AWC/2010022715607/December 2011
AWC/2010022679801/December 2011
AWC/2010022715606/December 2011
OS/2009017275301/November 2011
While associated with the firm, registered representatives made misrepresentations or omissions of material fact to purchasers of unsecured bridge notes and warrants to purchase common stock of a successor company.
The registered representatives:
- guaranteed customers that they would receive back their principal investment plus returns, failed to inform investors of any risks associated with the investments and did not discuss the risks outlined in the private placement memorandum (PPM) that could result in them losing their entire investment. The registered representatives had no reasonable basis for the guarantees given the description of the placement agent’s limited role in the PPM; and
- provided unwarranted price predictions to customers regarding the future price of common stock for which the warrants would be exchangeable and guaranteed the payment at maturity of promissory notes, which led customers to believe that funds raised by the sale of the anticipated private placement would be held in escrow for redemption of the promissory notes.
The Firm, acting through a registered representative, made misrepresentations and/or omissions of material fact to customers in connection with the sale of the private placement of firm units consisting of Class B common stock and warrants to purchase Class A common stock; the PPM stated that the investment was speculative, involving a high degree of risk and was only suitable for persons who could risk losing their entire investment. The representative represented to customers that he would invest their funds in another private placement and in direct contradiction, invested the funds in the firm private placement.
The Representative recommended and effected the sale of these securities without having a reasonable basis to believe that the transactions were suitable given the customers’ financial circumstances and conditions, and their investment objectives. The representative recommended customers use margin in their accounts, which was unsuitable given their risk tolerance and investment objectives, and he exercised discretion without prior written authorization in customers’ accounts.
Acting through Locy, its chief operating officer (COO) and president, the Firm failed to reasonably supervise the registered representative and failed to follow up on “red flags” that should have alerted him to the need to investigate the representative’s sales practices and determine whether trading restrictions, heightened supervision or discipline were warranted. Moreover, despite numerous red flags, the firm took no steps to contact customers or place the representative on heightened supervision, although it later placed limits only on the representative’s use of margin. The firm eventually suspended his trading authority after additional large margin calls, and Locy failed to ensure that the representative was making accurate representations and suitable recommendations.
Turbeville, the firm’s chief executive officer (CEO), and Locy delegated responsibility to Mercier, the firm’s chief compliance officer (CCO), to conduct due diligence on a company and were aware of red flags regarding its offering but did not take steps to investigate.
Acting through Turbeville, Locy and Mercier, the Firm failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability; under the firm’s written supervisory procedures (WSPs), Mercier was responsible for ensuring the offering complied with due diligence requirements but performed only a superficial review and failed to complete the steps required by the WSPs; Locy never evaluated the company’s financial situation and was unsure if a certified public accountant (CPA) audited the financials, and no one visited the company’s facility. Neither Turbeville nor Locy took any steps to ensure Mercier had completed the due diligence process. Turbeville and Locy created the firm’s deficient supervisory system; the firm’s procedures were inadequate to prevent and detect unsuitable recommendations resulting from excessive trading, excessive use of margin and over-concentration; principals did not review trades or correspondence; and the firm’s new account application process was flawed because a reviewing principal was unable to obtain an accurate picture of customers’ financial status, investment objectives and investment history when reviewing a transaction for suitability. The firm’s procedures failed to identify specific reports that its compliance department was to review and did not provide guidance on the actions or analysis that should occur in response to the reports; Turbeville and Locy knew, or should have known, of the compliance department’s limited reviews, but neither of them took steps to address the inadequate system.
Brookstone Securities, Inc.: Censured; Fine $200,000
David William Locy (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only
Mark Mather Mercier (Principal): Fined $5,000; Suspended from 3 months in Principal capacity only
Antony Lee Turbeville (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only
OS/2008011672301/November 2011
As the AMLCO and president of his member firm, Grossman failed to demonstrate that he implemented and followed sufficient AML procedures to adequately detect and investigate potentially suspicious activity.
Grossman did not consider the AML procedures and rules to be
applicable to the type of accounts held at the firm and therefore did not
adequately utilize, monitor or review for red flags listed in the firm’s
procedures. His daily review of trades
executed at the firm and all outgoing cash journals and wires, Grossman did not
identify any activity of unusual size, volume or pattern as an AML concern. The
firm’s registered representatives, who were also assigned responsibility for
monitoring their own accounts, failed to report any suspicious activity to
Grossman. Until the SEC and/or FINRA alerted
Grossman to red flags of suspicious conduct, Grossman did not file any SARs.
Grossman failed to implement adequate procedures reasonably designed to detect and cause the reporting of suspicious transactions and, even with those minimal procedures that he had in place at the firm, he still failed to adequately implement or enforce the firm’s own AML program. For example, accounts were opened at the firm within a short period of each other that engaged in similar activity in many of the same penny stocks, and several red flags existed in connection with these accounts that should have triggered Grossman’s obligations to undertake scrutiny of the accounts, as set out in the firm’s procedures, including possibly filing a SAR. Additionally,individuals associated with the accounts had prior disciplinary histories, including securities fraud and/or money laundering. Because of Grossman’s failure to effectively identify and investigate suspicious activity,he often failed to identify transactions potentially meriting reporting through the filing of SARs. Moreover, Grossman failed to implement an adequate AML training program for appropriate personnel; the AML training conducted was not provided to all of the registered representatives at the firm.
Furthermore, Grossman failed to establish and maintain a supervisory system at the firm to address the firm’s responsibilities for determining whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act of 1933 (Securities Act) and, as a result, Grossman failed to take steps, including conducting a searching inquiry, to ascertain whether these securities were freely tradeable or subject to an exemption from registration and not in contravention of Section 5 of the Securities Act. The firm did not have a system in place, written or unwritten, to determine whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act; Grossman relied solely upon the clearing firm, assuming that if the stocks were permitted to be sold by the clearing firm, then his firm was compliant with Section 5 of the Securities Act.
Grossman failed to designate a principal to test and verify the reasonableness of the firm’s supervisory system, and failed to establish, maintain and enforce written supervisory control policies and procedures at the firm and failed to designate and specifically identify to FINRA at least one principal to test and verify that the firm’s supervisory system was reasonable to establish, maintain and enforce a system of supervisory control policies and procedures.
The firm created a report, which was deficient in several areas, including in its details of the firm’s system of supervisory controls, procedures for conducting tests and gaps analysis, and identities of responsible persons or departments for required tests and gaps analysis. Grossman made annual CEO certifications, certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and registrations; the certifications were deficient in that they failed to include certain information, including whether the firm has in place processes to establish, maintain and review policies and procedures designed to achieve compliance with applicable laws and regulations and whether the firm has in place processes to modify such policies and procedures as business, regulatory and legislative events dictate.
Grossman failed to ensure that the firm’s heightened supervisory procedures placed on a registered representative were reasonably designed and implemented to address the conduct cited within SEC’s allegations; the additional supervisory steps imposed by Grossman to be taken for the registered representative were no different than ordinary supervisory requirements. Moreover, there was a conflict of interest between the registered representative and the principal assigned to monitor the registered representative’s actions at the firm;namely, the principal had a financial interest in not reprimanding or otherwise hindering the registered representative’s actions. Furthermore,Grossman was aware of this conflict, yet nonetheless assigned the principal to conduct heightened supervision over the registered representative.
The heightened supervisory procedures Grossman implemented did not contain any explanation of how the supervision was to be evidenced, and the firm failed to provide any evidence that heightened supervision was being conducted on the registered representative. Also, Grossman entered into rebate arrangements with customers without maintaining the firm’s required minimum net capital. Similarly, he caused the firm to engage in a securities business when the firm’s net capital was below the required minimum and without establishing a reserve bank account or qualifying for an exemption. Grossman was required to perform monthly reserve computations and to make deposits into a special reserve bank account for the exclusive benefit of customers, but failed to do so.
OS/2009016612701/November 2011
McGrath failed to reasonably supervise a registered representative who recommended and effected unsuitable and excessive trading in a customer’s account. McGrath had supervisory responsibility over the registered representative and was responsible for reviewing his securities recommendations to ensure compliance with member firm procedures and applicable securities rules. McGrath failed to reasonably supervise the registered representative by, among other things, failing to enforce firm account procedures and failing to respond to red flags regarding the registered representative’s trading activity in the customer’s account.
The firm’s supervisory procedures required McGrath to review account transactions, such as the registered representative’s recommended transactions in the customer’s account, on a daily and monthly basis for, among other things, general suitability, excessive trading and churning, in-and-out trading and excessive commissions and fees; the firm’s procedures also required that McGrath review all exception reports related to the individuals who he supervised and take appropriate measures as necessary. Through these required reviews, McGrath was aware of red flags of possible misconduct in the customer’s account, including frequent short-term trading, excessive commission and margin charges, high turnover and cost-to-equity ratios, and substantial trading losses, and the account frequently appeared on the firm’s exception reports; McGrath failed to reasonably respond to and address the red flags in the customer’s account.
McGrath never spoke with the customer despite the fact that the firm’s compliance department sent several emails to McGrath advising him that the customer’s account needed customer contact as required by the firm’s WSPs; McGrath never spoke with the customer directly to confirm that he was aware of the activity level in his account or that such activity was appropriate in light of his financial circumstances and investment objectives.
McGrath failed to ensure that an Active Account Suitability Supplement and Questionnaire was sent to the customer within the time frame the firm’s WSPs required. Moreover, months after the registered representative began trading in the customer’s account, McGrath instructed the registered representative to curtail the short-term trading in the account and hold positions for a longer period; that was the only time McGrath spoke to the registered representative about the customer’s account. Furthermore, McGrath reduced the registered representative’s commissions for purchases in the customer’s account, but this measure did not have the desired impact; the registered representative actually increased the number of purchases and frequency of short-term trading to offset the effects of the commission reduction until the customer closed the account after suffering losses of approximately $120,000.
McGrath failed to take any action against the registered representative based on his failure to comply with his instructions; among other things, McGrath never restricted the trading in the customer’s account, spoke to the customer, placed the registered representative on heightened supervision, recommended disciplinary measures against him to address these concerns, or spoke with the firm’s compliance department regarding the supervision of the registered representative. The firm allowed the registered representative to effect transactions in the customer’s account for months without obtaining a signed and completed new account form from the customer, and failed to enforce its review of active accounts as the WSPs required. The firm failed to send a required suitability questionnaire to the customer until almost a year after the account had been opened and suffered significant losses, failed to qualify his account as suitable for active trading and failed to perform a timely quarterly review of the account.
J.P. Turner & Company, LLC: Censured; Fined $20,000
James Edward McGrath (Principal): Fined $5,000; Suspended 10 business days in Principal capacity only
OS/2009016354101/October 2011
Acting through Birkelbach, the Firm failed to adequately supervise to ensure the timely reporting of customer settlements. Birkelbach relied on an unregistered outside consultant to process Rule 3070 filings and amendments to Applications for Broker-Dealer Registration (Forms BD) and Uniform Applications for Securities Industry Registration or Transfer (Forms U4), gave the consultant inadequate instructions and guidance, and did not otherwise ensure that timely and complete filings and amendments were made.
Birkelbach neglected to instruct the consultant to process disclosures or otherwise take action to correct the deficiencies until a later date, even after FINRA advised him of the deficiencies.
Birkelbach and the firm failed to ensure the timely reporting of settlements with customers on 3070 filings and the amendment of Forms BD and Forms U4 to disclose this information.
Birkelbach Investment Securities, Inc.: Censured; Fined $10,000, jointly and severally with Carl Birkelbach
Carl Max Birkelbach: Censured; Fined $10,000, jointly and severally with Birkelbach Invst.; Fined additional $15,000; Suspended 30 days in all capacities; Suspended 90 days in Principal capacity only; Required to requalify by examination as a principal.
OS/2005002244102/September 2011
Brewer failed to adequately supervise a registered representative’s variable annuity sales activities.
Brewer personally reviewed and approved variable annuity switches of the registered representative’s customers despite the misstatements and omissions on the switch forms and numerous red flags revealing that the transactions were unsuitable. After becoming aware of the inaccurate information and omissions contained in the forms the registered representative submitted, Brewer did not require that all of the deficiencies be corrected on his member firm’s books and records and that customers be presented with forms that were completely accurate. At no time did Brewer take any action to reverse the transactions the registered representative had already effected, nor did he take any actions to prevent the registered representative from completing additional unsuitable switches.
Brewer was responsible for replying to the audit reports and implementing adequate systems and procedures relating to the supervision of variable annuities at his firm; although he was made aware of issues in the variable annuities sales review process cited by the firm’s Audit Division, he failed to take adequate steps to correct the identified failings. Brewer failed to maintain an adequate system of supervision and follow-up review, and failed to maintain and enforce written procedures reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules in connection with the sale of variable annuities.
2008011701203/September 2011
Gallagher acted as a principal of his member firm without being registered as such and the firm allowed Gallagher to act in an unregistered capacity.
Gallagher failed to adhere to the heightened supervisory requirements FINRA imposed and the agreements he entered into with three states; because of his controlling role at the firm and the transitory nature of supervision at the firm, he was able to sidestep the heightened supervision requirements. The firm failed to ensure that Gallagher’s heightened supervisory requirements from the states and FINRA were being followed, and failed to have a system to adequately monitor Gallagher’s compliance.
Gallagher was responsible for the firm adhering to the requirements to establish, maintain and enforce written supervisory control policies and ensuring the completion of an annual certification certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations. The firm failed to conduct the analysis required to determine whether, as a producing manager, Gallagher should have been subjected to the heightened supervision requirements.
The firm failed to establish, maintain and enforce written supervisory control policies and procedures and failed to identify at least one principal who would establish, maintain and enforce written supervisory control policies and procedures. In addition, through Gallagher, the firm, failed to ensure that an annual certification was complete, certifying it had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations.
Moreover, FINRA found that the firm failed to report customer complaints against Gallagher and one customer-initiated lawsuit in which he was listed as a defendant.
Furthermore, the firm failed to make the necessary and required updates to Forms U4 and U5 for representatives to reflect customer complaints, arbitrations and lawsuits within the required 30 days.
Thefirm failed to conduct and evidence an independent test of its AML program, and failed to conduct and evidence an annual training program of its CE program for its covered registered persons.
While testifying at a FINRA on-the-record interview, Gallagher failed to respond to questions.
Gallagher willfully failed to timely amend his Form U4 with material facts. Gallagher appealed the decision to the NAC and the sanction is not in effect pending the appeal.
Vision Securities Inc.: Censured; Fined $60,000
Daniel James Gallagher: Barred
AWC/2008013864402/August 2011
Deutsche Bank held contractual agreements with third-party investment advisers who provided financial services to firm customers through the firm’s adviser select program for a fee the customers paid, and the firm customers granted discretionary trading authority to the third-party advisers. The agreements contained a confidentiality clause prohibiting firm employees from using the third-party advisers’ portfolio recommendations for other clients.
The firm instituted a written policy and procedure manual distributed to firm employees, including Tubridy, that contained guidelines related to the adviser select account and prohibited shadowing adviser select accounts, but the firm did not implement any specific systems to detect and prevent shadowing; no exception reports were created to identify shadowing, no applicable training was conducted, and no supervisory systems were put in place to monitor accounts for possible shadowing.
In one branch office while Tubridy was responsible for performing trade reviews, shadowing was egregious and continued for years. Although the firm did not implement exception reports to identify shadowing, shadowed trades were flagged for other reasons, which required Tubridy to follow up; she examined and approved shadowed trades on the exception reports, made notations on certain trades, which indicated an awareness of shadowing, but failed to follow up on the information and neglected to raise the issue with compliance or her supervisors.
Through shadowing, firm registered representatives circumvented the fee arrangement the firm had in place for the adviser select program and violated the provisions of confidentiality agreements prohibiting the use of the third-party investment advisers’ proprietary information. In addition, the firm and involved registered representatives failed to pay a combined total of over $200,000 to third-party investment advisers. Moreover,the firm failed to establish, maintain and enforce an adequate supervisory system to detect and prevent shadowing, and Tubridy failed to recognize and follow up on “red flags” of shadowing.
Once the firm learned that shadowing had occurred, with Tubridy’s assistance, it conducted an extensive and immediate internal investigation across all branch offices to identify and halt any other shadowing activity.
Deutsche Bank Securities Inc.: Censured; Fined $350,000. In assessing the fine, FINRA took into account financial benefits the firm obtained, and the firm’s discovery, reporting, investigation and corrective measures are reflected in the sanctions.
Adrienne Barrett Tubridy: Fined $10,000; Suspended 10 days in Supervisory capacity only; Required to cooperate with FINRA in its prosecution of any other disciplinary action related to these events by, among other things, meeting with and being interviewed by FINRA staff without the need of staff to resort to FINRA Rule 8210, and testifying truthfully at any related hearing.
AWC/2010024997001/July 2011
Campbell failed to enforce his member firm’s heightened supervisory procedures with respect to one of its representatives.
According to those procedures, Campbell was responsible for determining the scope of the heightened supervision and ensuring that the representative’s supervisor was enforcing the heightened supervision plan. The firm required that the plan be individualized based on the representative’s disciplinary history. Campbell placed a representative on heightened supervision because of his disciplinary history, and the plan Campbell prepared was deficient because it was not tailored to that representative’s history of engaging in private securities transactions and did not provide for any material additional supervision beyond the usual steps that were taken to oversee other firm representatives. Campbell failed to ensure that the plan was implemented and, as a result,the following actions that were required pursuant to the plan were not undertaken:
- a log was not created of the representative’s trades,
- certifications were not made to the compliance department that the heightened supervision plan was implemented, and
- and an annual review of the plan did not take place.
AWC/2009017399501/July 2011
Cyrus failed to supervise representatives at her member firm who made unsuitable recommendations to customers at their firm.
Cyrus was responsible for supervising the representatives but failed to take appropriate action to supervise the representatives that was reasonably designed to prevent their violations and achieve compliance with applicable rules. Cyrus failed to adequately review and follow up on the over-concentration of the customers’ liquid assets in preferred stocks and the risks associated with those securities.
AWC/2008013648002/June 2011
Ameriprise failed to establish, maintain and enforce a supervisory system reasonably designed to detect and prevent one of its broker’s misconduct. The broker who was registered with the firm forged customers’ signatures on various financial documents that he submitted to the firm for processing. The broker agreed to pay certain fees for customers without alerting the firm in order to avoid complaints from these customers. The broker agreed to a Bar.
An Ameriprise surveillance analyst became aware of potential forgeries by the broker and failed to follow up with a timely investigation, and the firm’s supervisory system did not ensure that a timely investigation was conducted.
The firm had implemented a new set of procedures for its surveillance department through which the firm discovered that the investigation of the broker had not been completed, and the firm promptly reassigned the matter to other surveillance personnel. The firm completed its investigation of the broker nearly two and a half years after it first opened the investigation and found ample evidence of repeated forgeries by the broker, whose employment was then terminated.
AWC/2009016251601/June 2011
The Firm failed to adopt and implement WSPs reasonably designed to supervise its research analysts and ensure that its research reports complied with NASD Rule 2711. Although the firm maintained some relevant WSPs, those procedures did not provide any real guidance to its employees about the specific steps they needed to take to achieve compliance with Rule 2711. The WSPs required that all public appearances by firm analysts be approved by the research director, that the appropriate disclosures be made to the media outlet, that a record documenting the disclosures provided to the media be maintained, and that the firm’s marketing department receive a copy of such disclosure. The WSPs made the research analyst responsible for meeting these obligations but provided little or no guidance on how these tasks could be successfully carried out or supervised.
The WSPs contained provisions broadly describing what portions of draft research reports could and could not be provided to covered companies, but failed to provide specific guidance to firm employees regarding the manner in which these requirements were to be fulfilled.
The WSPs permitted the research department to send sections of a research report to a subject company before publication to verify the accuracy of information in those sections, provided that a complete draft of the research report was first provided to the compliance department.
The Firm sent research report excerpts to a subject company before its compliance department had received a complete draft of the report, and in one of those instances, the complete draft was not sent to the compliance department. Moreover, in connection with public appearances by its research analysts, the firm failed to retain records that were sufficient to demonstrate compliance by those analysts with the disclosure requirements of NASD Rule 2711(h).
AWC/2008011640801/June 2011
In his capacity as the vice president of compliance, McKee failed to supervise certain aspects of his member firm’s securities business.
Acting on his firm’s behalf, McKee failed to
- establish and maintain a supervisory system or written supervisory procedures reasonably designed to detect and prevent the firm from charging excessive commissions on mutual fund liquidation transactions;
- adequately supervise the firm’s communications with the public;
- adequately supervise the firm’s compliance with NASD Rule 3070 and Uniform Termination Notice for Securities Industry Registration (Form U5) reporting provisions and customer complaint recordkeeping requirements; and
- comply with NASD Rules 3012 and 3013, in that the Rule 3012 and 3013 reports that he prepared on his firm’s behalf were inadequate.
Thee firm’s 3012 report for one year was inadequate because it failed to provide a rationale for the areas that would be tested, failed to detail the manner and method for testing and verifying that the firm’s system of supervisory policies and procedures were designed to achieve compliance with applicable rules and laws, and did not provide a summary of the test results and gaps found. The 3012 report also failed to detect repeat violations including, the failure to conduct annual Office of Supervisory Jurisdiction (OSJ) branch office inspections, advertising violations, customer complaint reporting and ensuring that all covered persons participated in the Firm Element of Continuing Education.
The firm's 3013 report for one year did not document the processes for establishing, maintaining, reviewing, testing and modifying compliance policies to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws, and the manner and frequency with which the processes are administered. In addition, the firm failed to enforce its 3013 procedures regarding notification from customers regarding address changes.
AWC/2009017072302/June 2011
A former associated person and employee of Morgan Stanley in its New York Position Services Group (NYPS) misappropriated approximately $2.5 million from the firm, institutional firm customers and a firm counterparty by entering, or causing to be entered, numerous false journal entries into the firm’s electronic system to transfer and credit money associated with corporate actions.
The former employee entered, or caused to be entered, into the firm’s electronic system requests for checks to be issued to his shell corporation against the suspense and/or fee accounts that he was using to misappropriate funds. The former employee entered some check requests himself, which NYPS employees that reported to him later approved. The former employee caused employees who reported to him to enter check requests, and he used the identification number and password of another NYPS employee who reported to him to enter the remaining check requests; he later approved all of the check requests.
Failed Oversight/Review
Morgan Stanley failed to establish and implement an adequate system of follow-up and review of journal entries and adequate procedures for reviewing and approving check requests related to corporate actions.
No review procedures
The firm did not have any procedure to review the former associated person’s check requests and journal entries.
In addition, the firm failed to properly supervise the former associated person and failed to detect that he entered, or caused to be entered, false check requests and false journal entries related to corporate actions, which allowed him to misappropriate approximately $2.5 million from the firm, its institutional customers and a firm counterparty.
SOMJ
The firm introduced a new system, the Summary of Manual Journals (SOMJ), to replace the review of all journal entries and require the review and approval of journal entries that the firm determined to be high priority. Furthermore, these journal entries remained on the SOMJs until a supervisor reviewed and approved them, and the former associated person was assigned to review and approve all high-priority journal entries flagged on the SOMJs, including his own.
Security Flaw
The firm assigned some NYPS supervisors, all of whom reported directly to the former associated person, to review and approve journal entries flagged on SOMJs, but nobody was assigned to review high-priority journal entries entered by anyone not on one of those teams, including the former associated person. The firm failed to have a system to inform NYPS management if journal entries flagged on the SOMJs were not approved. The former associated person made numerous journal entries, some of which were flagged as high-priority; he approved several of them; many were not reviewed and were listed on the SOMJs pending approval at the time of his termination.
Check Requests
Check requests NYPS personnel entered were required to be approved by another NYPS employee, but the firm did not require the person approving the check to be a supervisor or have supervisory responsibility; as a result, NYPS associates approved check requests an NYPS supervisor entered, and entered check requests on a supervisor’s behalf, which the supervisor subsequently approved. In addition, FINRA determined that the firm did not require any review to determine if the check request was associated with a corporate action and the approver simply ensured that all the required information was included in the check request.
OS/2008011640602/June 2011
Respondents failed to put any heightened supervisory measures in place for a branch manager or to follow up on “red flags.” Notwithstanding the branch manager’s remote location, prior disciplinary history, outside business disclosures or his disclosure that he was potentially under financial stress and unable to meet financial obligations, the Firm and Long failed to put any heightened supervisory measures in place or to follow up on the red flags after he disclosed information on a compliance questionnaire, for which the affirmative answer required that he attach a separate sheet providing complete details about the disclosed activities, which Long did not complete or enforce. Also, the firm’s and Long’s heightened supervision of the branch manager was inadequate in that it consisted only of inspecting his office annually and speaking on the phone on a fairly regular basis. Long inspected the branch manager’s branch office, and although she was aware that the manager was involved in certain outside business activities, based on the disclosures that he made on his Uniform Application for Securities Industry Registration or Transfer (Form U4), she admitted that she did not inspect any files or financial records associated with his disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.During a subsequent inspection, Long again did not review documentation regarding the branch manager’s disclosed outside business activities and did not detect any undisclosed outside business activities or private securities transactions.
Additionally, the branch manager had participated in private securities transactions wherein he had raised more than $1.5 million from investors, many of whom were firm customers.
In addition, the firm and Long failed to review or retain email communications on the branch manager’s outside email account, and Long did not review his outside email account during her inspections of his branch office. Moreover, FINRA found that the firm did not have any supervisory procedures regarding the review and retention of email communications on outside email accounts.
Portfolio Advisors Alliance, Inc.: Censured; Fined $35,000
Marcelle Long: Fined $7,500; Suspended in Principal/Supervisory capacity only for 30 days
AWC/2009019996501/June 2011
Oftring was responsible for supervising a former registered representative of his member firm and failed to take appropriate action to reasonably supervise her to detect and prevent her violations and achieve compliance with applicable rules in connection with a customer’s account. Among other things, Oftring failed to take reasonable steps to follow up on certain indications of potential misconduct that should have alerted him to the representative’s violations.
The representative engaged in excessive, short-term trading in the customer’s account, which resulted in losses of approximately $60,000; the account was subject to frequent margin calls and transfers from a third-party account to satisfy margin calls in the account, and once, the representative transferred funds back to the third-party account by forging the customer’s signature on an LOA.
Oftring was aware of
- the active trading in the customer’s account and knew that the representative was effecting securities transactions in the account while it had a negative balance, but he never stopped the representative from trading and never contacted the customer to discuss the activity; and
- and approved the transfer of funds between the customer’s account and the third-party account, and accepted the representative’s explanation for the same without contacting the customers involved in the transfers.
AWC/2008011707003/May 2011
Brown failed to reasonably supervise a registered representative of his member firm who churned a customer trust account and recommended investments to the elderly beneficial owner of the trust account that were inconsistent with the customer’s investment objectives, financial situation and needs.
Brown served as the assistant branch manager for his firm’s branch office and, as such, was one of the individuals at the firm with supervisory responsibility over the registered representatives at the branch office. There were numerous red flags indicating that the registered representative was churning the trust account and recommending unsuitable investments to the customer:
- the appearance of the account on numerous exception reports concerning active and aggressive trading;
- the account’s relatively substantial fluctuations in value, including relatively significant declines in value in a certain year;
- the customer’s age;
- the $2,500 monthly withdrawals that the customer was taking from the account; and
- the prior customer complaints against the registered representative.
Despite these red flags, Brown failed to take adequate supervisory action reasonably designed to prevent the representative’s churning of the trust account and recommendations of unsuitable investments to the customer.
AWC/2008011707004/May 2011
Kramer failed to reasonably supervise a registered representative of his member firm who churned a customer trust account and recommended unsuitable investments to the trust account’s elderly beneficial owner. Kramer served as a compliance officer for his firm, and as such, was one of the individuals at the firm with supervisory responsibility over the registered representatives at a branch office.
There were numerous red flags indicating that the registered representative was churning the trust account and recommending unsuitable investments to the customer. The red flags cited by FINRA were the:
- appearance of the account on numerous exception reports concerning active and aggressive trading;
- account’s relatively substantial fluctuations in value, including relatively significant declines in value in a certain year;
- customer’s age;
- $2,500 monthly withdrawals that the customer was taking from the account; and
- prior customer complaints against the registered representative.
Despite these red flags, Kramer failed to take adequate supervisory action reasonably designed to prevent the representative’s churning of the trust account and recommendations of unsuitable investments to the customer.
AWC/2009017339801/May 2011
Acting through Lapkin, the Firm failed to enforce its heightened supervisory procedures for a representative placed on heightened supervision based on his prior disciplinary history. Lapkin was responsible for implementing the heightened supervision plan, which required review of the representative’s correspondence on a daily basis, review of all of the representative’s transactions prior to execution, quarterly reviews with the representative of his business, and quarterly review of the representative’s journal of all conversations that resulted in any business. Lapkin did not perform any of the required steps and the firm failed to take any steps to ensure that he followed the plan. The firm, acting through Lapkin, allowed a representative to continue using a website, which is deemed an advertisement pursuant to NASD Rule 2210, that promoted investments to be made through the firm, even though it violated the content standards of the rule. The website failed to provide a sound basis for evaluating the investment products being promoted, and contained exaggerated, incomplete and oversimplified statements comparing alternative investments to traditional investment products. Also, the website further made unsubstantiated claims by identifying investments as “premier” alternative investments and stating that alternative investments can help dampen volatility and provide protection in down markets without providing a credible basis for these claims. In addition, the website also compared alternative investments to publicly traded investments, but failed to disclose all of the material differences between the investments, including the risks associated with the alternative investments.
Acting through Lapkin, the Firm allowed its representatives to sell shares of a fund through a flawed PPM that failed to disclose that the fund’s manager had been terminated from his member firm because, according to his Uniform Termination Notice for Securities Industry Registration (Form U5), he had misreported, falsely input and reported late into the firm’s internal booking systems for bond transactions, and that the fund manager had misreported numerous nondeliverable forward transactions, causing false profits on his profit and loss statements. Lapkin was aware of the content of the fund manager’s Form U5 and knew that the PPM was silent about it. This omission was material because, as disclosed in the PPM, the fund’s trading decisions relied primarily on the fund manager’s knowledge, judgment and experience.
Puritan Securities, Inc. nka First Union Securities, Inc.: Censured, Fined $10,000 (A lower fine was imposed after considering, among other things, the firm’s revenues and financial resources.)
Nathan Perry Lapkin: Fined $10,000; Suspended in Principal capacity only for 15 business days.
OS/2009017125101/April 2011
Keys made untrue statements and omissions in connection with the sale of a security; specifically, Keys recommended that a customer invest $1.1 million in a promissory note and represented to the customer that the promissory note was secured by $1.1 million in United States Treasury Bonds, when in fact, no such bonds existed. Keys provided wiring instructions to the customer in connection with the recommended purchase directing her to wire funds to the bank account of the issuing entity’s owner. Keys failed to investigate and discover that no treasury bonds existed, and instead relied on information he was given during a conference call initiated by the issuer’s owner to an unknown individual who claimed to be a representative of a well-known financial institution, the purported current custodian of the bonds; and Keys failed to investigate whether the unknown individual was in fact the financial institution’s employee.
At the time of Keys’ recommendation to the customer, he did not disclose the compensation, direct or indirect, that he expected to receive. The first time the customer discovered that any commission would be paid in connection with the sale of the note was when she received the note itself, delivered several weeks after she had wired the funds for the purchase; the note disclosed that a commission would be paid in connection with the note, but it erroneously stated that $50,000 would be paid to Keys’ member firm, and it did not disclose that Keys wholly owned the entity that received an additional $50,000. Keys was responsible for establishing, maintaining and enforcing his firm’s supervisory control policies and procedures, but failed to implement reasonable supervisory controls when he failed to ensure that an individual at the firm who was senior to or otherwise independent of himself supervised and reviewed his customer account activity.
OS/2008011612602/February 2011
Meckenstock failed to reasonably supervise a registered representative at his member firm in that the registered representative participated in sales of stock that were outside the course or scope of the registered representative’s employment with the firm. Meckenstock participated in certain sales of the stock himself, and failed to record the sales on the firm’s books and records as required by NASD Rule 3040(c).
Meckenstock failed to submit a written request to participate in the sale of stock, failed to receive written approval to participate in the transactions and failed to provide written approval to the registered representative to participate in the sales.
Meckenstock failed to conduct sufficient due diligence on the offering, failed to investigate the nature of the individual with the issuer, failed to investigate his relationship with the issuer, failed to question him about any additional sales he may have made to firm customers, and failed to investigate compensation that the registered representative was promised or received from the sale of the interests in the company.
Meckenstock failed to adequately supervise the resale of stock through a registered investment adviser (IA) the representative owned, and failed to review the IA’s books and records, which would have disclosed the representative’s sale of his shares of the stock to public customers.
Meckenstock reviewed a private placement memorandum and offering for his firm and approved it as a suitable investment, but failed to ensure that the issuer had established an escrow account, thereby failing to adequately supervise the sale of the offering and causing his firm to violate Securities Exchange Act Rule 15c2-4. In addition, Meckenstock failed to evidence his supervisory review and approval of customers’ purchases of interests in numerous offerings.
AWC/2005002244703/February 2011
Gibas failed to reasonably supervise a registered representative at his member firm by approving variable annuity transactions the representative recommended and affected; in approving these transactions, Gibas did not adequately respond to red flags that should have alerted him that the transactions were unsuitable.
Gibas’ firm placed the representative under heightened supervision, which was formalized by a written agreement the representative and Gibas signed, and under the agreement, Gibas was required, among of things, to pre-approve all the representative’s annuity business and new accounts, to speak with each of the representative’s customers who were 65 or older, and to help the representative diversify her business.
With respect to the variable annuity transactions, they were unsuitable, in that the transactions’ costs outweighed the benefits, and in some of those transactions, the customers purchased a rider for which they were not eligible. At the time Gibas approved these transactions, there were numerous red flags regarding the representative’s variable annuity transactions, including transactions appearing on exception reports, that should have alerted him to the potential unsuitability of her transactions and required follow-up more comprehensive than Gibas otherwise took. Gibas did not adequately carry out his other responsibilities under the firm’s heightened supervision of the representative; although Gibas reviewed the representative’s transactions and contacted certain elderly customers before those transactions were affected, some of the conversations with the representative’s customers lasted only a few minutes, were conducted when the representative was present, or before Gibas received any paperwork regarding the proposed transaction. While Gibas met with the representative, as well as with other supervisory and compliance personnel at the firm, none of the steps taken proved effective in preventing the representative’s unsuitable sales.
AWC/2010022093601/February 2011
UBS failed to reasonably supervise a junior trader on its Fixed Income Emerging Markets Latin American desk (the LatAm desk) who, by various means, made false and inaccurate entries into the firm’s trading systems for non-deliverable forward (NDF) transactions and bond transactions, which caused incorrect calculations of his risk positions and profit and loss (P&L), overstating his profits and understating his losses; in contrast to other traders on the LatAm desk, the firm gave the junior trader authority to enter NDF transactions directly into internal trading systems.
In each instance, the junior trader’s presumed goal was to conceal an unrealized loss associated with an actual transaction and/or create the appearance of a fictitious profit in connection with both actual and fictitious transactions, and by manipulating these trading systems, the junior trader was able to make undetected amended, late, mispriced and fictitious NDF transactions by which he concealed more than $28 million in trading losses.
The firm’s existing policies and procedures did not adequately address the junior trader’s ability to make entries directly into the trading systems; the firm’s electronic supervisory system did not capture NDF trade data, and the firm failed to establish supervisory systems or procedures to reasonably ensure that the junior trader’s entries were complete and accurate and that his trading system entries matched.
The firm likewise failed to establish policies and procedures providing for its creation and maintenance of required books and records of NDF transactions entered for its account, and failed to have written supervisory procedures, for the amending, settling and confirming of NDF transactions.
The junior trader concealed losses to the firm of approximately $700,000 through various false entries made in the firm’s Bloomberg system, and the firm’s electronic supervisory system did not capture his bond data.
The firm failed to provide the junior trader’s supervisor with reports concerning the junior trader’s trading in NDF and certain bonds that were necessary to supervise the junior trader’s activities, and it failed to make and keep current a memorandum of each NDF transaction the junior trader entered. Moreover, based on false, delayed and fictitious entries the junior trader made in connection to his NDF and certain bond transactions, the firm’s records of his and the LatAm Desk’s overall P&L and corresponding risk positions were not accurate. Furthermore, when the issues concerning the junior trader’s trading came to light, the firm conducted an internal investigation to identify the errant bond and NDF transactions and calculate the losses incurred in connection with them; thereafter, the firm instituted remedial measures to prevent a recurrence in the future.
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