In August 2013, FINRA announced that New York Registered Representative John Rom submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Rom consented to the described sanction and to the entry of findings that, in his capacity as the treasurer of a school parent teacher association (PTA), he misappropriated at least $3,000 from the PTA by writing a series of checks on the PTA’s bank account that were made payable to either himself or cash, and then used the funds for his personal expenses. The findings stated that Rom did not have permission or authority to use the funds for his own purposes. Mr. Rom was most recently registered with J.P. Morgan Securities LLC. Mr. Rom’s CRD does not reflect any FINRA arbitrations or customer complaints.
FINRA Disciplinary Action Against G. Research, Inc. f/k/a Gabelli & Company, Inc.
In August 2013, FINRA announced that G. Research, Inc. f/k/a Gabelli & Company, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $1,000,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that its Written Supervisory Procedures were not reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD® and FINRA rules, with respect to private partnerships formed by firm registered representatives, and the firm did not adequately supervise the private partnerships.
The findings stated that although the private partnerships frequently offered hedge funds and funds of hedge funds, directly or indirectly, to customers, the firm did not maintain WSPs reasonably designed to provide adequate supervision regarding due diligence related to these hedge funds and funds of hedge funds. The firm’s WSPs did not provide specific guidance regarding the relative fees to be charged by the private partnerships. Private partnership investors were contractually obligated to pay additional fees to invest with an affiliated adviser through a private partnership, yet the firm’s WSPs did not provide guidance regarding offering similar investments that carry different fees, or how to balance the relative fees, benefits and detriments of closely-related investment vehicles, or the circumstances in which waivers of the affiliated adviser’s investment minimum might be sought or granted. As a result, the firm’s WSPs did not adequately consider the fees such customers were charged, or the ability of private partnership investors to seek and obtain accommodations from the affiliated adviser to invest below the stated minimum. The findings also stated that the WSPs in place were not reasonably designed to address the obligations set forth in Notice to Members 03-07 that impose obligations when members sell hedge funds and funds of hedge funds. The firm did not adequately evaluate a provision in the fund of funds’ subscription agreements that disavowed its obligation to perform due diligence on the fund manager. While the investment adviser to the fund of funds was well known to the firm, the firm should have, but did not have, the WSPs required by Notice to Members 03-07. As a result, the firm’s WSPs were defective. The findings also included that the firm failed reasonably to supervise the private partnerships by failing to enforce its own WSPs governing various aspects of the formation, operation, marketing and sale of the private partnerships, including supervisory review of sales materials. The firm’s failures to reasonably enforce its WSPs resulted in sales materials for the private partnerships not being approved by the firm prior to being used, and statements of securities held by the private partnerships not being provided to mandated firm departments. As a further result of the firm’s failure to reasonably enforce its WSPs, it did not adequately review the subscription documents for the direct investment in the fund manager through the fund of funds.
FINRA found that the firm failed to discover that its customers were being offered an investment in the fund manager even though the subscription documents did not legally obligate the private partnerships to invest solely in the fund of funds, and that the private partnerships provided investors with no legal recourse in the event the investments were not made in the fund manager as the customers instructed. Although the private partnerships did limited advertising, those communications were not approved and initialed by a registered principal prior to their use, nor were copies of them retained in a separate file that included the name(s) of the persons who prepared them. FINRA also found that the firm failed to take appropriate steps to ensure the mandated review of the sales materials occurred prior to their dissemination on behalf of private partnerships. As a result of the firm’s failure reasonably to enforce these WSPs, the private partnerships prepared advertising and sales materials that failed to comply with applicable FINRA rules. The private partnerships used items of advertising that did not comply with applicable advertising rules. Each of the noncompliant communications involved the private partnerships’ investment in the fund manager. In addition, FINRA determined that the marketing documents lacked sufficient disclosure regarding the risks of investing in the private partnerships, including potential loss of principal, concentration of investment, leverage, management fees, lack of liquidity, and conflicts of interest between the investors and the managers. Omission of these risk disclosures made the marketing documents impermissibly incomplete and unbalanced with respect to risks versus rewards.
SEC Announces Charges Against Florida-Based Penny Stock Schemes
On August 12, 2013, the SEC announced the latest charges in a joint law enforcement crackdown on penny stock schemes with ties to the Florida region.
The SEC charged two microcap companies, their CEOs, and one penny stock promoter for spearheading illegal kickback schemes. Also charged were two other microcap companies, their CEOs, and four other promoters with arranging the payment of bribes to hype the companies in which they had a stake in order to create a false sense of market activity and illegally generate stock sales.
The SEC worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation’s Miami Division to uncover the penny stock schemes. Parallel criminal charges were also announced against the same nine individuals facing SEC charges.
According to the complaint, one of the schemes involved an arrangement to pay an undisclosed kickback to a pension fund manager in exchange for the fund’s purchase of restricted shares of stock in the company. Two other schemes involved agreements to pay undisclosed kickbacks to hedge fund principals in return for their funds’ purchase of restricted shares.
The SEC’s complaints alleged that the companies, officers, and promoters violated Section 17(a)(1) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and/or 10b-5(c). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions. The SEC is also seeking penny stock bars against each of the officers and promoters, and certain officer-and-director bars.
FINRA Issues New Investor Alert, Cold Calls From Brokerage Firm Imposters—Beware of Old-Fashioned Phishing
On August 6, 2013, FINRA issued a new investor alert called Cold Calls From Brokerage Firm Imposters—Beware of Old-Fashioned Phishing, to warn investors of cold calls from scammers falsely claiming to be representatives of at least one well-known brokerage firm. In this latest twist on phishing scams, fraudsters are cold calling investors claiming to offer information about certificates of deposit with yields well above the best rates in the market in an attempt to get potential victims to divulge their personal or financial account information. Armed with this information, the fraudsters may attempt to steal the person’s identity or money.
FINRA is reminding investors who receive unsolicited telephone calls never to provide personal information or authorize any transfer of funds to any unknown person.
“Cold Calls from Brokerage Firm Imposters” advises investors who feel they are victims of this scam to act quickly and contact their financial institution immediately to report a loss or theft of funds through an electronic funds transfer. Anyone who believes his or her identity has been stolen can follow the Federal Trade Commission’s Identity Theft action plan. FINRA also encourages investors to file a complaint using its online Complaint Center or send a tip to FINRA’s Office of the Whistleblower.
Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6 Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422
SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
On August 6, 2013, the SEC obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area. The former Marine masqueraded as a successful trader to defraud fellow veterans, current military, and others.
The SEC alleged that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed. Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund. Cohn invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and high-end nightclubs. In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent.
According to the SEC’s complaint filed in Chicago, Cohn targeted mostly unsophisticated investors and solicited friends, family members, and fellow veterans. Cohn controlled a so-called charity called the Veterans Financial Education Network (VFEN) that purported to teach veterans how to understand and manage their money.
The SEC alleged that Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois. Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund. He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.
According to the SEC, Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with money for his personal expenses. The audit firm named by Cohn never agreed to audit the fund’s financial statements. Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.
The SEC’s complaint charged Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws. The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze. The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors. It was unclear whether the customers initiated any type of securities arbitration proceeding.
FINRA Fines Oppenheimer & Co., Inc. $1.4 Million for the Sale of Unregistered Penny Stocks and Anti-Money Laundering Violations
On August 5, 2013, FINRA announced that it had fined Oppenheimer and Co., Inc. $1,425,000 for the sale of unregistered penny stock shares and for failing to have an adequate anti-money laundering (AML) compliance program to detect and report suspicious penny stock transactions. Oppenheimer is also required to retain an independent consultant to conduct a comprehensive review of the adequacy of Oppenheimer’s penny stock and AML policies, systems and procedures. Oppenheimer agreed to the sanctions to resolve charges first brought against the firm in a FINRA complaint in May 2013.
FINRA’s findings stated that from Aug. 19, 2008, to Sept. 20, 2010, Oppenheimer, through branch offices located across the country, sold more than a billion shares of twenty low-priced, highly speculative securities (penny stocks) without registration or an applicable exemption. The customers deposited large blocks of penny stocks shortly after opening the accounts, and then liquidated the stock and transferred proceeds out of the accounts. Each of the sales presented additional “red flags” that should have prompted further review to determine whether the securities were registered. FINRA also found that the firm’s systems and procedures governing penny stock transactions were inadequate, and were unable to determine whether stocks were restricted or freely tradable. Oppenheimer also failed to conduct adequate supervisory reviews to determine whether the securities were registered.
FINRA also found that Oppenheimer’s AML program did not focus on securities transactions and therefore failed to monitor patterns of suspicious activity associated with the penny stock trades. In addition, Oppenheimer failed to conduct adequate due diligence on a correspondent account for a customer that was a broker-dealer in the Bahamas, and therefore a Foreign Financial Institution under the Bank Secrecy Act; the firm’s failure contributed to Oppenheimer’s failure to understand the nature of the customer’s business and the anticipated use of the account, which was to sell securities on behalf of parties not subject to Oppenheimer’s AML review. This is the second time Oppenheimer has been found to have violated its AML obligations.
In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
SEC Charges Former Green Mountain Coffee Employee And Friend In $7 Million Insider Trading Scheme
On August 2, 2013, the SEC announced insider trading charges against a former systems administrator at Vermont-based Green Mountain Coffee Roasters who repeatedly obtained quarterly earnings data and traded in advance of its public release. The SEC also charged his friend who illegally traded along with him.
In a complaint unsealed July 31, 2013 in U.S. District Court for the District of Connecticut, the SEC alleged that Chad McGinnis purchased Green Mountain Coffee securities – typically out-of-the-money options – shortly before earnings announcements were made. McGinnis also tipped his longtime friend and business associate Sergey Pugach, who illegally traded in his own account and his mother’s trading account. Together, McGinnis and Pugach garnered $7 million in illegal profits by using inside information to correctly predict the reaction of Green Mountain Coffee’s stock price to 12 of the past 13 quarterly earnings announcements since 2010.
The SEC alleged that as an information technology employee, McGinnis had access to shared folders on Green Mountain Coffee’s computer server where drafts of pending press releases and earnings announcements were stored. He also had access to other employees’ e-mail accounts. Both sources provided McGinnis with details about upcoming Green Mountain Coffee earnings announcements before they became public.
According to the SEC’s complaint, McGinnis lives in Morrisville, VT, and Pugach lives in Hamden, CT. Despite living in different states, much of the insider trading in their online brokerage accounts occurred through McGinnis’ home Internet service. They communicated frequently around earnings announcements, but infrequently otherwise. Around trading times, they exchanged numerous phone calls and text messages not only on their own phones, but also using cell phones belonging to their spouses.
The SEC’s complaint alleged that McGinnis and Pugach violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Pugach’s mother Bella Pugach is named as a relief defendant in the SEC’s complaint for the purpose of recovering ill-gotten gains in her trading account.