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Category Archives: FINRA News

FINRA Disciplinary Proceeding Against HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen

On April 18, 2013, FINRA announced that it had fined HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen collectively $60,000.00 in sanctions for materially failing to fairly present the risks and potential disadvantages of hedge fund investing.

Between January 2008 and June 2011, the Firm’s procedures for the review and approval of hedge fund institutional sales material were not reasonably designed or implemented to achieve compliance with FINRA’s contents standards for institutional sales material.  Cohen, as the Firm’s Chief Compliance Officer and the principal responsible for the review and approval of institutional sales material, did not engage in adequate supervision to achieve compliance with FINRA’s content standards for institutional sales material.  The Firm and Cohen violated NASD Rule 221(b)(1)(B), NASD Rule 3010, NASD Rule 2110, and FINRA Rule 2010.

The Firm failed to adequately supervise the use of institutional sales material by its registered representatives.  Cohen did not follow the Firm’s written procedures, which required post-hoc review of institutional sales material and a written notation of approval.  Cohen’s review was not focused on compliance with FINRA’s content standards.  Rather, he looked to see whether the Firm’s summary was consistent with his own understanding of the funds being marketed.  The failure to review documents prepared by the funds resulted in documents being sent to potential investors that were labeled “not to be distributed to clients,” among other things.

The findings also concluded that the Firm did not maintain a complete file of institutional sales material and did not notate the sales material with the name of the person who prepared the document and the date the document was first circulated.  Cohen was responsible for ensuring the Firm’s compliance with these recordkeeping requirements.

In settling this matter, HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA Fines Merrill Lynch $1 Million and Orders Restitution of More Than $320,000 for Failing to Provide Customers Best Execution in Non-Convertible Preferred Securities Transactions

On April 16, 2013, FINRA announced that it fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket), and for failing to have an adequate supervisory system and written supervisory procedures in place. Merrill Lynch was also ordered to pay more than $323,000 in restitution, plus interest, to customers who did not receive best execution for their trades in non-convertible preferred securities. Additionally, FINRA has required Merrill Lynch to revise its written supervisory procedures regarding ML BondMarket best execution obligations within 30 business days.

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 Merrill Lynch had programmed a faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result, in instances when there was a better quote on a market other than the primary listing exchange, that quote was not reflected on ML BondMarket. The firm instead executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer (NBBO).

FINRA also found that Merrill Lynch’s supervisory system relating to ML BondMarket was deficient in a number of respects. Merrill Lynch failed to perform any post-execution review of non-convertible preferred transactions executed on ML BondMarket to ensure compliance with its best execution obligations. The firm also failed to enhance its supervisory review of non-convertible preferred securities transactions executed on ML BondMarket despite the fact that several thousand of such transactions were identified on FINRA’s best execution report cards and it had received several inquiry letters from the staff.

In concluding this settlement, Merrill Lynch 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.

FINRA Disciplinary Proceeding Against Deutsche Bank Securities Inc.

On April 8, 2013, FINRA announced that it had censured and fined Deutsche Bank Securities Inc. $275,000.00 for violating FINRA’s rules by failing to establish and enforce adequate supervisory procedures regarding dividend-related yield enhancement on total return swap transactions that involve U.S. equities.

An equity-based swap is a contractual arrangement between two parties who agree to exchange cash flows that replicate the economics of owning an underlying equity.  The buyer of a swap has the risks and benefits similar to those of owning the underlying equity, while the seller of the swap has countervailing risks and benefits.  From at least 2002 through 2011, Deutsche Bank did not maintain any written procedures for how to supervise or document decisions that impacted dividend uplift on swap trades referencing U.S. dividend-paying securities.

For the reviews that were conducted, the Firm developed a document so that overall client trading patterns could be monitored and potential red flags regarding the use of Total Return Swaps could be identified by desk personnel.  However, this document and the Firm’s review of it were insufficient in that the document was based on data that did not facilitate adequate monitoring.

Deutsche Bank was aware that it needed to improve its record keeping regarding swaps, so as to better manage risks associated with yield enhancement on Total Return Swaps.  However, the Firm did not put in place systems to retrieve sufficient data for managers’ review of executions made by the desk staff.  The records regarding market-on-close pricing or cross trades were not adequate under NASD Rule 3010.

In settling this matter, Deutsche Bank Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA Disciplinary Proceeding Against E*Trade Securities LLC

On April 4, 2013, FINRA announced that it had censured and fined E*Trade Securities LLC  $30,000.00.  The fine was based on the amount of  excess commissions as well as other excess commissions self-identified and self-reported by firms that are not the subject of the formal charges.

Between July 1, 2009 and September 30, 2009, E*Trade Securities charged a fixed charge of $1.00 per bond for online corporate bond purchases.  In 14 transactions in low priced bonds, this charge was in excess of a fair and reasonable amount, taking into consideration all relevant factors, including the availability of the securities involved in the transaction, the expense of executing or filling the customer’s order, the value of the securities rendered by the firm, and the amount of any other compensation received or to be received by the firm in connection with the transaction.  As a result, the Firm violated NASD Rule 2440.

In settling this matter, E*Trade Securities LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA Disciplinary Action Against Nicholas P. Bentivegna

On April 4, 2013, FINRA announced that it has fined and suspended New York Registered Representative Nicholas P. Bentivegna.

On March 18, 2011 and March 21, 2011, while registered through EKN Financial Services, Inc., Mr. Bentivegna effected six unauthorized transactions in a customer’s account without the customer’s knowledge, authorization or consent.  This is a violation of FINRA Rule 2010, and as a result he consented to a fifteen business day suspension in all capacities from association with any FINRA member firm, and a fine of $5,000.00.  The suspension was in effect from May 6, 2013 through May 24, 2013.

In settling this matter Nicholas P. Bentivegna neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA Bars Florida Broker for Unsuitable Recommendations and Unapproved Securities Transactions Involving 31 NFL Players

On March 7, 2013, FINRA announced that it had barred broker Jeffrey Rubin of Lighthouse Point, Florida, from the securities industry for making unsuitable recommendations to his customer, an NFL player. The recommendations related to a now-bankrupt casino in Alabama. As a result, the customer lost approximately $3 million. Based on Rubin’s referrals, 30 other NFL players also invested in the casino project and lost approximately $40 million. Rubin also failed to obtain the required approval from his employers to participate in the securities transactions involving the casino.

Rubin operated a Florida-based company, Pro Sports Financial, which provided financial-related “concierge” services to professional athletes for an annual fee. Between March 2006 and June 2008, while he was registered as a broker with Lincoln Financial Advisors Corporation and Alterna Capital Corporation, Rubin recommended that one of his NFL clients invest a total of $3.5 million, the majority of his liquid net worth, in four high-risk securities. Rubin recommended and facilitated the largest investment, $2 million, in the Alabama casino project without informing his employer member firm or receiving the firm’s approval of this activity.

Rubin referred other investors to the casino project while employed by Alterna Capital Corporation and International Assets Advisory, LLC without the firms’ knowledge or approval. FINRA found that from approximately January 2008 through March 2011, 30 additional clients of Rubin’s concierge firm, all NFL players, invested approximately $40 million in the casino project. Rubin received a 4 percent ownership stake and $500,000 from the project promoter for these referrals.

In settling this matter, Rubin 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.

FINRA Disciplinary Proceeding against Todd Lloyd Goedeke

On November 7, 2012, FINRA’s Department of Enforcement initiated a Disciplinary Proceeding against Todd Lloyd Goedeke for allegedly misappropriating a customer’s funds and failing to respond to FINRA’s requests for information with respect to the referenced investigation.  Mr. Goedeke entered the securities industry in 1983 and joined Cantella & Co., Inc. in 2004.  He remained with Cantella until his termination on June 18, 2010.

According to the Complaint, on September 14, 2009, at Mr. Goedeke’s directions, one of his customers gave him a check in the amount of $4,800 payable to an entity controlled by Mr.  Goedeke.   Later the same day, Mr. Goedeke deposited the funds into one of his accounts.   In March 2011, the customer accepted a settlement with Cantella in the amount of $4,825.  FINRA Enforcement made several attempts to contact Mr. Goedeke for an explanation and requested information in reference to this investigation.  As of the date of this Complaint, Mr. Goedeke had not responded to FINRA Enforcement’s requests.

FINRA Disciplinary Proceeding against Annie O. Kim

On November 6, 2012, FINRA’s Department of Enforcement initiated a Disciplinary Proceeding against Annie O. Kim for alleged use of unauthorized discretion in a customer’s account, and for failing to appear for an on-the-record interview.  Ms. Kim entered the securities industry in 2004 and remained registered until April 2, 2010.  According to the Amended Complaint, from January 11, 2010 through January 26, 2010, while registered with Wells Fargo Advisors, LLC, Ms. Kim exercised discretion in at least eleven transactions in the securities account of one customer.  The transactions were effected at Ms. Kim’s discretion without written authorization.  According to FINRA, between May 3, 2011 and June 30, 2011, FINRA made several failed attempts to contact Ms. Kim for an on-the-record interview.  FINRA is seeking sanctions, including monetary sanctions.

FINRA Disciplinary Proceeding against Mark C. Hotton

On November 5, 2012, FINRA’s Department of Enforcement initiated a Disciplinary Proceeding against Mark C. Hotton for allegedly funneling over $5,932,000 from his clients for his personal use, or to pay other investors.   Mr. Hotton entered the securities industry in 1993 and joined Oppenheimer in 2005.  He left Oppenheimer in 2009.

According to the Complaint, since at least July 24, 2006, Mr. Hotton engaged in numerous, varied and interrelated schemes to steal his clients’ money.  He diverted funds to various entities he controlled, while his clients believed they were being invested in legitimate businesses.  In other instances, he convinced his clients to invest in securities that did not exist.  FINRA alleged that Mr. Hotton used numerous forged, fabricated and false documents, fictitious transactions, fictitious securities, false statements, and false and misleading account summaries to perpetuate his scheme.

The primary subject of FINRA’s Complaint is Mr. Hotton’s misappropriation of $5,932,000.  In addition, Mr. Hotton caused millions of dollars in clients’ losses resulting from churning and excessive trading, exercising discretion without authorization, and recommending unsuitable transactions.  Furthermore, Mr. Hotton also caused at least an additional $2,584,078 to be wired from his clients’ accounts at Oppenheimer, to his outside business activities and other entities and individuals with whom he was affiliated.

During FINRA’s investigation, Mr. Hotton is alleged to have repeatedly lied under oath, provided false written statements, and forged and fabricated documents.  Furthermore, Mr. Hotton willfully failed to disclose and/or misleadingly described a customer arbitration, settlements, and civil actions on his Uniform Application for Securities Industry Registration or Transfer (Form U-4).  Mr. Hotton’s registrations were terminated on May 31, 2012.  Mr. Hotton is currently not associated with any FINRA member firm.

FINRA Ordered David Lerner Associates To Pay Approximately $12 Million in Restitution to Customers

FINRA ordered David Lerner Associates, Inc. to pay approximately $12 million in restitution to customers who purchased shares in Apple REIT Ten and to customers who were charged excessive markups.  David Lerner Associates, Inc. (“DLA”) is a privately-held broker dealer that operates six branches in the New York tri-state area and Florida.  FINRA found that DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT investment without performing adequate due diligence to determine that there was a reasonable basis to recommend the investment.  In addition to paying restitution to affected customers, DLA was fined $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) and for related supervisory violations.

According to FINRA’s investigation, between January 2011 and at least December 2011, DLA recommended and sold over $442 million of a $2 billion non-traded real estate investment trust (REIT) without performing adequate due diligence in violation of its suitability obligations.  In addition, DLA used misleading marketing materials that presented performance results for the REIT without disclosing to customers that the income portrayed was insufficient to support the distributions to unit owners.  FINRA found that many of DLA’s customers were senior and/or unsophisticated investors and a substantial number of them owned two or more of the Apple REITs.  DLA solicited customers by general means such as the internet, radio, cold calling, mailings, and open-invitation seminars at senior centers, restaurants and country clubs.  According to FINRA’s investigation, between 60% to 70% of DLA’s business came from Apple REIT sales.  DLA earned over $42 million in commissions and marketing allowances related to sales of Apple REIT Ten shares.

FINRA also fined David Lerner, DLA’s founder, President & CEO, and DLA’s Head Trader, William Mason.  David Lerner was fined $250,000 and suspended for one year from the securities industry, and for 2 years from acting as a principal.  The fine was imposed in connection with the false, misleading statements regarding the REIT.  David Lerner personally made false claims regarding the investment returns, market values and performance in at least four DLA seminars, held in New York and Florida, and in letters to customers.  William Mason was fined $200,000 and suspended for six months from the securities industry for his role in charging excessive muni and CMO markups.

In concluding this settlement, DLA and David Lerner 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.