News and Articles

Monthly Archives: November 2014

FINRA Expels NSM Securities, Inc. and bars Niyukt Raghu Bhasin from Association with any FINRA Member

In November 2014, FINRA announced that it had submitted an Offer of Settlement in which NSM Securities, Inc. was expelled from FINRA membership, and Niyukt Raghu Bhasin was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, the firm and Bhasin consented to the sanctions and to the entry of findings that the firm, acting through and at the direction of its founder, owner, President and Chief Executive Officer (CEO) Bhasin, derived most of its revenue from actively and aggressively trading stocks in the commission-based accounts of its retail customers.

The findings stated that Bhasin prioritized his firm’s profits over the duties owed to its customers and chose not to establish, maintain and enforce a supervisory system tailored to the firm’s business. Instead, Bhasin fostered a culture of non-compliance that resulted in widespread sales practice violations, numerous customer complaints, related reporting violations and cold-calling abuses. The firm, through Bhasin, failed to establish, maintain and enforce a system, including written supervisory procedures (WSPs), to supervise its core activity, an active and aggressive investment strategy. The firm, through Bhasin, failed to monitor for, detect and prevent churning, excessive trading, related violations of Regulation T, and unsuitable investment recommendations, and failed to adequately review electronic correspondence, adequately handle customer complaints, and place certain brokers who were the subjects of multiple customer complaints and arbitrations on heightened supervision. The firm’s culture of non-compliance that Bhasin fostered harmed the firm’s customers, as the lax to non-existent oversight of its brokers resulted in significant sales practice abuses. As a result, the firm willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The findings also stated that in implementing Bhasin’s active and aggressive trading strategy, and in order to generate commissions, the firm committed multiple violations of Regulation T and the related NASD®/FINRA rules governing the extension of credit. Specifically, the firm, acting through its brokers, made a practice of allowing customers to buy securities in cash accounts where the cost to buy the securities was met by the sale of the same securities, known as free-riding. The findings also included that the firm’s active and aggressive trading strategy, as developed and instituted by Bhasin, led to numerous customer complaints. The firm, through Bhasin, failed to report and failed to timely report customer complaints to FINRA, and failed to disclose and/or timely disclose material facts on its brokers’ Uniform Applications for Securities Industry Registration or Transfer (Forms U4) or Uniform Termination Notices for Securities Industry Registration (Forms U5).

FINRA found that Bhasin willfully failed to disclose material facts or information on his own Form U4, and willfully filed false and misleading amendments to his Form U4. The firm, through Bhasin, also filed an untimely and inaccurate Form U5 for its former chief compliance officer (CCO). FINRA also found that the firm, through Bhasin, failed to institute adequate procedures for cold-calling prospective customers. As a result, the firm, through its brokers and other representatives, initiated telephone solicitations to persons whose numbers were on the firm’s do-not-call list and/or the national do-not-call list.

SEC Charges Unregistered Broker in Tampa Area With Stealing From Investors in Fraudulent Day Trading Scheme

On November 18, 2014, the SEC announced that it had charged an unregistered broker living outside Tampa, Florida, with stealing investor funds as part of a fraudulent day trading scheme.

The SEC alleged that Albert J. Scipione and his business partner solicited investors to establish accounts at their company called Traders Café for the purposes of day trading, which entails the rapid buying and selling of stocks throughout the day in hope that the stock values continue climbing or falling for the seconds to minutes they own them so they can lock in quick profits.  Scipione touted Traders Café’s software trading platform and made a series of false misrepresentations to investors about low commissions and fees, high trading leverage, and safety of their assets.  More than $500,000 was raised from investors who were assured that funds invested with Traders Café would be segregated and used only for day trading or other specific business purposes.  However, many customers encountered technical service problems that prevented them from trading at all, and Scipione and his business partner squandered nearly all of the money in investor accounts for their personal use.  Meanwhile, Traders Café was never registered with the SEC as a broker-dealer as required under the federal securities laws.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida announced that Scipione has pleaded guilty to criminal charges.

According to the SEC’s complaint filed against Scipione in federal court in Tampa, customers across the country deposited approximately $367,000 with Traders Café from December 2012 to October 2013 with the intention of opening day trading accounts.  Traders Café also received approximately $150,000 from an investor who invested directly in Traders Café’s business. Customers encountered problems with Traders Café from the outset, and many of them cancelled their accounts and requested refunds of their remaining account balances.  Scipione and Ionno tried to cover up their fraudulent scheme by offering excuses and delays for why customers could not get refunds.  Eventually less than $1,200 remained in Traders Café’s accounts primarily due to the repeated misuse of investor funds by Scipione.

The SEC’s complaint against Scipione alleged that he violated Section 17(a) of the Securities Act of 1933 as well as Section 15(a) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC is seeking disgorgement of ill-gotten gains, financial penalties, and permanent injunctive relief to enjoin Scipione from future violations of the federal securities laws.

SEC Sanctions 13 Firms for Improper Sales of Puerto Rico Junk Bonds

On November 3, 2014, the SEC announced that it hadsanctioned 13 firms for violating a rule primarily designed to protect retail investors in the municipal securities market.

All municipal bond offerings include a “minimum denomination” that establishes the smallest amount of the bonds that a dealer firm is allowed to sell an investor in a single transaction.  Municipal issuers often set high minimum denomination amounts for so-called “junk bonds” that have a higher default risk that may make the investments inappropriate for retail investors.  Because retail investors tend to purchase securities in smaller amounts, this minimum denomination standard helps ensure that dealer firms sell high-risk securities only to investors who are capable of making sizeable investments and more prepared to bear the higher risk.

In its surveillance of trading in the municipal bond market, the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit detected improper sales below a $100,000 minimum denomination set in a $3.5 billion offering of junk bonds by the Commonwealth of Puerto Rico earlier this year.  The SEC’s subsequent investigation identified a total of 66 occasions when dealer firms sold the Puerto Rico bonds to investors in amounts below $100,000.  The agency instituted administrative proceedings against the firms behind those improper sales: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corporation, Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services, and Wedbush Securities.

The enforcement actions are the SEC’s first under Municipal Securities Rulemaking Board (MSRB) Rule G-15(f), which establishes the minimum denomination requirement.  Each firm agreed to settle the SEC’s charges and pay penalties ranging from $54,000 to $130,000.

The SEC’s orders against the 13 dealers find that in addition to violating MSRB Rule G-15(f) by executing sales below the minimum denomination, they violated Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits violations of any MSRB rule.  Without admitting or denying the findings, each of the firms agreed to be censured.  They also agreed to review their policies and procedures and make any changes that are necessary to ensure proper compliance with MSRB Rule G-15(f).

It was unclear from the SEC’s announcement whether customers had initiated FINRA arbitrations or any other types of adversarial proceedings.  If you believe that you have suffered losses as a result of improper sales of Puerto Rico bonds, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422