Category Archives: FINRA News

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.

The Financial Industry Regulatory Authority (“FINRA”) sanctioned Citigroup Global Markets Inc., Morgan Stanley & Co., LLC, UBS Financial Services, and Wells Fargo Advisors, LLC (the “firms”), for improper transactions involving leveraged and inverse exchange-traded funds.  FINRA ordered the firms to pay the following: Citigroup, $2 million fine and $146,431.00 in restitution, Morgan Stanley, $1.75 million fine and $604,584 in restitution, UBS, $1.5 million fine and $431,488.00 in restitution, and Wells Fargo, $2.1 million fine and $641,489 in restitution.

According to FINRA, leveraged and inverse ETF’s have particular risks not found in traditional ETF’s.  Most of these products “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis.  FINRA’s investigation revealed that each firm sold billions of dollars of these non-traditional EFT’s.  The firms exposed investors to risks and unpredictability factors inherent in these products, especially when held over a period longer than a day.

FINRA’s investigation found that from January 2008 through June 2009, the firms did not have adequate supervisory systems to monitor the sales of the products and failed to conduct proper due diligence regarding the risks and features of inverse ETF’s.   Furthermore, the firms’ registered representatives made unsuitable recommendations of these products to some customers with conservative investment objectives and/or risk profiles.  FINRA said, “[t]he added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers.  Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”

By accepting the settlement, the firms neither admitted nor denied the charges.

The Financial Industry Regulatory Authority (“FINRA”) in conjunction with the Securities and Exchange Commission (“SEC”) fined Goldman, Sachs & Co. $22 million for failure to establish adequate policies to prevent the misuse of material, nonpublic information about upcoming changes to its research.

According to the investigation, in 2006 Goldman implemented a formalized business process known as “Trading Huddles.” These were internal weekly meetings attended by equity research analysts, traders, and on occasion, may have included clients, to discuss their top short-term trading ideas. In addition to Trading Huddles, in January 2007, Goldman established a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with Goldman’s high priority clients. ASI clients were typically large hedge funds and other institutional investors. These programs created significant risks that material nonpublic information could be disclosed to ASI clients, prior to its release to the general public. Goldman’s failure to properly supervise these programs gave ASI clients an unfair advantage of trading in advance of research ratings and other changes.

The SEC found that the Trading Huddles and the ASI programs were created to improve the performance of the firm’s traders and generating increased commission revenues from ASI clients. Furthermore, FINRA alleged that Goldman made clear to analysts the importance of the programs to their performance evaluations which would impact their compensation.

The SEC stated, “[f]irms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” and that “Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.” Both the Trading Huddles and the ASI programs were discontinued in 2011.

The SEC and FINRA sanctions come 10 months after Massachusetts regulators fined Goldman for the same practice.

The Financial Industry Regulatory Authority (“FINRA”) fined Citi International Financial Services, LLC, a subsidiary of Citigroup, Inc., for charging excessive markups and markdowns on corporate and agency bond transactions.

FINRA’s investigation concluded that from July 2007 through September 2010, Citi International charged markups or markdowns between 2.73% and 10%, which were excessive given market conditions, the cost of executing the transactions, and the value of the services rendered to its customers, among other factors.  FINRA stated “[t]he markups and markdowns charged by Citi International were outside of appropriate standards for fair pricing in debt transactions.”  FINRA’s Rules of Fair Practice established 5% as a reasonable guideline in markups and markdowns.  FINRA fined Citi International $600,000, and ordered it to pay more than $648,000 in restitution and interest to its customers.  According to FINRA, the firm’s supervisory procedures in reference to fixed income transactions had significant deficiencies.

By accepting the settlement, Citi International neither admitted nor denied the charges.

The Financial Industry Regulatory Authority (“FINRA”) filed a complaint against Charles Schwab & Company for violating FINRA rules when the firm amended its Customer Account Agreements to include (1) a Waiver of Class Action or Representative Action provision, and (2), language requiring customers to waive their right to bring or participate in class actions against Schwab.

According to FINRA’s complaint, Schwab mailed improper contractual amendments to over 6.8 million clients.  FINRA alleged that Schwab’s “violative conduct is ongoing”, and that it will “likely lead millions of Schwab customers who have received the account agreements to incorrectly believe they don’t have the ability to bring or participate in class actions.”

FINRA stated that both provisions violate FINRA Rule 2268(d)(1), which prohibits member firms from placing any condition in a pre-dispute arbitration agreement that “limits or contradicts the rules of any self-regulatory organization.”  Additionally, FINRA alleges Schwab’s class action waiver is a condition that contradicts the FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12204(d), which addresses how customers can bring and participate in class actions against member firms.

In response, Schwab filed a lawsuit in the U.S. District Court for the Northern District of California in San Francisco, where the company is based, against FINRA.  Schwab alleged that it added the waiver provision to all of its customers account agreements in September 2011, following the Supreme Court’s decision in AT&T Mobility LLC vs. Concepcion.  In a statement, Schwab declared that it is confident that the court will find FINRA’s action is barred by the Federal Arbitration Act.  Moreover, the company says that it is “committed to resolving customer disputes fairly and efficiently without litigation through its internal customer advocacy program or by use of FINRA Dispute Resolution.”