Category Archives: FINRA News

In July 2013, FINRA announced that StockCross Financial Services, Inc.  submitted a Letter of Acceptance, Waiver and Consent in which the firm agreed to be censured, fined $20,000 and required to pay $6,781.40, plus interest, in restitution to customers. Without admitting or denying the findings, the firm  consented to the described 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.  The markdowns at issue were below 4%, and the mark-ups at issue were between 2.26% and 5.26%.  It was unclear whether the customers initiated FINRA arbitrations, or any other type of securities arbitration.

In July 2013, FINRA reported that VSR Financial Services, Inc. and Donald Joseph Beary submitted a Letter of Acceptance,Waiver and Consent in which the firm agreed to be censured and fined $550,000. Beary was fined $10,000 and suspended from association with any FINRA member in any principal capacity for 45 days. Without admitting or denying the findings, the firm and Beary consented to the described sanctions and to the entry of findings that the firm failed to establish, maintain and enforce a reasonable supervisory system regarding the sale of non-conventional investments. The findings stated that the firm’s WSPs provided that no more than 40 percent to 50 percent of a client’s exclusive net worth could be invested cumulatively in alternative investments unless there was a substantial reason to exceed the guidelines and that justification was well documented. Supplemental to these procedures, the firm, through Beary, created additional procedures that applied a discount to certain non-conventional instruments, reducing the percentage of a customer’s liquid net worth invested. The findings also stated that as the direct participation principal, Beary had responsibility for the implementation and supervision of the discount program. The Securities and Exchange Commission (SEC) identified as a deficiency, in a letter to the firm, that it did not have adequate written procedures relating to the discount program.  The SEC made the same finding two years later regarding the lack of WSPs relating to the discount program. Despite these warnings from the SEC, Beary did not take reasonable steps to implement WSPs or to otherwise discontinue the use of the discount program.

The findings also included that in addition to the 40 percent to 50 percent concentration limit stated in the firm’s WSPs, the firm’s new account form asked each client to specify the percentage of liquid net worth that the client would be comfortable investing in various risk categories. Most alternative investment program sponsors identified their products involving, at a minimum, a high degree of risk. The firm also assigned a risk category to each alternative investment it sold. Rather than assign a risk category based upon the risk level identified by the sponsor in the alternative investment offering documents, the firm routinely assigned lower risk categories. In several instances, the firm lowered its internal risk rating subsequent to the firm’s acceptance of the product. In spite of the firm’s efforts to increase sales of alternative investments through the use of discounts and risk rating reductions, customer investments still exceeded the 40 percent concentration guideline, but the firm did not document the existence of a substantial reason to exceed the concentration guidelines as required by its WSPs.

FINRA found that the firm failed to establish, maintain and enforce a reasonable supervisory system regarding the use of consolidated reports. The firm’s WSPs regarding consolidated statements were limited to a few memoranda issued to registered representatives prior to the issuance of FINRA Regulatory Notice 10-19. In practice, for six years, the firm’s registered representatives used a number of consolidated reporting systems. The firm did not require pre-approval of the consolidated reports to determine whether accurate pricing and disclosures were being used. The firm did not have a system for prompt review of the consolidated reports after the reports were sent to Disciplinary and Other FINRA Actions 3 customers. Given the fact that the firm allowed its registered representatives to enter valuations manually, the firm’s lack of supervision of the consolidated reports was unreasonable. FINRA also found that the firm, acting through a registered representative, recommended and effected the sale of high-risk private placements to customers. While these products may have been suitable for certain customers, they were not suitable for these customers given their financial circumstances and condition. The firm earned approximately $35,950 in commissions on the transactions. The firm, through another registered representative, made recommendations to customers that were not suitable given their moderate risk tolerance and specifications, and the firm earned commissions on the transactions of approximately $483,077.38. In addition, FINRA determined that the firm failed to reasonably supervise its representatives with respect to the unsuitable transactions. One of several firm principals reviewed and approved the transactions of one of these representatives, and each of the principals failed to detect or investigate “red flags” regarding the transactions. This representative falsified the account documentation for customers, but the firm did not detect or investigate any of the representatives’ falsification of documents or other red flags. Detection and investigation of any of these red flags might have prevented the representative’s unsuitable recommendations and the resulting loss of the customers’ funds. Moreover, FINRA found that the firm allowed its registered representatives to send consolidated statements to their customers but never reviewed the consolidated statements a representative sent to some customers to determine whether he was following the firm’s procedures regarding pricing. Because of the inaccurate pricing the representative used, and the firm’s lack of supervision, these customers received statements with erroneous pricing information. It was unclear whether the customers initiated FINRA arbitrations, or any other type of securities arbitration.

In July 2013, FINRA reported that JHS Capital Advisors, LLC submitted a Letter of Acceptance, Waiver and Consent in which the firm agreed to be censured and fined $75,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that, in connection with terminating its relationship with one clearing firm, it transferred accounts from the clearing firm to another clearing firm. The first clearing firm charged a fee of $50 to transfer a non-qualified account and $90 to transfer a qualified account to the second clearing firm.

The findings stated that in connection with this transfer of accounts, the firm sent letter(s) to customers, advising them that it would liquidate the securities in their accounts, send the account proceeds to them, and close their accounts, if they did not transfer their accounts to another firm within a certain period, typically 30 days. In accounts from which the firm did not receive a response to the letter(s), it liquidated the securities in the accounts, sent the account proceeds to the customers, and closed the accounts. The firm did not have the requisite oral or written authority to execute such sales in non-discretionary accounts.

In total, in connection with liquidating the accounts, JHS exercised discretion in 882 transactions in 843 non-discretionary accounts, including at least 33 qualified accounts.  It was unclear whether the customers initiated FINRA arbitrations, or any other type of securities arbitration.

In June 2013, FINRA reported that it had fined and suspended for twenty days Florida Registered Representative Robert Ronald Liggero.

During his association with Bull & Bear Brokerage Services, Inc., Mr. Liggero signed the names of two customers on documents related to the opening of IRA accounts without the customers’ knowledge or consent.  By signing their names on documents, he violated NASD Conduct Rule 2110.  Mr. Liggero consented to a 20 day suspension and a $5,000.00 fine.

In settling this matter Robert Ronald Liggero neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.  It was unclear whether the customer initiated a FINRA arbitration, or any other type of securities arbitration.

In June 2013, FINRA reported that it had fined and suspended for one month Florida Registered Representative Frederico Goldin.

During his association with ITA Financial Services, LLC, Mr. Goldin borrowed a total of $28,688.47 from customers.  When the loans were made, ITA did not have written procedures that allowed its representatives to borrow money from customers.  As a result of the foregoing, FINRA Rules 3240 and 2010 were violated.

In settling this matter Frederico Goldin neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.  Because the loans were repaid, it is unlikely that the customers initiated a FINRA arbitration, or any other type of securities arbitration.

In June 2013,  FINRA reported that it had fined and suspended for five months New York Registered Representative Sheila J. Justin.

During her association with Hazard & Siegel, Inc., Ms. Justin was listed as the broker of record on several accounts and variable annuity transactions, but allowed another individual to service the accounts and effect the transactions.  The findings state that she knew that the individual signed her name on at least 332 variable annuity applications, thus rendering these records and related books and records of her member firm inaccurate.  This conduct constitutes violations of FINRA’s rule prohibiting unethical conduct and recordkeeping.

In settling this matter, Sheila J. Justin neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.  It is unclear whether any of the 332 customers initiated FINRA arbitration proceedings, or any other type of securities arbitration.

On June 26, 2013, FINRA announced that it had fined StateTrust Investments, Inc. $1.045 million and sanctioned the firm’s head trader, Jose Luis Turnes, for charging excessive markups and markdowns in corporate bond transactions and, 85, in particular, that operated as a fraud or deceit upon the customers. FINRA also ordered StateTrust to pay more than $353,000 in restitution, plus interest, to customers who received unfair prices. In addition, Turnes was suspended for six months and fined $75,000. In a related April 2012 action, Jeffrey Cimbal, StateTrust’s Chief Compliance Officer, was fined $20,000 and suspended for five months in a principal capacity for failing to supervise Turnes.

FINRA found that StateTrust charged excessive markups/markdowns to customers in a total of 563 transactions. In 227 instances, the markups or markdowns exceeded 5 percent. In 85 of those instances, StateTrust, acting through Turnes, charged excessive markups and markdowns, ranging from 8 percent to over 23 percent away from the prevailing market price, which operated as a fraud or deceit upon the customers. In each of the 85 instances, StateTrust either bought bonds from its bank or insurance affiliate and then sold the bonds to customers at a price that was 8 percent or more away from the prevailing market; or bought bonds from customers at prices that were 8 percent or more below the prevailing market, and then sold them to its bank or insurance affiliate at a slight markup. During that period, Turnes was also the chairman and largest indirect shareholder of the bank and its insurance affiliates.

StateTrust, Turnes and Cimbal neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA’s investigations were conducted by the Departments of Market Regulation, Member Regulation and Enforcement.

On June 12, 2013 FINRA and the SEC issued an Investor Alert titled “Inbox Alert—Don’t Trade on Pump-And-Dump Stock Emails,” warning investors of a sharp increase in email-linked “pump-and-dump” stock schemes.

FINRA and the SEC’s joint Alert noted that the latest McAfee Threats Report confirms a steep rise in spam email linked to bogus “pump-and-dump” stock schemes designed to trick unsuspecting investors. These false claims could also be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat room pages.

Pump-and-dump promoters frequently claim to have “inside” information about an impending development. Others may say they use an “infallible” system that uses a combination of economic and stock market data to pick stocks. These scams are the “inbox” equivalent of a boiler room sales operation, hounding investors with potentially false information about a company.

The fraudsters behind these scams stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create through the mass email push. Once these fraudsters “dump” their shares by selling them and stop hyping the stock, investors lose their money or are left with worthless, or near worthless, stock.

On June 4, 2013, FINRA announced that it had fined two firms a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds. FINRA ordered Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers. FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor to Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.

Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.

In concluding the settlement, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On May 21, 2013, FINRA announced that it fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm’s email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.

As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL’s numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.

Some examples of LPL’s 35 email failures include the following:

• Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
• LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
• For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
• LPL failed to archive emails sent to customers through third-party email-based advertising platforms.

In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren’t any “red flags” suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.

In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.

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

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.