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Author Archives: David Weintraub

FINRA Fines Citigroup Global Markets Inc. $1.85 Million and Orders Restitution of $638,000 for Best Execution and Supervisory Violations in Non-Convertible Preferred Securities Transactions

Posted byDavid Weintraub

On August 26, 2014, FINRA announced that it had fined Citigroup Global Markets Inc. $1.85 million for failing to provide best execution in approximately 22,000 customer transactions involving non-convertible preferred securities, and for related supervisory deficiencies for more than three years. FINRA also ordered Citigroup to pay more than $638,000 in restitution, plus interest, to affected customers.

In any customer transaction, a firm or its registered persons must use reasonable diligence to ensure that the purchase or sale price to the customer is as favorable as possible under current market conditions. FINRA found that one of Citigroup’s trading desks employed a manual pricing methodology for non-convertible preferred securities that did not appropriately incorporate the National Best Bid and Offer (NBBO) for those securities. As a result, Citigroup priced more than 14,800 customer transactions inferior to the NBBO. In addition, Citigroup priced more than 7,200 customer transactions inferior to the NBBO because the firm’s proprietary BondsDirect order execution system (BondsDirect) used a faulty pricing logic that only incorporated the primary listing exchange’s quotation for each non-convertible preferred security. As securities trade on multiple exchanges, Citigroup missed the prospect of a better price for that security on an exchange other than its primary listing exchange.

FINRA also found that Citigroup’s supervisory system and written supervisory procedures for best execution in non-convertible preferred securities were deficient. Citigroup failed to perform any review of customer transactions in non-convertible preferred securities executed on BondsDirect or manually by the trading desk to ensure compliance with the firm’s best execution obligations. The firm failed to conduct these supervisory reviews even though it had received several inquiry letters from FINRA staff. Moreover, while many of the transactions in question were identified on FINRA’s best execution report cards, the firm only attempted to access its best execution report cards once during the relevant period.

In concluding this settlement, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

SEC Charges N.Y. Based Brokerage Firm With Overcharging Customers in $18 Million Scheme

Posted byDavid Weintraub

On August 14, 2014, the SEC announced that they had charged New York based brokerage firm Linkbrokers Derivatives LLC for unlawfully taking secret profits of more than $18 million from customers by adding hidden markups and markdowns to their trades.

According to the SEC’s order instituting administrative proceedings, certain representatives on Linkbrokers’ cash equity desk defrauded customers by purporting to charge them very low commission fees, but in reality extracting fees that in some cases were more than 1,000 percent greater than represented.  These brokers hid the true size of the fees they were collecting by misrepresenting the price at which they had bought or sold securities on behalf of their customers.  The scheme was difficult for customers to detect because the brokers charged the markups and markdowns during times of market volatility in order to conceal the false prices they were reporting to customers.

Linkbrokers has agreed to pay $14 million to settle the SEC’s charges. The SEC previously charged four former brokers on the cash equities desk at Linkbrokers, and three of them later agreed to settle those charges by consenting to judgments ordering more than $4 million in disgorgement plus interest.

According to the SEC’s order instituting a settled administrative proceeding against Linkbrokers, the scheme occurred from at least 2005 to February 2009 and involved more than 36,000 transactions.  The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000.  Linkbrokers secured additional illicit profits by stealing a portion of customers’ trades.  When customers placed limit orders seeking to purchase or sell shares at a specified maximum or minimum price, the brokers filled the orders at the customers’ limit price but withheld that information from the customers.  Instead, they monitored the movement in the price of the securities and purchased or sold portions of these positions back to the market, keeping the profit for the firm.  The brokers then falsely reported to the customers that they could not fill the order at the limit price.

The SEC’s order, to which Linkbrokers consented without admitting or denying the findings, found that the firm violated Section 15(c)(1) of the Securities Exchange Act of 1934 and requires Linkbrokers to pay $14 million in disgorgement.  Linkbrokers ceased acting as a broker-dealer in April 2013 and will withdraw its registration.

SEC Obtains Nearly $70 Million Judgment Against Richmond, Virginia Based Firms and CEO Found Liable for Defrauding Investors

Posted byDavid Weintraub

On August 1, 2014, the SEC announced that it has obtained a final judgment in federal court requiring a Richmond, Virginia based financial services holding company, a subsidiary brokerage firm, and their CEO to pay nearly $70 million as the outcome of a trial that found them liable for fraud.

The SEC’s complaint filed against AIC Inc., Community Bankers Securities LLC, and Nicholas D. Skaltsounis alleged that they conducted an offering fraud while selling AIC promissory notes and stock to numerous investors across multiple states, many of whom were elderly or unsophisticated brokerage customers.  They misrepresented and omitted material information about the investments when pitching them to investors, including the safety and risk associated with the investments, the rates of return, and how the proceeds would be used by AIC.  In reality, AIC and its subsidiaries were never profitable, and Skaltsounis and the companies used money raised from new investors to pay back principal and returns to existing investors.

The court imposed permanent injunctions against AIC, Community Bankers Securities, and Skaltsounis for future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

FINRA Disciplinary Action Against J.P. Turner & Company, L.L.C.

Posted byDavid Weintraub

In July 2014, FINRA announced that J.P. Turner & Company, L.L.C. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $35,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it sold (bought) corporate bonds to (from) customers and failed to sell (buy) such bonds at a price that was fair, taking into consideration all relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved and that the firm was entitled to a profit.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of J.P. Turner & Company, L.L.C.’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.

SEC Charges Virginia-Based Broker With Stealing Funds From Elderly Customers

Posted byDavid Weintraub

On July 31, 2014, the SEC announced that it had charged a broker based in Roanoke, Virginia, with defrauding elderly customers, including some who are legally blind, by stealing their funds for her personal use and falsifying their account statements to cover up her fraud.

According to the SEC’s complaint, Donna Jessee Tucker siphoned $730,289 from elderly customers and used the money to pay for such personal expenses as vacations, vehicles, clothes, and a country club membership.  Tucker ensured that the customers received their monthly account statements electronically, knowing that they were unable or unwilling to access their statements in that format.  The SEC further alleged that Tucker engaged in unauthorized trading and other financial transactions while making misrepresentations to customers about their investment accounts and forging brokerage, banking, and other documents.

In a parallel action, the U.S. Attorney’s Office for the Western District of Virginia has announced criminal charges against Tucker.

Tucker has agreed to settle the SEC’s charges and disgorge the $730,289 in ill-gotten gains either in the criminal case or the civil case.  She consented to the entry of an order permanently enjoining her from violating Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The settlement is subject to court approval.

FINRA Disciplinary Action Against Great American Advisors, Inc.

Posted byDavid Weintraub

In July 2014, FINRA announced that Great American Advisors, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $100,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to have an adequate supervisory system for the sale of variable annuities.

The findings stated that as a result, two of its independent contractor registered representatives recommended and effected unsuitable variable annuity transactions involving firm customers. The independent contractor registered representatives and the firm improperly earned commissions and caused customers to pay $363,173 in unnecessary surrender fees and incur longer surrender periods. The firm noted a high number of variable annuities replacement transactions by one of these representatives in which the customers had held the prior annuity for only two to three years. The firm began an internal review of the replacements and required the representatives to provide information about the annuity replacements, including details about the high volume of replacement transactions, records of the transactions and copies of sales materials used. The firm suspended all variable annuities replacement transactions by the two representatives during its compliance department’s internal investigation.

According to the findings, the firm’s written procedures generally addressed suitability considerations related to variable annuities sales. However, the firm did not have an adequate supervisory system to ensure that the procedures were properly implemented. The firm failed to ensure that the sales of the variable annuities by these representatives adhered to its written procedures. The supervisors approved variable annuities replacements based on limited firm systems and with inadequate written guidance, computer systems and surveillance tools. One of the representatives underreported surrender fees on replacement transactions, and the firm did not check or verify the correct surrender fees. The firm also did not have a system or Web-based access to a database that allowed it to adequately compare the annuity to be replaced with the other variable annuities.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of Great American Advisors, Inc.’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.

FINRA Disciplinary Action Against CP Capital Securities, Inc.

Posted byDavid Weintraub

In July 2014, FINRA announced that CP Capital Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $5,000 and ordered to pay $1,676.92, plus interest, in restitution to customers. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it bought corporate bonds from customers and failed to buy such bonds at prices that were fair, taking into consideration all relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved and that the firm was entitled to a profit.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of CP Capital Securities, Inc.’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.

SEC Charges Florida-Based Transfer Agent and Owner with Defrauding Investors

Posted byDavid Weintraub

On July 24, 2014, the SEC announced it had charged a Florida-based transfer agent and its owner with defrauding investors by using aggressive boiler room tactics to peddle worthless securities with promises of high returns or discounted prices.

Transfer agents are typically used by publicly-traded companies to keep track of the individuals and entities that own their stocks and bonds. The SEC alleged that Cecil Franklin Speight, whose firm International Stock Transfer Inc. (IST) was a registered transfer agent, abused the transfer agent function by creating and issuing fake securities certificates to both U.S. and international investors. While investors collectively sent in millions of dollars thinking they were purchasing high-yield investments and discounted stock, they ended up receiving counterfeit certificates that Speight and IST fooled them into thinking were legitimate.

Speight and IST agreed to settle the SEC’s charges. Speight will be barred from serving as an officer or director of a public company and from participating in any penny stock offering. The court will determine monetary sanctions at a later date.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Speight’s scheme included multiple securities, including the issuance of fake foreign bond certificates and stock certificates for a publicly-traded microcap company with no connection to IST. To bolster the appearance of the safety of the investments and conceal from investors how their money was really being spent, Speight enlisted two attorneys to receive investment funds into their own bank accounts. From there, the money was transferred to IST. Instead of making its way to any issuers, however, IST and Speight spent investors’ money almost as quickly as it came in. They used it to pay Speight’s personal expenses, and in Ponzi scheme fashion new investor money was used to fund interest payments to prior foreign bond investors. In all, Speight and IST stole more than $3.3 million from at least 70 investors.

The SEC’s complaint charged Speight and IST with violating the antifraud provisions of the securities laws, including Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The complaint charged IST with violating the transfer agent books and records requirements of Section 17(a)(3) of the Exchange Act, and Speight with aiding and abetting such violations. Speight and IST have consented to the entry of judgments permanently enjoining them from future securities law violations and requiring them to pay disgorgement of all ill-gotten gains plus prejudgment interest and penalties as determined by the court, which must approve the settlement.

SEC Approves FINRA Rule to Prohibit Conditioning Settlements on Expungement

Posted byDavid Weintraub

On July 23, 2014, FINRA announced that the SEC had approved a new rule prohibiting firms and registered representatives from conditioning settlement of a customer dispute on—or otherwise compensating a customer for—the customer’s agreement to consent to, or not to oppose, the firm’s or representative’s request to expunge such information from the Central Registration Depository (CRD™) system.

FINRA operates the CRD system, which is an online registration and licensing system for the securities industry. The CRD system contains information regarding members and registered representatives, such as personal, registration and employment history, as well as disclosure information including criminal matters, regulatory and disciplinary actions, civil judicial actions, and information relating to customer complaints and disputes. The information FINRA makes public through BrokerCheck is derived from CRD. Brokers who wish to have a customer dispute removed from the CRD system and, thereby, from BrokerCheck, must obtain a court order confirming an arbitration award recommending expungement relief.

FINRA Disciplinary Action Against Gary B. Lesnik

Posted byDavid Weintraub

In July 2014, FINRA announced that Gary B. Lesnik, employed by Lightspeed Trading, LLC, submitted a Letter of Acceptance, Waiver and Consent in which he was assessed a deferred fine of $60,000, suspended from association with any FINRA member in any capacity for eight months and required to cooperate with FINRA in its continuing investigation. Without admitting or denying the findings, Lesnik consented to the sanctions and to the entry of findings that he operated an unregistered broker-dealer in willful violation of Section 15(a)(1) of the Securities Exchange Act of 1934.

The findings stated that after opening an account with Lesnik’s member firm, the unregistered broker-dealer operated as a day-trading company. The unregistered broker-dealer and Lesnik recruited retail customers to open accounts with his firm to day-trade securities using the unregistered broker-dealer’s offices and equipment. Lesnik was the registered representative of record on each of the unregistered broker-dealer’s customer accounts at his firm. The commissions that the unregistered broker-dealer earned, through Lesnik’s receipt and transfer of commission payments from his firm, constituted transaction-based compensation and effecting transactions in securities.

In addition, the findings stated that Lesnik shared commissions with unregistered persons. Lesnik’s firm paid him a total of $131,450 in commissions that were generated from trading activity by retail customers that the unregistered broker-dealer referred to his firm. Lesnik endorsed the monthly commission checks that he received to the unregistered broker-dealer, which in turn distributed the commissions to the owners and members, including Lesnik. The unregistered broker-dealer’s other owners and members were not registered with a FINRA member firm.