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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
Raymond Thomas Blunk
OS/2007008935009/December 2011
Blunk recommended that customers participate in a Stock-to-Cash program under which customers would pledge stock to obtain loans to purchase other products. Customers obtained non-recourse loans, totaling approximately $1.8 million, from a non-broker-dealer company and pledged stock to that entity as collateral for the loans; the pledged stock would be transferred to the loaning entity’s securities account, which was maintained at a clearing firm.

The loans were in amounts up to 90 percent of the value of the pledged stock and were typically for a short period of time, usually three years, with no payments required during the term of the loan; instead, customers were required to pay the full principal and interest due at the end of the loan term. Customers used some of the loan proceeds to purchase insurance products through Blunk. 

Documentation used by the loaning entity made it appear that the entity was retaining the securities customers pledged and might use those securities to enter into hedging transactions, but the customers actually conveyed full ownership of their stock to the entity conducting the program, which routinely sold the securities upon receipt and often moved the money into its own bank account. 

When the entity became unable to make complete payments to customers with profitable portfolios, it used the proceeds from the sale of securities new customers pledged to pay off its obligations to existing customers and diverted money to pay for expenses not related to its operation. Blunk did not undertake adequate efforts to find out what happened to the stock that was conveyed to the lender; he relied on information the persons marketing the program provided and assumed that the lender was a broker-dealer holding the stock for his customers in custodial accounts. Blunk did not undertake any steps to verify this mistaken assumption.

The intermediaries with whom Blunk dealt refused to provide more information when he tried to obtain information about the lender and nevertheless, continued to entrust his clients’ securities to the lender.
Raymond Thomas Blunk: Fined $15,000; Suspended 25 days
Tags:  Stock To Cash     |    In: Cases of Note : FINRA
February 2011
Lochlainn Ohaimhirgin
AWC/2007008935006/February 2011

Ohaimhirgin recommended that customers participate in a Stock to Cash program under which customers would pledge stock to obtain loans, the proceeds of which were, in many cases, used to purchase non-securities insurance products; customers accepted his recommendation, taking out loans in the Stock to Cash program totaling more than $3.3 million.

Ohaimhirgin made no effort to find out what happened to the stock that was conveyed to the lender, and did not inquire into what would be done with the stock. He assumed that the lender held the stock as collateral for the entire loan term and did not attempt to obtain any information from the lender to whom the stock was assigned, or to verify any information provided by the promoter of the program with the lender.

Because the Stock to Cash strategy involved in each case a pledge of stock, Ohaimhirgin’s advice to his clients constituted a recommendation of “the purchase, sale or exchange of any security,” and as a registered representative, he was obligated under NASD Rule 2310 to have a reasonable basis for recommending that his customers pledge their stock to this lender to participate in the Stock to Cash program. Ohaimhirgin failed to obtain and verify information about how the stock was held or secured, and whether the lender had the ability to fulfill its obligations before recommending that his customers participate in the Stock to Cash program. As a result of failing to ascertain the facts necessary to understand the potential risks inherent in the program, Ohaimhirgin did not have a reasonable basis for his recommendations.

Lochlainn Ohaimhirgin : Fined $15,000; Suspended 60 days
Tags:  Stock To Cash     |    In: Cases of Note : FINRA
Paul Michael Rodak (Principal)
AWC/2007008935003/February 2011

Rodak assisted customers in participating in a Stock to Cash program, under which customers would pledge stock to obtain loans, the proceeds of which were, in many cases, used to purchase non-securities insurance products. Customers that Rodak assisted took out stocks to cash loans totaling more than $7.8 million.

As part of the process of obtaining a loan through the Stock to Cash loan program, customers were required to provide documentation setting forth the intended use of proceeds in order to ensure compliance with Federal Reserve Board regulations restricting the extension of margin credit. In order to avoid violation of Regulation U, borrowers who pledge marginable securities must complete a Federal Reserve Form G-3, also referred to as a Purpose Statement, which requires them to certify whether they will be using the loan proceeds to buy margin securities and, if not, to describe the specific purpose of the credit; the Form G-3 includes a warning that the falsification of the purpose of the credit by a borrower on the form violates the margin rules.

Rodak completed the Purpose Statement for the customers, indicating that they would be using the proceeds for real estate, but at the time Rodak completed these forms, he did not know how the customers would be using the proceeds, or whether the customers had already decided to use the proceeds to buy insurance products; as a result, Rodak caused numerous Purpose Statements to be inaccurate, and a copy of the completed statement for each customer was subsequently provided to the promoter of the program.

Paul Michael Rodak (Principal): Fined $15,000; Suspended 60 days
Tags:  Reg U    Stock To Cash     |    In: Cases of Note : FINRA
Robert Charles Keane (Principal)
AWC/2007008935004/February 2011

Keane particpated in the marketing and implementation of a Stock to Cash program under which customers would pledge stock to obtain loans, the proceeds of which were, in many cases, used to purchase non-securities insurance products. The “pledged” stock would be transferred to the loaning entity’s securities account, which was maintained at a clearing firm, and Keane played an integral part in facilitating these loans; customers accepted his recommendations, taking out loans totaling more than $3.3 million. Keane facilitated his customers’ pledging of the securities and recommended what stocks they should pledge and, in some cases, recommended that they sell specific securities and buy others to pledge to the lender, and affected those transactions. 

Despite making these recommendations, Keane made no effort to find out what happened to the stock conveyed to the lender, and did not inquire into what would be done with the stock; he understood that the lender took ownership of his customers’ securities but incorrectly assumed that the customers retained some interest in the pledged stock. Keane did not conduct an inquiry into the lender’s financial condition and whether it had the ability to fulfill its obligations, and when he attempted to find out about the lender’s hedging strategy, he was told that it was proprietary and that he could not get that information, but nevertheless entrusted his clients’ securities to this lender.

The Stock to Cash strategy involved in each case a pledge of stock, Keane’s advice to his clients constituted a recommendation of “the purchase, sale or exchange of any security”; and as a registered representative, Keane was obligated under NASD Rule 2310 to have a reasonable basis for recommending that his customers pledge their stock to this lender to participate in the Stock to Cash program.

Keane failed to conduct adequate due diligence concerning the program lender, failed to take sufficient action to determine whether his clients’ ownership interest in the pledged securities was adequately protected and, as a result, he did not understand the potential risks inherent in the strategy and did not have a reasonable basis for recommending the strategy to his current and potential customers.

Robert Charles Keane (Principal): Fined $10,000; Suspended 30 days
Tags:  Stock to Cash         |    In: Cases of Note : FINRA
Bill Singer's Comment
As I was reading this case, I was wondering how FINRA would connect the dots. Frankly, I sort of liked how the SRO concluded that since the Stock to Cash strategy involved pledging stock, that Keane "recommended" the purchase/sale/exchange of a security and, as such, could be caught in the net of NASD Rule 2310: Suitability. I tip my hat to FINRA's staff for that clever charging -- and I mean that sincerely.  This wasn't "cutesy" but well thought out.
Todd Randall Ware (Principal)
AWC/2007008935007/February 2011

Ware introduced several customers to a Stock to Cash program under which customers would pledge stock to obtain loans to purchase other products. Ware recommended a customer participate in the program under which the customer obtained loans of approximately $388,000 and pledged securities in support of these loans, using the proceeds to purchase fixed annuities through Ware.

Ware failed to conduct adequate due diligence concerning the operations or financial stability of the Stock to Cash program lender and failed to take sufficient action to determine whether his clients’ ownership interest in the pledged securities was adequately protected. Ware did not understand the potential risks inherent in the program and therefore did not have a reasonable basis for his recommendations.

Todd Randall Ware (Principal): Fined $15,000; Suspended 15 business days
Tags:  Stock To Cash    Due Diligence    Annuities     |    In: Cases of Note : FINRA
January 2011
David William Trende
2007008935010/January 2011
Trende falsified Federal Reserve forms with respect to customers and caused his firm to maintain false books and records by providing false information on Purpose Statements and submitting them to the firm.
A Stock-to-Cash program was designed to help customers of insurance agents fund purchases of fixed annuity and fixed life insurance products; however, loan documents and federal regulations prohibited investment of the loan proceeds in margin securities and from  investing in variable annuities. As part of the Stock-to-Cash loan process, Trende was required to provide a Purpose Statement setting forth the intended use of proceeds, in order to ensure compliance with Federal Reserve Board regulations restricting the extension of margin credit. Trende had general discussions with the customers who agreed to borrow approximately $180,000 concerning the possible uses of the loan proceeds, but no decisions were made about how to use the funds until after the proceeds were received so real estate was written on the Purpose Statement as the specific purpose of the loan. 

The customers did not use the proceeds for the stated purpose of purchasing real estate; they used more than 50 percent of the proceeds of the Stock-to-Cash loan to purchase a variable annuity from an entity, with Trende as their broker, and used the remainder of the proceeds to purchase an equity-indexed annuity, again through Trende, and to pay some debts.

The firm received a commission from the annuity sales, and Trende received a payout from the firm. 

Another of Trende’s customers agreed to borrow approximately $100,000 through the Stock-to-Cash program. In connection with this customer’s loan, Trende completed a Purpose Statement for the customer’s signature, which stated that the credit was going to be used for real estate. When the customer signed the Purpose Statement, he had discussed several options for the use of the proceeds with Trende, but had not determined how he would ultimately use the loan proceeds but did not use the proceeds to purchase real estate. The customer signed an application to purchase a variable annuity, with Trende as the broker, with most of the proceeds from the Stock-to-Cash loan; the firm received a commission from the annuity sale, and Trende received a payout from the firm. FINRA found that both customers profited on their investments in the securities that they bought for participation in the Stock-to-Cash program and posted as collateral for their loans.

Trende was well aware that his customers had not decided how to use the money at the time the Purpose Statements were signed. Trende’s conduct was unethical and reflects negatively on his commitment to compliance with the securities industry’s regulatory requirements.
David William Trende : Fiend $10,000; Suspended 3 months.
Tags:  Borrowing    Stock To Cash    Variable Annuity     |    In: Cases of Note : FINRA
Enforcement Actions
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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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