Category Archives: FINRA News

Disciplinary Proceeding No. 2011025780101, October 19, 2012, Los Angeles, California

Under FINRA rules, securities firms must ensure that information on a broker’s registration application (Form U-4) is updated and kept current on the Central Registration Depository (CRD) system.  In addition, firms are required to update that information whenever a reportable event occurs.  A reportable event includes any regulatory investigation against the broker, specific customer complaints, settlements involving the broker, and certain felony charges and convictions.  Reportable events must be filed within 30 days of the event.  A firm is also required to notify to FINRA within 30 days of the termination of a registered person’s association with a member firm by filing a notice known as Form U-5.  Furthermore, the firm must notify FINRA within 30 days if the firm learns that the information disclosed on a Form U-5 becomes inaccurate.

FINRA’s investigation found that from 2005 until August 2011, between 23% and 63% of customer complaints and related Form U-4 and U-5 filings were either untimely or not reported at all.  In addition, from 2007 until 2011, Merrill Lynch failed to file or timely file more than 650 required reports, including customer complaints and customer settlements.  Lastly, FINRA found that the firm failed to file or timely file approximately 300 non-NASD/FINRA arbitrations, criminal, and civil complaints that it received from on or about July 2007 through 2009.

FINRA found that the firm failed to establish and implement supervisory systems and procedures to adequately review, monitor and ensure compliance with its obligations to timely file required reports and timely acknowledge customer complaints.   Merrill Lynch’s failures may have concealed significant risks and potential investor harm.  The firm’s violations, which went undetected for several years, may have hampered investors’ ability to access the background of certain brokers via FINRA’s Broker’s Check, a public disclosed program.  Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Firms that fail to file important regulatory information on a timely manner can compromise the integrity of CRD and BrokerCheck.  In this instance, Merrill Lynch failed to report critical information that regulators and investors rely upon.  Without timely and accurate reporting by firms, investors only have part of the picture when researching and making decision about their brokers.”

FINRA fined Rodman & Renshaw LLC $315,000 for supervisory and other violations related to the interaction between the firm’s research and investment banking functions.  Rodman is a New York based broker-dealer that provides investment banking services to private and public companies, as well as research, sales, and trading services to institutional investors.  FINRA also sanctioned Rodman’s former COO, William A. Iommi, Sr., with a fine of $15,000 and a suspension from acting in a principal capacity for 90 days.  Two research analysts were fined $10,000 respectively, for participating in efforts to solicit investment banking business.

According to FINRA, from January 2008 through March 15, 2012, Rodman failed to establish, maintain, and enforce supervisory and compliance procedures to monitor potential conflicts of interest between research and investment banking.  As a result of these deficiencies, Rodman failed to prevent research analysts from engaging in the solicitation of investment banking business, and failed to prevent a member engaged in investment banking activities from having influence or control over research analysts’ evaluations or compensation.  Furthermore, FINRA found that a research analyst was compensated for his contribution to Rodman’s investment banking business.

FINRA stated, “The deficiencies in Rodman’s supervisory system created an environment in which the conflict of interest between research and investment banking was left unmanaged.  FINRA will continue to ensure that firms have adequate supervisory systems tailored to the firm’s business and we will continue to sanction firms that demonstrate a weak culture of compliance and internal controls.”

Without admitting or denying the allegations, Rodman, Iommi, and the two research analysts agreed to the sanctions and consented to the entry of FINRA’s findings.

Letter of Acceptance, Waiver and Consent, No. 2011026804401, August 17, 2012, Los Angeles, California

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $2.8 million for supervisory failures that caused the firm to overcharge fees over $32 million to nearly 95,000 customers.  FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents.

FINRA found that from July 2006 to November 2010, Merrill Lynch failed to send approximately 10,647,187 trade confirmations for 232,356 customers due to incorrect system coding.  FINRA’s investigation also discovered other violations such as failure to include or state whether the firm acted as an agent or a principal on trade confirmations and account statements, failure to provide margin risk disclosure statements as well as business continuity plans, and failure to deliver proxy materials to customers or to their designated investment advisers.

FINRA said, “Investors must be able to trust that the fees charged by their securities firm are, in fact, correct.  When this is not the case, investor confidence is threatened.”  In a statement, Merrill Lynch said, “Following Bank of America’s acquisition of Merrill Lynch, we identified operational issues that affected certain investment advisory accounts.  These were primarily the results of improper coding of accounts.”  Merrill Lynch has reimbursed $32 million, plus interest, to the affected customers.  In settling in this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the findings and the fine.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Merrill Lynch investors.  Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

A FINRA hearing panel ruled that Brookstone Securities of Lakeland, Florida, together with the firm’s Owner/CEO, Anthony Turbeville, and one of its brokers, Christopher Kline, made fraudulent misrepresentations and omissions of material fact in selling collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors.   The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers, with $440,600 of that amount imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline.

The FINRA hearing panel found that all of the customers involved in this matter were unsophisticated investors who relied on brokers to assist them with their investment needs.  The customers were looking for safer alternatives to equity investments.  Turbeville and Kline led the customers to believe that their portfolio consisted of government guaranteed bonds that preserved capital while at the same time generating 10% to 15% returns.  After a 16-day hearing, the panel found that between July 2005 and July 2007, Respondents made negligent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks of CMOs.  During this period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers while those same customers lost $1,620,100.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Brookstone clients.  Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

FINRA fined First Midwest Securities, Inc. $75,000.00 for unsuitable recommendations, excessive trading and supervisory failures that caused customer losses of approximately $287,380.00.  According to FINRA, between January 2006 and December 2009, First Midwest failed to establish, maintain and enforce a supervisory system and written procedures to reasonably identify excessive trading of equities.   Due to the supervisory deficiencies, First Midwest failed to prevent excessive trading by one of its registered representatives.

FINRA’s investigation found that at various times from September 2006 through August 2008, one of First Midwest’s registered representatives recommended and engaged in excessive, unsuitable trading in the accounts of four customers.  The unsuitable practices included excessive, short-term trading, and excessive use of margin that resulted in $149,000 in commissions for the registered representative.

Without admitting or denying the allegations, First Midwest agreed to pay $75,000 to settle FINRA’s charges.  It is unclear from FINRA’s Letter of Acceptance, Waiver and Consent whether FINRA arbitration proceedings were initiated on behalf of the four customers whose accounts were churned, or whether the four customers were compensated.

FINRA fined Citigroup Global Markets Inc. (“Citigroup”) for providing inaccurate mortgage performance information, supervisory failures, and other violations relating to its residential mortgage-backed securitizations or RMBS.

According to FINRA, from January 2006 to October 2007 Citigroup posted inaccurate performance data and static pool information on its website.  The inaccurate performance information included RMBS data on delinquencies, bankruptcies, foreclosures, and real estate owned by securitization trusts.  In addition, Citigroup referred to inaccurate static pool information (how prior securitizations similar in collateral content and structure performed) in subsequent subprime and RMBS offerings.  The performance data and static pool data are used to determine the profitability of an RMBS investment and the probability of future returns on an RMBS investment that is currently disrupted as a result of mortgage holders failing to make loan payments as scheduled.  The performance data and static pool information contained material errors that affected investor’s evaluation of the fair market value, yield and anticipated holding period of an RMBS.  On multiple occasions Citigroup was informed that the information posted was inaccurate yet failed to correct the data until May 2012.

During the period of July – September 2007, Citigroup failed to establish and maintain sufficient supervisory policies and procedures addressing independent price verification for mortgage-backed Level 3 CDO’s.  FINRA’s investigation found that on certain occasions, when Citigroup re-priced mortgage-backed securities following a margin call, Citigroup did not maintain records of the original margin calls.

FINRA stated, “Citigroup posted data for its RMBS deals that it should have known was inaccurate; and even after they learned that the data was inaccurate, Citigroup did not correct the problem until years later.  Investors use this data to inform their decisions and in this case, for over six years, investors potentially used faulty data to assess the value of the RMBS.”  Citigroup neither admitted nor denied the charges, but consented to the findings and the fine.

In an arbitration that lasted 38 hearing sessions, a Chicago panel awarded damages to a former employee of Advanced Equities, Inc. for injuries suffered as a result of the Respondents allegedly failing to pay him commissions for his efforts in raising capital for Advanced Equities funded transactions.  The arbitrators also awarded interest and expert witness fees.  This case represents a rare example of punitive damages being awarded in an employment context.  DAW did not represent the Claimants.  FINRA Arbitration No. 10-00048.

In an arbitration that lasted 12 hearing sessions, a Richmond, Virginia panel awarded damages to former clients who suffered losses in variable annuities issued by John Hancock, Pacific Life, Jackson National Life, Travelers and Allianz.  DAW did not represent the Claimants.  FINRA Arbitration No. 10-04782.