,000. The firm’s net capital was below that required minimum, and as a result the Financial and Operational Combined Uniform Single (FOCUS) reports it filed, and its books and records, were inaccurate. The firm also failed to timely file Securities and Exchange Commission (SEC) Rule 17a-11 notices when notified by its designated examining authority that the broker-dealer’s net capital was, or had been, below its minimum requirement. 
When acting in the capacity as the firm’s FINOP, Kaiser was responsible for supervision and/or performance of the firm’s compliance under all financial responsibility rules promulgated pursuant to provisions of the Securities Exchange Act of 1934. Kaiser failed to adequately perform his FINOP responsibilities in that he failed to take adequate steps to ensure the accuracy of the firm’s net capital calculations. 

As Poliak participated in the firm’s holding of customer funds in violation of Rule 15c3-3, Poliak caused the firm’s net capital and books and records violations. The firm’s compensation committee did not document the basis upon which a research analyst’s compensation was established, thus failing to establish a written record of whether specific factors required by NASD Rule 2711 were properly considered, and whether research analyst compensation was tied to any investment banking activities. 

FINRA found that a senior officer at the firm inaccurately represented in required attestations submitted to FINRA that the compensation committee documented the basis upon which each research analyst’s compensation was established. The senior officer should have known that each attestation submitted contained false information. Furthermore, the Firm sold securities for customer accounts that were not registered pursuant to Section 5 of the Securities Act of 1933, nor exempt from registration; the sales constituted an unregistered distribution by the firm. 

Dawson James Securities, Inc: Censured; FIned $90,000
Albert James Poliak: Fined $30,000; Suspended 1 year
Douglas Fulton Kaiser: Fined $30,000; Suspended 1 year
Tags:  Commissions    Membership Agreement    Customer Protection Rule        FINOP     |    In: Cases of Note : FINRA
September 2011
Searle & Co. and Robert Southworth Searle (Principal)
AWC/2009016262101/September 2011

Although the Firm sought and received permission to conduct its private placement activity, it failed to timely amend its Application for Broker-Dealer Registration (Form BD), as it did not identify this business on its Form BD until years later.

Acting through Searle, the Firm’s president and CCO failed to establish, maintain and enforce an adequate system and written procedures reasonably designed to supervise its placement business; and failed to adequately supervise the placement business conducted by a former registered representative who conducted firm business at an unregistered office. The Firm failed to adequately ensure that its ledgers or other records accurately reflected all of the firm’s assets, liabilities, income and expenses. The Firm impermissibly “netted” the commission revenue it received, failing to reflect the gross amount of commission the firm received and the amount paid to the registered representative who placed the business, thus understating gross revenues and expenses. As a result, the Firm filed inaccurate Financial and Operational Combined Uniform Single (FOCUS) Reports and inaccurate annual audits.

The Firm failed to establish, maintain and enforce adequate WSPs regarding the use of outside emails for firm business and the review and retention of emails; the firm permitted associated persons to use personal email accounts to send and receive emails related to the firm’s securities business without capturing, reviewing or retaining them.

In addition, the Firm paid fees and commissions totaling $21 million to non-registered limited liability company (LLC) entities of which the firm’s registered representatives were the sole members. Moreover, the Firm improperly paid the non-registered entities rather than paying the commissions and fees directly to the registered representatives who owned the non-registered entities. The suspension was in effect from August 15, 2011, through August 26, 2011. (FINRA Case #)

Searle & Co.: Censured; Fined $47,500 ($10,000 was jointly and severally with Searle)

Robert Southworth Searle: Fined $10,000 joint/several with Searle & Co.; Suspended 10 business days in Principal capacity

Tags:  Membership Agreement    Material Change Of Business    FOCUS    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment

Geez, another well written disciplinary action squib --  maybe things are truly changing for the better at FINRA?  Is that possible?  Wow!!

In any event, two key takeaways. One, make sure to update your Form BD to reflect all new business lines.  Two, don't pay transactional compensation to unregistered entities/persons.

If I have one quibble with the case, it's this:  If FINRA knew that this member firm had asked for and been granted approval to engage in a new business, then how come it took "years later" for the regulator to notice that the Form BD was not updated?  After all, assuming that FINRA (or NASD's) Staff was conducting an annual or at least a regulator examination fo the firm, didn't any examiner notice that the firm was engaged in a line of business for which it had been approved but for which it had not updated the Form BD.  I mean isn't that sort of regulatory examination 101?

July 2011
Grant Williams L.P.
AWC/2009016225201/July 2011

The Firm made material changes in its business operations without first filing an application and obtaining FINRA approval.

The Firm increased the number of its registered representatives, an increase of 80 percent over the number of representatives provided for in its membership agreement, and increased the number of its registered and non-registered branch offices, an increase of 113 percent over the number of branch offices provided for in the membership agreement.

Grant Williams L.P. : Censured; Fined $20,000
Tags:  Membership Agreement     |    In: Cases of Note : FINRA
Bill Singer's Comment
I understand and appreciate the violation. Not an issue. But what the hell warranted a whopping $20,000 fine?
May 2011
First Dallas Securities Incorporated
AWC/2009016267801/May 2011

The Firm implemented a succession plan that resulted in the transfer of ownership from the firm’s chairman and majority shareholder to his relatives who were at that time minority shareholders, and the transfer represented 27.91 percent of the voting shares in the firm’s holding company. The failed to file for FINRA approval of a material change in ownership or control

  • at least 30 days prior to a 25 percent or greater indirect change in ownership or control; and
  • related to the transfer until several years after the transfer had taken place.
First Dallas Securities Incorporated : Censured; FIned $10,000
Tags:  Membership Agreement     |    In: Cases of Note : FINRA
Bill Singer's Comment
Word to the wise. Make sure to review you FINRA Membership Agreement and to ensure that any contemplated transfers/sales of your firm's ownership comply with the Agreement and applicable FINRA membership rules.
TradeStation Securities, Inc.
AWC/2010023770401/May 2011

The Firm proceeded with new business operations prior to obtaining FINRA approval. The firm filed an Application for Approval of Change of Business Operations to move its futures business operations from fully-disclosed clearing to omnibus clearing operations, and while it requested expedited processing of its application, it did not wait for approval before commencing omnibus clearing.

FINRA notified the firm by letter that it had conducted an initial review of the application and requested additional information regarding the firm and the proposed change in business operations. The firm provided the requested information to FINRA by letter, in which it notified FINRA that it made the required net capital increases and went live with its omnibus arrangement although FINRA had neither concluded its review of the application nor granted the firm’s request for provisional approval to effect the change from fully disclosed to omnibus clearing operations.

At the time the firm was undergoing the approval process for its application, the firm was also contemplating a change in its business operations to prime brokerage. The firm informed FINRA that prior to conducting any full scale prime brokerage business, it intended to submit a separate Rule 1017 application. In addition, the firm submitted another Application for Approval of Change of Business Operations requesting approval to conduct prime brokerage business, which FINRA approved, although the firm had been engaging in unapproved prime brokerage activity prior to approval.

TradeStation Securities, Inc. : Censured; Fined $15,000
Enforcement Actions
Tags
It's All Over Now: My 42-year Wall Street Journey by Bill Singer, Esq.
January 30, 2024
Before my second career as a lawyer, I was the third generation of my family in the wine and liquor industry. In 1981, I started law school; and in 1982, I was hired as a law student in Smith Barney, Harris & Upham's Legal Department. After I graduated law school, I was a regulatory lawyer with the American Stock Exchange and then with the NASD (now... Read On
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