News and Articles

Category Archives: FINRA News

Merrill Lynch Sanctioned By FINRA

On June 4, 2020, FINRA issued a press release detailing wrongdoing in the handling of mutual funds by Merrill Lynch, Pierce, Fenner & Smith Inc and the resulting settlement.  FINRA found that Merrill Lynch did not have an adequate system for ensuring that customers received mutual fund sales charge waivers and fee rebates.  Customers were entitled to these funds through rights of reinstatement offered by mutual fund companies. Mutual fund companies often offer customers waivers on up-front sales charges when they repurchase shares of either the same fund that they invested in before, or another fund in the same family. Merrill Lynch customers paid approximately $6 million in improper sales charges and fees between April 2011 and April 2017. The firm relied on a rudimentary alert system to determine whether or not a customer was owed waivers/rebates, but it was nowhere near adequate.

The up-front sales charges which Merrill Lynch customers were improperly charged for typically go to Merrill Lynch’s brokers, who have an incentive to charge customers as much as they can. In this instance, FINRA lauded Merrill Lynch for its openness in its investigation, but this does not always happen. As a result of its violations, Merrill Lynch agreed to a censure and approximately $7.25 million in restitution plus interest.

If you have not hired an attorney and wish to discuss any securities related question, please contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

Stifel, Nicolaus & Co. to Pay Around $1.9 Million in Restitution to More than 1,700 Customers

On May 28, 2020 FINRA announced that it has ordered Stifel, Nicolaus & Co., to pay approximately $1.9 million in restitution, plus interest, to more than 1,700 customers in connection with early rollovers of Unit Investment Trusts (UITs).  FINRA also fined the firm $1.74 million for providing inaccurate information to customers related to rollover costs incurred, and for related supervisory violations.  The Letter of Acceptance states that Stifel failed to establish and maintain a supervisory system and enforce written supervisory systems that were reasonably designed to achieve compliance with FINRA’s suitability rule regarding early rollovers of UITs.

A Unit Investment Trust (UIT) is an SEC-registered investment company that offers investors shares or units in a fixed portfolio of securities in a one-time public offering.  A UIT’s maturity date is often 15 to 24 months at which point the underlying securities are sold and the resulting proceeds are paid to investors.  UITs impose a variety of upfront sales charges.  A registered representative who recommended the sale of a customer’s UIT before its maturity date and used the sale proceeds to purchase a new UIT would cause the customer to incur greater sales charges than if the customer had held the UIT until maturity.  Because of the long-term nature of UITs, their structure, and their costs, short term trading of UITs may be unsuitable.

FINRA’s investigation found that from January 2012 through December 2016, Stifel executed approximately $10.9 billion in UIT transactions – $935.2 million of which were early rollovers.  It was also uncovered that the firm’s supervisory system and procedures were not reasonably designed to supervise the suitability of those early rollovers.  As a result, Stifel failed to identify that its representatives recommended potentially unsuitable early rollovers that, collectively, may have caused customers to incur approximately $1.9 million in sales charges that they would not have incurred had they held the UITs until their maturity date.  Additionally, Stifel sent approximately 600 letters to customers that contained inaccurate information or were missing information about the costs incurred by customers in connection with early UIT rollovers or switches.

In settling this matter, Stifel neither admitted or denied the charges, but consented to the entry of FINRA’s findings.

If you have not hired an attorney and wish to discuss any securities related question, please contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

 

FINRA Fines Robinhood Financial, LLC $1.25 Million for Best Execution Violations

FINRA announced today, that it has fined online broker, Robinhood Financial, LLC $1.25 million for violations relating to its best execution of customer equity orders and related supervisory failures.  Robinhood Financial provides online trading for retail investors and offers customers commission-free trading when using the platform’s online mobile trading application or website to submit orders to trade in U.S.  During the investigation period from October 1, 2016 through November 9, 2017, Robinhood allegedly, routed its customers’ non-directed equity orders to four broker-dealers for execution.  Robinhood and the broker dealers engaged in an arrangement known as “payment for order flow.”   This means that although Robinhood provided commission-free trading to its customers, it nonetheless received compensation for that trading through its payment for order flow model.  

FINRA found that for more than a year, Robinhood failed to exercise reasonable diligence to ascertain whether these four broker-dealers provided the best market for the subject securities to ensure its customers received the best execution quality from these as compared to other execution venues.  Additionally, Robinhood did not systematically review certain order types, and it failed to establish and maintain a supervisory system, including written supervisory procedures, reasonable designed to achieve compliance with its best execution obligations.  

According to Jessica Hopper, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, “Best execution of customer orders is a key investor protection requirement”, “FINRA member firms must exercise reasonable diligence in performing regular and rigorous reviews to achieve best execution for their customers.”  Robinhood, which has been a FINRA member since Oct. 2013 and serves around 10 million people.  In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.   The company agreed to pay the fine and hire an independent consultant to conduct a comprehensive review of its systems and procedures.

FINRA Bans Two Registered Representatives for Churning Accounts of Elderly Client with Alzheimer’s.

On October 21, 2019, FINRA announced that it had barred Ami Forte and Charles Lawrence of Florida for their roles in churning accounts belonging to a 79-year-old customer who suffered from severe Alzheimer’s and dementia.  According to the Complaint, Forte and Lawrence engaged in unsuitable and excessive trading, specifically in the 10 months preceding his death, the Forte group effected more than 2,800 trades in the victim’s accounts generating around $9 million in commissions.  Over half of these transactions involved short-term trading in long-maturity bonds, including municipal bonds, intended for customers with long-term investment horizons.  

The investigation revealed that Forte first met the customer (referred to as RS) in the late 90s when they began a romantic relationship.  Forte, who was the broker of record in the accounts, and maintained near daily contact with the customer, used her position of trust and confidence to exploit RS and generate excessive commissions from his accounts.  During the relevant period, RS held approximately $192 million in six accounts in Morgan Stanley.  In 2001, Forte established the Forte Group at Morgan Stanley, which she headed as Senior Vice President.  Lawrence joined the Forte Group at its inception, and by 2009, he was mainly entering the Forte Group’s day to day trades in the RS accounts.  It’s worth noting, that RS accounts generated approximately 94 percent of Forte’s commission revenues.  On the other hand, Lawrence did not received commissions from the trading activity in the RS Accounts.  He was paid an annual salary plus bonuses.  

According to the settlement, Forte and Lawrence met and spoke frequently with RS and knew he suffered severe cognitive impairment.  It states that multiple treating physicians, some as early as 2008, determined that RS suffered from dementia or Alzheimer’s or both.  During the investigation period, at least four separate physicians on approximately five occasions diagnosed RS with severe cognitive impairment.  Forte and Lawrence exploited RS’s vulnerable mental and physical condition to unsuitability and excessive trade his accounts, it continued until shortly before RS’s death.  For instance, on June 20, 2012, RS entered the hospital for the final time before his passing in August 2012.  Despite being hospitalized and not in contact with anyone from the Forte Group, between June 20 and June 29, 2012, RS’s accounts had over $14 million in transactions.  Forte and Lawrence never reported RS’s condition to Morgan Stanley.  Instead, they increased their level of trading in RS’s accounts in the months after RS’s diagnosis.  

In settling this matter, Forte and Lawrence neither admitted nor denied the charges, but consented to the entry of FINRA’s finding. 

FINRA Fined Accelerated Capital Group and Ordered it to Pay Restitution to Six Customers

FINRA censured and fined Accelerated Capital Group $400,000 for failing to establish and maintain a supervisory system and written procedures reasonably designed to achieve compliance with applicable laws, regulations and rules.  The investigation found that the Firm’s failures allowed a registered representative to engage in excessive and unsuitable transactions.  The firm’s supervisory failures resulted in harm to vulnerable customers, five of them over the age of 80, and at least seven living on fixed incomes.  These transactions resulted in over $650,000 in commissions.   

The firm’s supervisory system was not reasonably designed to identify unauthorized, excessive, or unsuitable trades effected by representatives in their customers’ accounts.  The system failed to ensure that representatives made customers aware of all commissions, costs and breakpoints associated with mutual fund transactions, specifically ones relating to Class A mutual funds and front-loaded fees.  Additionally, the investigation found that the firm failed to report customer complaints and an internal disciplinary action to FINRA. 

On March 15, 2019, an Office of Hearing Officers decision became final in which Accelerated Capital Group was censured and fined.  It was also ordered to pay $422,029.53, plus interest, in restitution to six customers.

If you have not hired an attorney 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 Fined Corinthian Partners, LLC its Chairman/President and its CCO

On March 18, 2019, FINRA censured and fined Corinthian Partners, LLC, together with the firm’s Chairman/President and CCO, for failure to establish, maintain, and enforce a reasonably designed supervisory system, related to the sale of Non-Traditional ETPs (NT-ETPs) to customers.  According to FINRA’s Regulatory Notice 09-31, NT-ETPs “are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”  Due to NT-ETPs’ inherent risks and the complexity of the products, it is required that firms oversee the transactions and monitor for unsuitability and risks particular to non-traditional ETPs such as the risk incurred by long-term holding of a product that resets daily. 

The investigation revealed that a sole registered representative recommended that his customers invest almost exclusively in NT-EFTPs and hold them for extended periods of time.  The registered representative solicited 1,910 purchases totaling $279 million and 1,663 transactions that amounted to $275 million in sales of NT-ETPs.  These transactions generated approximately $890,000 in commissions, which represented a significant portion of the firm’s revenue.  Despite this activity, the firm lacked a reasonably-designed supervisory system and WSPs to ensure suitability of recommendations, failed to ensure that new account documents were filled out completely and accurately.  Additionally, the firm’s principals admitted that they had joint responsibility for establishing, maintaining and enforcing the firm’s supervisory system and its WSPs, they failed to identify and investigate red flags of unsuitable trading.

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 enforce a reasonably designed supervisory system.  Corinthian Partners, LLC was censured and fined $30,000, the firm’s principals were also fined and suspended from association with any FINRA member in any capacity for 30 business days. 

If you have not hired an attorney you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

Kestra Investments Services Agrees to Pay 1.9M in Restitution to Eligible Mutual Fund Customers

During the investigation period, July 1, 2009 and February 22, 2018, Kestra deprived eligible retirement accounts and charitable organizations that qualified but did not receive, the applicable mutual fund sales charge waiver or appropriate share class.  Customers were overcharged approximately $1.6 million.  The investigation found that since July 2009, approximately 3,250 eligible customers accounts purchased mutual funds shares for which the Firm did not apply an available sales charge waiver.  Kestra relied on its financial advisors to determine the applicability of sales charge waivers but failed to maintain reasonable designed written policies or procedures to assist in making this determination.  The different sales charges, breakpoints, waivers and fees associated with different shares classes affect the return customers receive from mutual fund investments.   

Without admitting or denying the findings, the firm agreed to pay customers $1.9 million.  Kestra was also fined $325,000.  The firm agreed to the entry of findings that it failed to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that its registered representatives’ recommendations complied with applicable securities laws and regulations and FINRA rules.  Additionally, Kestra has provided FINRA with a detailed plan to remediate eligible customers. 

FINRA Fines CFD Investments, Inc. for Supervisory Deficiencies

On January 10, 2019, FINRA fined CFD Investments $125,000 for failure to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that its registered representatives’ recommendations of variable annuities complied with applicable securities laws, regulations and FINRA rules.  

CFD failed to provide sufficient training to its registered representatives and reviewing principals to ensure that they understood the material features of variable annuities, specifically the additional scrutiny of the suitability issues raised by the sale of an L-share contract combined with a long-term rider, or to a customer with a long term investment objective.  The findings also stated that the firm failed to implement reasonable procedures to supervise rates of variable annuity exchanges by associated persons. The procedures did not provide any guidance regarding what constituted excessive switching, and how to supervise for excessive switching.  Moreover, the firm had no surveillance procedures or processes to review the rates of exchanges of its associated persons. The lack of supervisory systems and procedures relating to rates of exchanges was particularly unreasonable given that nearly 25 percent of the firm’s variable annuity transactions were exchanges

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 enforce a supervisory system and written supervisory procedures (WSPs) reasonably designed to ensure that its registered representatives’ recommendations of variable annuities complied with applicable securities laws and regulations and FINRA rules.

FINRA Fined Merrill Lynch, Pierce, Fenner & Smith Inc. for Failure to Supervise

On December 13, 2018,

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $300,000 for failure to reasonable supervise an associated person who was part of a scheme to defraud a firm’s customer.  Merrill Lynch failed to investigate red flags raised by the registered representaitve’s email communications, and it failed to follow up on a $1.7M default judgment entered against the same registered representative.  As well as the firm’s failure to disclose to FINRA these reportable events, together with a felony charge against the registered agent.      

During the investigation period, FINRA found that in three instances, Merrill Lynch flagged for review some of the registered representative’s email communications, showing possible violations of the firm’s policies and procedures.  It failed to further investigate these flags.  In doing so, Merrill Lynch would have learned that the representative, allegedly, had a close association with a con man, that she was providing services beyond what the firm permitted, and that she was potentially involved with private securities transactions. 

Another red flag was raised on March 25, 2010, when the Firm’s payroll department received a garnishment order, in connection with a lawsuit filed against the registered representative.  It showed that the representative had a default judgment against her, in the amount of $1,694,233.10.  Merrill Lynch failed to review the underlying complaint, although the default judgement and garnishment order were eventually vacated.  The firmed also failed to report to FINRA several events related to the registered representative, including the garnishment order, as well as the felony charges against her for writing post-dated checks.

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to reasonably supervise this associated person. 

FINRA Fined Lenox Financial Services for Failure to Disclose Financial Interest and Beneficial Interest

FINRA fined Lenox Financial Services $15,000 for failure to disclosed required financial interest and beneficial ownership in several Research Reports prepared by the firm’s principal.  Additionally, Lenox failed to prevent its principal from making at least eight purchases in research analysts’ accounts of securities of companies that were the subject of his research reports.  FINRA found that the firm failed to establish a supervisory system reasonably designed to achieve compliance with disclosures requirements and personal trading restrictions.  

The investigation found that between September 28, 2012 and November 23, 2015, Lenox published 79 research reports prepared by its principal, regarding the equities of 14 companies.  In 14 of the initial research reports, Lenox included a generic disclaimer that used vague language that failed to identify its principal’s actual financial interest or the nature of his actual financial interest in the subject companies. 

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to make required financial interest and beneficial ownership disclosures in its research reports, as well as establish a supervisory system reasonably designed to achieve compliance with personal trading restrictions. 

If you have not hired an attorney you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.