Category Archives: FINRA News

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.

On May 9, 2013, FINRA and the SEC issued an investor alert entitled, “Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them.”

The alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

The alert contains a checklist of questions before selling away an income stream:

• Is the transaction legal?
• Is the transaction worth the cost?
• What is the reputation of the company offering the lump sum?
• Will the factoring company require life insurance?
• What are the tax consequences?
• Does the sale fit your longer-term financial goals?

The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

• Investors may encounter commissions of seven percent or higher.
• Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.
• These products are illiquid, which means they can be difficult to sell. In the event you need money and want to sell the product you may not be able to do so or you may only be able to do so at a loss.
• Your “rights” to the income steam you purchased could face legal challenges.

A direct link to the alert can be found here.

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.

On April 25, 2013, FINRA announced that it had had fined Global Financial Services LLC $42,500.00, and that they were required to pay $16,931.30, plus interest, in restitution to customers.

In 16 transactions from October 20, 2008, through December 19, 2008, Global Financial Services failed to sell corporate bonds to customers at prices that were fair, taking into consideration all the relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved, and the firm’s entitlement to a profit.  As a result, the Firm violated NASD Rule 2110, 2440, IM-2440-1 and IM-2440-2, and FINRA Rule 2010.

According to FINRA’s findings the Firm also failed to provide adequate supervision reasonably designed to achieve compliance with respect to applicable FINRA rules concerning corporate bond pricing in that the firm failed to detect the transactions referenced above.

In settling this matter, Global Financial Services LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 25, 2013, FINRA announced that it had fined and suspended New York Registered Representative Bryan R. Mackey.  The suspension effective dates were from May 20, 2013 until June 10, 2013.

During his association with Merrill Lynch, Pierce, Fenner & Smith, on September 28, 2012 Mr. Mackey exercised discretion in connection with 17 transactions he effected in the account of one customer.  He did not have written authorization from the customer to place discretionary trades.  Moreover, he failed to obtain written acceptance of the account as a discretionary account from Merrill Lynch, Pierce, Fenner & Smith.  This conduct is in direction violation of NASD Rule 2510(b).

In settling this matter Bryan R. Mackey 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.

On April 25, 2013, FINRA announced that it had fined Knight Capital Americas, L.P. $20,000.00, and that they were required to pay $890.14, plus interest, in restitution to customers.

FINRA’s findings state that during the period of January 1, 2009 through March 31, 2009 there were 21 instances when the Firm failed to contemporaneously or partially execute a customer limit order in seven NASDAQ securities after it traded each subject security for its own market-making account at a price that would have satisfied each customer’s limit order. The conduct described in this paragraph violates FINRA Rule 2010 and NASD IM-2110-2.

During the same time period outlined above there were also 31 instances where Knight Capital Americas, L.P. accepted customer market orders, traded for their own account at prices that would have satisfied the customer market orders, and failed to immediately thereafter execute the customer market orders up to the size and at the same price at which it traded for its own account or a at better price.  This is a distinct violation of FINRA Rule 2010 and NASD Rule 2111(b)

In settling this matter, Knight Capital Americas, L.P. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 24, 2013, FINRA announced that it had censured and fined RBC Capital Markets, LLC $97,500.00.

FINRA’s findings state that during a review period of July 1, 2009 through September 30, 2009, RBC failed to use due diligence with transactions in corporate bonds for or with customers to ascertain the best inter-dealer market, and failed to buy or sell in such market so that the resultant price to its customers was as favorable as possible under prevailing market conditions.   The conduct described in this paragraph constitutes distinct violations of FINRA Rule 2010 and NASD Rule 2320.

The Firm also purchased municipal securities for its own account from a customer and/or sold municipal securities for its own account to a customer at an aggregate price (including any markdown or markup) that was not fair and reasonable, taking into consideration all relevant factors, including the best judgment of the broker, dealer or municipal securities dealer as to the fair market value of the securities at the time of the transactions; the expense involved in effecting the transactions; the fact that the broker, dealer or municipal securities dealer is entitled to a profit; and the total dollar amount of the transactions.  This violates MSRB Rules G-17 and G-30(a).

In addition, FINRA found that RBC failed to provide written notification disclosing to its customers its correct capacity in transactions; failed to disclose details available upon request for compensation, which is stated in a  single amount of customer confirmations; and disclosed on customer confirmations that a commission was charged for order filled in a principal capacity.  As a result, the Firm was not in compliance with SEC Rule 10b-10.

In settling this matter RBC Capital Markets, LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 19, 2013, FINRA announced that it had censured and fined Caprock Securities, Inc. $15,000.00.  The Firm consented to the entry of findings that it failed to establish, maintain, and enforce a supervisory system reasonably designed to review and retain its associated persons’ email communications with the public.

Between March 5, 2007 and December 23, 2011, Caprock failed to retain all of its business-related electronic communication in a non-rewritable, non-erasable format. By failing to establish a reasonable supervisory system for email review and retention, Caprock violated NASD Rules 3010(d) and 2110, FINRA Rule 2010, and SEC Rule 17-a-4(b)(4).  SEC Rule 17-a-4(b)(4) requires members to preserve, for a period of not less than three years, the first two years in an easily accessible place, electronic and other communications relating to their business as broker-dealers.

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