On December 27, 2017, FINRA announced that it fined J.P. Morgan Securities $2.8 million for violating the Securities and Exchange Commission’s (SEC) Customer Protection Rule and for related supervisory failures. The SEC rule creates requirements to protect customers’ funds and securities.
To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the Customer Protection Rule requires a broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. These securities must be segregated in a “control location” and be free of liens or any other encumbrance that could prevent customers from taking possession of their securities. A firm cannot use segregated securities for its own purposes.
FINRA found that from March 2008 to June 2016, J.P. Morgan Clearing Corp. did not have reasonable processes in place to ensure that its possession or control systems were operating properly. Shares that should have been segregated were available for the firm’s use, due to systemic coding and design flaws, recurring and unresolved deficits and unreasonable supervision. By failing to move and maintain securities in good control locations, the firm created deficits in foreign and domestic securities valued at hundreds of millions of dollars. For example, J.P. Morgan failed to move Italian securities to a good control location for nearly two years, and on one sample day, created a deficit in 81 Italian securities worth approximately $146 million.
In determining the appropriate monetary sanction, FINRA considered J.P. Morgan’s cooperation in undertaking a plan to address the violations and that it over-reserved cash deposits in an effort to protect customers from its failed segregation of securities. In settling this matter, J.P. Morgan neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
On December 21, 2017, the Securities and Exchange Commission announced charges and an asset freeze against a group of unregistered funds and their owner who allegedly bilked thousands of retail investors, many of them seniors, in a $1.2 billion Ponzi scheme.
According to the SEC’s complaint, Robert H. Shapiro and a group of unregistered investment companies called the Woodbridge Group of Companies LLC, formerly headquartered in Boca Raton, Florida, defrauded more than 8,400 investors in unregistered Woodbridge funds.
The SEC’s complaint alleges that Woodbridge advertised its primary business as issuing loans to supposed third-party commercial property owners paying Woodbridge 11-15 percent annual interest for “hard money,” short-term financing. In return, Woodbridge promised to pay investors 5-10 percent interest annually. Woodbridge and Shapiro allegedly sought to avoid investors cashing out at the end of their terms and boasted in marketing materials that “clients keep coming back to [Woodbridge] because time and experience have proven results. Over 90% national renewal rate!” While Woodbridge claimed it made high-interest loans to third parties, the SEC’s complaint demonstrates that the vast majority of the borrowers were Shapiro-owned companies that had no income and never made interest payments on the loans.
The SEC’s complaint states that Shapiro and Woodbridge used investors’ money to pay other investors, and paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.” Shapiro, of Sherman Oaks, California, is alleged to have diverted at least $21 million for his own benefit, including to charter planes, pay country club fees, and buy luxury vehicles and jewelry. According to the complaint, the scheme collapsed in typical Ponzi fashion in early December as Woodbridge stopped paying investors and filed for Chapter 11 bankruptcy protection.
Shapiro, Woodbridge, and certain affiliated companies are charged with fraud and violations of the securities and broker-dealer registration provisions of the federal securities laws. The SEC is seeking return of allegedly ill-gotten gains with interest and financial penalties. This law firm is accepting Woodbridge cases on a contingency fee basis. Financial Advisors who recommended Woodbridge may have failed to exercise due diligence, and may have errors and omissions insurance that would cover Woodbridge losses.
On December 20, 2017, a Letter of Acceptance, Waiver and Consent was issued in which FSC Securities Coporation was censured, fined $100,000, and required to provide FINRA with a plan to remediate eligible customers who qualified for, but did not receive, the applicable mutual fund sales-charge waiver. As part of this settlement, the firm agreed to pay restitution to eligible customers, which is estimated to total $414,261 (the amount eligible customers were overcharged, inclusive of interest). Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge. The findings stated that these eligible customers were instead sold Class A shares with a front-end sales charge, or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. These sales disadvantaged eligible customers by causing the customers to pay higher fees than they were actually required to pay.
The findings also stated that the firm failed to reasonably supervise the application of sales-charge waivers to eligible mutual fund sales. The firm relied on its financial advisors to determine the applicability of sales-charge waivers, but failed to maintain adequate written policies or procedures to assist financial advisors in making this determination. In addition, the firm failed to adequately notify and train its financial advisors regarding the availability of mutual fund sales-charge waivers for eligible customers. The firm also failed to adopt adequate controls to detect instances in which they did not provide sales-charge waivers to eligible customers in connection with their mutual fund purchases. As a result of the firm’s failure to apply available sales-charge waivers, the firm estimates that eligible customers were overcharged by approximately $380,520 for mutual fund purchases made since January 1, 2011. If you believe that you have suffered losses as a result of FSC Securities Corporation’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.
On December 6, 2017, a Letter of Acceptance, Waiver and Consent was issued in which Next Financial Group, Inc. was censured, fined $750,000, and required to retain an independent consultant to conduct a comprehensive review of the adequacy of its policies, systems and procedures (written and otherwise) and training. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain, and implement a supervisory system reasonably designed to detect and address excessively traded accounts. The findings stated that the supervisory failings resulted from an inadequate corrective action taken by the firm in response to prior FINRA disciplinary actions that included a failure to use exception reports or any other reasonably designed system to detect excessive trading. In addition, the firm failed to identify excessive trading due to lack of clarity regarding supervisory responsibilities. Due to flaws in its supervisory system, the firm did not reasonably supervise a registered representative’s excessive trading activity. If the firm had instituted reasonably designed procedures to ensure branch audits were completed and findings of excessive trading acted upon, it could have prevented this activity.
The findings also stated that the firm failed to implement a supervisory system and procedures reasonably designed to ensure appropriate suitability determinations in its variable annuity sales, including L-share contracts. The firm failed to establish, maintain and enforce systematic surveillance procedures to identify possible inappropriate rates of variable annuity exchanges. The firm also failed to enforce its existing procedures relating to the suitability review of variable annuity transactions. In addition, the firm did not establish, maintain, and enforce a reasonably designed supervisory system and WSPs related to the sale of multi-share class variable annuities. The firm’s WSPs failed to provide representatives and principals with guidance or suitability considerations for sales of different variable annuity share classes. Moreover, the firm failed to establish, maintain, and enforce WSPs or provide sufficient guidance to its representatives and principals on the sale of long-term income riders, such as long-term income riders with L-share contracts. The findings also included that the firm lacked a supervisory system reasonably designed to ensure that information included on consolidated reports provided to customers was accurate. The firm’s supervisory system was inadequate and it failed to enforce its own procedures.
FINRA also found that the firm failed to have supervisory procedures reasonably designed to detect and monitor for misleading communications on its website. As a result, the firm omitted material facts from its website that caused its communications with the public to be misleading. FINRA also found that the firm failed to establish, maintain, and enforce a system and WSPs reasonably designed to achieve compliance with FINRA rule 2310(c) related to maintaining records of all non-cash compensation received by it or its associated persons. As a result, the firm failed to track and verify non-cash compensation received by its representatives that came in the form of direct sponsorship payments by product issuers to vendors/merchants. Emails of representatives reflected multiple occurrences of product issuers paying vendors/merchants for branch client events directly without the firm’s knowledge and approval of the non-cash compensation. If you believe that you have suffered losses as a result of Next Financial Group’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.
On December 4, 2017, an Office of Hearing Officers decision became final in which Legend Securities, Inc. was censured and fined $200,000. The sanctions were based on findings that it failed to supervise one of his registered representatives who engaged in a manipulative, deceptive and fraudulent scheme in which he churned the accounts of an elderly and blind customer.
The investigation revealed that between October 1, 2012 and December 31, 2015, the firm’s agent, Hank Werner, churned and excessively traded each of the three of the elderly client’s accounts, charging more than $243,000 in commission and fees. According to the complaint, the Firm identified the representative as an individual who should be subject to heightened supervision, however, it failed to act at any time during the investigation period. Additionally, the firm failed to reasonably supervise the Mr. Werner, which allowed him to engage in unsuitable trading and churning in the customer’s accounts causing the client’s losses of nearly $184,000. The firm failed to enforce its procedures and adequately monitor its representatives.
If you believe that you have suffered losses as a result of misconduct, you may contact David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.