Author Archives: David Weintraub

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 6^th 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 6^th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

On November 9, 2017, FINRA announced an extended hearing panel barred broker Hank Mark Werner of Northport, New York, for fraudulently churning and excessively trading the accounts of his customer, a blind, elderly widow, and for making unsuitable recommendations. The hearing panel also ordered Werner to pay more than $155,000 in restitution to the widow, fined him $80,000 and ordered disgorgement of more than $10,000 representing commissions received for recommending the purchase of an unsuitable variable annuity.

Werner had been the elderly widow’s broker, and that of her blind husband until his 2012 death, since 1995. According to the hearing panel decision, Werner plundered his customer’s accounts by engaging in such an active trading strategy that, when the high commissions he charged were taken into account, it was impossible for the customer to make money. The panel found Werner frequently bought and sold a security within a week or two, and charged exorbitant commissions even though the blind widow’s financial circumstances required that Werner invest her assets with a minimum amount of risk. She was 77 and in ill health when Werner began churning her accounts. Werner engaged in more than 700 trades from October 2012 to December 2015, generating approximately $210,000 in commissions while the customer lost more than $175,000 as a result of his reckless trading. The decision also noted that it was apparent to the Hearing Panel that Werner took advantage of the customer’s vulnerability after her husband died in September 2012.

The hearing panel concluded that Werner engaged in egregious misconduct and is unfit to work in the securities industry.

Legend Securities, Inc., which was also named in an amended disciplinary complaint, failed to respond and accordingly was held in default. The complaint charged that Legend failed to reasonably supervise Werner, which allowed him to engage in churning his customer’s account, and failed to establish, maintain, and enforce an adequate supervisory system to ensure that Werner was subject to heightened supervision. The hearing officer issued a default decision censuring and fining the firm $200,000. Legend voluntarily paid $20,000 in partial restitution to the customer.

On October 16, 2017, FINRA announced that it had ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures. FINRA found that between July 1, 2010, and May 1, 2012, certain Wells Fargo registered representatives recommended volatility-linked ETPs without fully understanding their risks and features.

Volatility-linked ETPs are complex products that could be misunderstood and improperly sold by registered representatives. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn. In fact, volatility-linked ETPs are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy.

FINRA found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs. In addition, Wells Fargo provided substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.

In settling with FINRA, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On September 25, 2017, FINRA announced that it had fined Morgan Stanley Smith Barney LLC $3.25 million and required the firm to pay approximately $9.78 million in restitution to more than 3,000 affected customers for failing to supervise its representatives’ short-term trades of unit investment trusts (UITs).

A UIT is an investment company that offers units in a portfolio of securities that terminates on a specific maturity date, often after 15 or 24 months. UITs impose a variety of charges, including a deferred sales charge and a creation and development fee, that can total approximately 3.95 percent for a typical 24-month UIT. A registered representative who repeatedly recommends that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes the customer to incur increased sale charges over time, raising suitability concerns.

FINRA found that from January 2012 through June 2015, hundreds of Morgan Stanley representatives executed short-term UIT rollovers, including UITs rolled over more than 100 days before maturity, in thousands of customer accounts. FINRA further found that Morgan Stanley failed to adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading, failing to implement an adequate system to detect short-term UIT rollovers, and failing to provide for supervisory review of rollovers prior to execution within the firm’s order entry system. Morgan Stanley also failed to conduct training for registered representatives specific to UITs.

In settling this matter, Morgan Stanley nether admitted or denied the charges, but consented to the entry of FINRA’s findings.

On September 14, 2017, the Securities and Exchange Commission announced that it had charged the investment services subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.

SunTrust Investment Services agreed to pay a penalty of more than $1.1 million to settle the charges.  SunTrust separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation.  SEC examiners cited the practice during a compliance review of the firm in mid-2015.  More than 4,500 accounts were affected.

According to the SEC’s order, the Atlanta-based firm breached its fiduciary duty to act in its clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees.  Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees.  The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.

The SEC’s order found that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients.  The firm also agreed to be censured.